Solar Micro Finance: Potential in INDIA

With Support of Govt ……… Concern authorities have to promoting Social Businesses for fighting poverty and
improving living condition of the low income population …

A majority person in India still relies on costly and environmentally hostile

alternatives such as kerosene.

True Power is to expand the use of solar energy which is a cost effective and
environmentally friendly solution source of energy. Our’s goal is to provide this
source of energy in an effective and affordable manner. To this aim, True power
plans to build local production plants for PV modules with the technical assistance
of Renewable Energy Experts meanwhile offering micro-lending services to
guarantee accessibility to the lower segments of the population. Effectively the
supplementation of this project, in combining technical expertise and microcredit
techniques will provide a high quality product accessible to a higher proportion of
the India population. The generalization of solar energy could have numerous
ameliorative impacts on the Indian society, namely: An increase in purchasing
power derived from a reduction in energy costs, an expansion of business activities
in areas previously limited by power shortages and environmental preservation.

The social, economical, and environmental impacts of this innovative project and
the magnitude of its impact on rural and micro businesses makes it very promising.

Solar power could help alleviate rural poverty, Increasing access to energy is critical to ensuring
socioeconomic development in the world's poorest countries.

For these people, even access to a small amount of electricity could lead to life-saving improvements in
agricultural productivity, health, education, communications and access to clean water.

Options for expanding access to electricity in developing countries tend to focus on increasing centralized
energy from fossil fuels such as oil, gas and coal, by expanding grid electricity. But this approach has little
benefit for the rural poor. Grid extension in these areas is either impractical or too expensive.

Neither does this strategy help tackle climate change. Power already accounts for 26 per cent of global
greenhouse gas emissions and while most of this comes from the developed world, by 2030 developing
countries are predicted to use 70 per cent more total annual energy than developed nations.

Place in the sun

The Earth receives more solar energy in one hour than the world population consumes in an entire year.

Almost all developing countries have enormous solar power potential — most of Africa, for example, has
around 325 days of strong sunlight a year, delivering, on average, more than 6 kWh energy per square
meter a day And yet the countries that receive the most solar energy are often also the ones least able to
benefit from it, due to a lack of knowledge and capacity to harness solar power and convert it into electricity
.

The technology

There are two ways of using power from the sun: collecting its heat (solar-thermal) or converting its light
into electricity (photovoltaic).

Solar photovoltaic (PV) systems use solar cells, linked together in 'modules' (solar panels), to convert light
into electricity. They range from a few small cells that can run a calculator to huge solar power stations with
thousands of solar panels.

More than 90 per cent of PV systems are based on silicon materials. PV systems that are connected to the
electricity grid include a device called an inverter to turn the direct current (DC) power generated by solar
panels to the alternating current (AC) power used on the grid.

Off-grid PV systems may also include an inverter but also require batteries to store surplus energy, and an
electronic charge controller to prevent the batteries from overcharging.

Sun Energy can be directly converted to electrical energy by means of Solar

Photovoltaic System. Solar Photovoltaic (SPV) Technology enables the conversion of
direct sunlight into electricity without involving any moving part such as turbine etc.
The basic part Solar Photovoltaic is known as Solar Cell. Solar Cells are made of
semi conducting materials- a thin wafer of Silicon which is exposed to sunlight, to
produce D.C electric current.

In developing countries the percentage of households which have no access to

electricity is more significant. Most of those lacking access live in rural or per-urban
areas. Solar photovoltaic (PV) cell designed to convert light into electricity is often
used to cover the electricity need of household.
Solar power and other renewable energy sources are seeing technological advances
that are making them cost effective. Rapid growth is projected.

At the moment, photovoltaic power is expensive, but since we will never run out of
sunlight, it is an exciting source of energy for the future! Solar water heating
systems pay for themselves in three to five years. The technological challenge we
face is to find ways to make solar technologies affordable for everyone.

At present, solar-thermal systems are about 30 per cent efficient at turning heat into electricity — compared
with approximately 15 per cent efficiency for PV systems. But, in the long run, the development of newer
materials for PV systems, such as polymers and nanoparticles, should increase their efficiency.

Who uses it?

Solar the Photovoltaic Energy is part of Rural Revolution in the rural areas where
grid power is not yet reached. In India Solar Photovoltaic System is successfully
installed in large number of villages.

A household can generate most of the electricity they need with photovoltaic cells
on their rooftops. If there isn't enough sunlight at times, electricity can be stored in
batteries for cloudy days.

Solar water heating systems pay for themselves in three to five years. The
technological challenge we face is to find ways to make solar technologies
affordable for everyone.

The SPV system consists of an 800/860 WP (weather permitting) photovoltaic

arrangement, a permanent DC magnet motor-driven floating pump which can pump
water from a depth of eight meters through the optimum of 6.5 meters. It can
ideally function in a wide-mouth well with a flow rate of 70,000 liters a day. The
photovoltaic modules on the solar panel capture energy from the sun and convert it
into electricity. The panel is connected to the pump via a plug so that the farmer
finds it easy to use. The system works as long as there is sunshine. For example in
In South India, the sun is of course plentiful.

Solar home systems

The most common solar PV system in rural settings is the solar home system, made up of a solar panel,
connected to a battery and charge controller. It usually includes at least one light and a socket to power
other electrical equipment such as radios, televisions or mobile phone chargers

What is the Microfinance?

Microfinance is an innovative banking system that provides small loans to poor

people (often women) to help them start their own businesses and gradually work
their way out of poverty.

In remote parts of the Indian subcontinent...through small loans for solar powered
devices, microfinance is bringing light...where a lack of electricity has stymied
economic development, literacy rates and health.."They have increased their
productivity, improved their health and socio-economic status .

Success Stories:

It is not only technology companies that are pivotal in the spread of sustainable energy.
Banks are critical too. In Uttar Pradesh, the Aryavart Gramin Bank has provided the finance
for solar photovoltaic systems, providing electricity for 28,000 rural families across the
state.
The impetus for the bank’s initiative came from its own need to tackle the problem of an
unreliable mains supply. Having installed solar units in its own branches, it recognized the
potential for its customers who depend on kerosene lights – and the potential for it to
provide a commercially profitable service. Credit camps were set up in villages to explain
how the financing would work and loans were offered with an initial deposit of 20% and five
year repayment terms. The repayment costs are covered by the cost savings on kerosene.
The benefits are human – better, less polluted and more reliable lighting – and economic, as
people have more capacity for income generating activity. The environmental benefits are
also considerable with CO2 savings of over 6000 tonnes/year by 2009. And for the Aryavart
Gramin Bank the project makes good business sense. A reminder that sustainability’s
success will be driven ultimately by its ability, in the long-term, to benefit everybody.

The primary goal under this objective is to provide extremely low cost, durable and efficient
lighting systems to the village home and the community. Initially the goal would be to focus on
providing quality and bare bone lighting to the village home and later to the community.

The underlying objective in all the programs shall be to make the village self-sufficient in
meeting its energy requirements through off-grid systems, powered primarily by low energy.

Potentials of Solar Microfinance in India:

Energy is a crucial commodity to the development of any activity.

Many potential customers without access to electricity have trouble mobilizing

sufficient capital to buy solar products. Microfinance loans for solar products can
increase sales and allow solar enterprises to reach clients with low or irregular
incomes.

At present, roughly 1.6 billion people do not have access to electricity and over 2.5
billion people do not have access to clean cooking options. Most of the people
without modern energy access also lack access to financing that would enable them
to purchase cleaner energy services. People on low incomes in developing countries
typically spend a large proportion of their income on energy. For many rural
customers, buying and installing a solar home system typically costs at least US$
250 (depending on the system size and where it is in the world), but can provide
light and electricity for many years with minimal ongoing costs aside from routine
maintenance and occasional battery replacement. However, experience has shown
that most potential customers without access to electricity have trouble mobilizing
sufficient capital to make a lump-sum cash payment for solar products. As such, it is
often easier for solar enterprises to serve higher income people who can purchase
products on a cash basis rather than find ways to target lower income people.

Potential for energy-lending underutilized

Lack of affordable, appropriately designed loans and other financing options is a key barrier
limiting wider access to clean energy products and services. Without end-user finance options
available for their customers, it can be difficult for most solar energy enterprises to achieve
significant scale. Microfinance institutions (MFIs) have demonstrated that providing credit to
micro entrepreneurs and households can be efficient, responsive, and profitable to both the
borrower and institution. If appropriately designed, loans offered by MFIs can provide clients
with access to high-quality modern energy services by closely matching loan payments to
existing energy expenditures or income flows.
Such loans can offset the high upfront costs associated with cleaner, more efficient energy
technologies, including solar. Despite its being the largest expenditure in many poor households,
the potential for energy lending is currently underutilized, due in large part to a knowledge and
resource gap between consumers, MFIs, and energy providers. However, evidence suggests that
access to modern energy can be greatly enhanced with access to innovative lending and
microfinance options and can provide a new, profitable product line for both microfinance
institutions and the larger financial community.

For many sustainable energy enterprises, market potential is limited to customers who are able to
purchase products and services on a cash basis. The potential market for solar energy can be
transformed into actual customers if end users are able to access financing for the purchase of
energy products and services from microfinance institutions. Building strong linkages between
MFIs and energy enterprises can benefit many stakeholders.

Households and small businesses are able to purchase solar products and services that bring
economic and livelihood benefits otherwise out of reach if they were required to pay on a cash-
only basis. Microfinance loans for solar products can increase sales and allow solar enterprises to
reach clients with lower incomes or irregular income streams. For MFIs, the introduction of
special energy loans offers the potential to increase client retention, diversify product offerings,
increase competitiveness, and ultimately expand the client base while having added social and
environmental impacts.

Microfinance partnership

Experience has shown that linking energy and microfinance can be effective, but requires serious
commitment on the part of both the MFI and energy enterprise. For example, partnering with an
MFI may require a solar enterprise to invest significant financial and human resources in client
and loan officer training beyond core operations. As many MFIs can have a nation-wide reach,
solar companies may also find that a new microfinance partnership often requires a rapid
expansion of installation and after-sales service coverage to currently underserved geographic
areas.

On the MFI side, energy loans need to be designed carefully and may require technical training
of loan officers, modifying operations, introducing energy-specific monitoring and evaluation
processes, and identifying dedicated capital to fund an energy portfolio. Finally, the structure of
a partnership agreement between energy enterprises and MFIs must clearly outline roles and
responsibilities of each stakeholder, communication and coordination channels, warranty and
after-sales service provisions, and training requirements.
Solar Energy for Lighting

Combining the sun’s energy with modern technology has now

provided mankind with a better way. We try to increase the villager’s useful hours
after sunset by providing them lights powered by solar energy. This digital lighting
is non-polluting and eliminates the carbon dioxide being emitted from rural homes.

Technology Advantages of LED Lamps

Solar Energy powered Digital LED lighting systems are clear winners in terms of
luminosity, life span, power required, and costs, when compared to other lighting
products.

LED lamp with 42 Compact Fluorescent

Feature Incandescent lamp
LEDs Lamp
LUMINOSITY
(150 Lumens) Power 2.5W 5W 15W
Used
Lifespan 40,000 hours and more 4000 hours 600 hours
Electricity Used/per Year 7.3 kilowatt-hours 14.6 kilowatt-hours 43.8 kilowatt-hours

Savings in electricity using LED lamps:

LED Compact Fluorescent

Yearly Usage Incandescent lamp
Lamp Lamp
Extra electricity used, over 7.3 kilowatt-hours more 36.5 kilowatt-hours more
0
LED lamps per year per year
Cost of electricity, over LED
0 Rs 45 more per year Rs 219 more per year
lamps
Unit replacement costs 0 Rs 90 per year Rs 60 per year
Total yearly costs, over LED 0 Rs 135 per year Rs 279 per year
lamps

Benefits of LED lamps:

• Long-lasting - LED bulbs last 10 times as long as compact fluorescents, and 50-100 times
longer than typical incandescents in normal everyday use situations.
• Durable - Since LEDs do not have a filament, they are not damaged under circumstances
when a regular incandescent bulb or CFL would be broken. Because they are solid, LED
bulbs hold up well to jarring and bumping. With CFLs, there is the added problem of
mercury toxins spreading on breakage.
• Cool - these bulbs do not cause heat build-up. LEDs produce 3.4 btus/hour, compared to
85 btus/hour for incandescent bulbs.
• Energy-saving - LEDs use a fraction of the wattage of incandescent bulbs. These bulbs
last for years, therefore energy is saved in maintenance and replacement costs. This also
makes LEDs the best choice for use with alternative energy sources

सवरमङलमाङलयं सवरपापपणाशनम् .
िचंताशोकपशमनं आयुवरधरनमुतमम् ..

This great prayer confers all blessings, destroys all sins, dispels worries and is the
bestower of longevity.

रिशममंतं समुदनतं देवासुरनमसकृतम् .

पूजयसव िववसवनतं भासकरं भुवनेशरम्

Offer prayers to the Great Sun God, who is the owner of rays, and who is
worshipped by every one.

सवरदेवातमको हेष तेजसवी रिशमभावनः .

एष देवासुरगणाललोकान् पाित गभिसतिभः

He represents all deities; he is brilliant and world-sustaining. He is the nourishing

force for all worlds
17/01/10

Write up help ;

Rural community in developing countries has no access to modern forms of energy. The World
Bank funding through the Governments and through local village banks forms a very good
network of reaching the people who need the loans to purchase renewable energy systems.

Despite advancement in technology and reduction of the cost of solar systems cost per watt peak,
the rural community’s disposable income would not let them purchase these systems. On the
other hand renewable energy vending companies did not have capacity to loan out systems to
their customers because of the limited cash flow problems these companies face. These
companies also do not have loan recovery mechanism in place to ensure proper payment for the
installed systems. So the result was that the rural electrification was not possible.

Now the people of the rural community can go to their local banks or village micro credit banks,
apply for a solar loan and work out payment plans suitable to their individual incomes, which
can be easily verified by the staffs of the microfinance institutions. Then the microfinance
institution will sign an agreement with the Governments rural electrification agency (REA) and
the vending company. The microfinance institution will place an order with the vending
company for the total number of systems required by its members. And the vending company
will go ahead to supply and install solar systems for the identified customers.

Roles of the 3 parties

1. REA, to ensure quality of the system supplied by the vendor and to do an

energy audit on each system and to give the government subsidy on
successful completion of the job to the vending company.
2. SACCO, to identify the end user customer who needs a solar system, a
certain their capacity to pay the loan, extend the loan and ensure they
receive a quality solar system. To identify suitable solar vending companies.
3. Solar vending company, to ensure quality supply of solar system, install it
and see it is in proper working condition and to recover payment from the
saccos and subsidy from the government after successful installation.

The rural community will be serviced with the solar home systems (SHS). But
each of the SACCO can have one off grid renewable Village power supply
system, which can supply the whole village.

The following advantages can be got from such a system.

1. Community projects like water pumping, community hall, tele-center, health clinics, Internet
café etc.
2. Surplus power is sold to the national grid if the renewable energy system is near the grid.
3. Better security for the power supply
4. Small factory and processing equipment for the benefit of the village and as a money
generation activity.
5. Bio fuel generator, bio fuel cooking stove. Lantern and making of soap from glycerol will
serve as a stimulus for people to grow Jatropha as a cash bio fuel crop.

Bio-fuel production - Using Jatropha The Next Generation sustainable fuel.

What is bio-Diesel?

AS the volatile Middle East continues to affect global oil supply, countries like Uganda are
chocking on heavy oil import costs. Crude fossil oil prices touched $100 this combines with the
erratic and increasing dollar rate (at last month high dollar rate this translates to Sh230, 000) per
barrel this year and are expected to reach the $150 (Sh345, 000) mark in two years.

The ever-increasing and erratic oil prices and a volatile dollar are driving many countries to
search for alternatives of achieving energy independence. This has intensified research and
boosted development of bio fuels as the most reliable energy alternative.

Production of bio-diesel from Jatropha Carcus, commonly known as 'Ekiloowa, has many
advantages. Ekiloowa is well known in Uganda and is commonly used as a support for vanilla
vines and sometimes as a hedge.
Jatropha, a drought- resistant perennial crop with an over 40 - year life span, is a member of the
Europhobiaceace family. Its seeds can yield about 37% non-edible oil.

One kilogram of the seeds produces 200ml of oil. Every tree can bear one-
and-a half kilogrammes of seeds annually in the begining and as it grows it
can produce up to 6kgs. On a land of 1acre you can plant 1000 jatropha
trees spaces at 2mts interval.

The global bio-diesel market is estimated to reach 37 billion gallons by 2016,

growing at an average annual rate of 42%.

Lankveld said developing bio-fuels offers the most immediate and viable
response to emerging economies in the Tropics to produce and supply the
global energy market and reduce carbon dioxide emissions as part of the
battle against climate change.

Our company has set up a demonstration project on the shores of Lake

Victoria. It will supply renewable energy products and process biofuel.

The company will not be relying on new plantations to source its raw
material. Instead it will start by buying up Jatropha nuts already available
from the existing plants This year It intends to collect about 10,000 Kgs of
the seed from vanilla farmers in the districts of Mukono, Kayunga, Jinja,
Iganga, Kamuli and Bugiri, from which it expect to extract 3,300 litters of
oil... The company will also plant about 40 hectares (about 60,000 trees) of
jatropha at a new land farm we aquired.
The project will also be giving farmers high quality jatropha seeds to increase
crop output for the future. Rather than setting up large plantations, the
venture is promoting Jatropha as a means of diversification for farmers,
encouraging its integration alongside millet, sorghum or maize and reviving
those who had abandoned it because of the disappointments in the vanilla
market and using it as fencing material for their farms.

We believe in small-scale, decentralized bio-diesel processing plants, where there is local

production of jatropha nuts to minimize transport. We also believe that selling of plant oil stoves
will encourage the local farmers to grow jatropha and other oil crops primarily as a source of fuel
for their kitchen cooking and later as a commercial cash crop venture. We will also sell to them
small oil hand mills so that they can extract their own oil for domestic use.

The first test runs of Uganda electronics and computer industry ltd, small-scale off grid
renewable energy and biodiesel plants will take place in November 2010. However starting
October we are running sensitization seminars in 3 districts, collecting seeds, selling stoves and
processing oil.

The UN special reporter on the right to food recently recommended jatropha as a bio-fuels crop
for developing countries. Jatropha was recommended because of its high inedible oil content,
gestation period and ability to grow on degraded soils.

There is need for developing countries to invest in bio-fuels production because with climate
change, the world's energy polices is bound to change for the worst.

Uganda can excel in bio- diesel production since the majority of the people derive their incomes
from agriculture. Jatropha offers enormous potential to alleviate poverty and improve health. A
farmer can earn up to $250 (sh427, 500) annually from a 1km hedge of jatropha.

Long Term Potential

Speaking about the long-term potential of bio-diesel, the realities of the bio-diesel markets, a
successful bio-diesel business plan begins with an effective feedstock strategy from which
process design flows. To make bio-diesel a long term business opportunity attention must be
paid to the critical issue of availability of right feedstock at right cost.

Jatropha will be a vast source of bio-fuel and a key to reducing our dependence on fossil fuel.
Jatropha can bring significant environment benefits. It can replace jet fuel and fossil fuel from
petroleum companies without interfering with food crops or leading to clearing of forests. The
good thing about jatropha is that you are producing a tree shrub that lives for a long time and
does its job. Producing oil while it also sequesters lots of carbon from the atmosphere. Jatropha
is a multipurpose crop to alleviate soil degradation, desertification and deforestation, which can
be used for bio-energy to replace diesel, cooking fuel wood and for soap production and climatic
protection and hence deserves special attention. Jatropha can help increase rural incomes, self-
sustainability and alleviate poverty.
Financing of Renewable Energy Projects for Microfinance Institutions in India

Funding for Renewable Energy Projects Indian Renewable Energy Development

Agency (IREDA), established in 1987 as a Public Limited Government Company,
under the administrative control of MNRE, is a specialized developmental financial
institution with the objective to provide financial support to specific projects and
schemes for generating electricity and/or energy through new and renewable
sources .

Indian Renewable Energy Development Agency (IREDA), established in 1987 as a Public Limited
Government Company, under the administrative control of MNRE, is a specialized developmental
financial institution with the objective to provide financial support to specific projects and schemes for
generating electricity and/or energy through new and renewable sources and conserving energy through
energy efficiency.

It offers term loans to renewable energy projects at rates slightly more favorable than general commercial
lending rates. As of March 31, 2010, IREDA financed 1,921 projects with a loan commitment amounts
totaling over Rs.121.8 billion.

Other government agencies that actively fund renewable energy projects are the Power Finance
Cooperation (PFC), the Rural Electrification Corporation (REC), and National Bank for Agricultural and
Rural Development (NABARD). Corporate financiers of renewable energy projects in India are primarily
concentrated on the large wind and hydropower projects, where captive power generation and the
application of accelerated depreciation benefits play a significant role.

Of late, the growing awareness and favorable government policies & regulatory mechanisms (both at
Central & State level) have led to gradual increase in confidence of domestic commercial banks providing
loans to renewable energy projects.

Renewable Energy and Microfinance

A number of microfinance institutions (MFIs) facilitate the purchase of renewable energy

systems like solar cookers, solar lanterns, or small biogas plants in off-grid areas of the country.
The Self Employed Women’s Association (SEWA) is perhaps the most well-known example of
an MFI in India.

NABARD releases disbursement figures for MFI's

The National Bank for Agriculture and Rural Development (NABARD) has reported that bank
loans amounting to Rs. 3732.33 crore has been disbursed to 581 Micro Finance Institutions
(MFIs) during the year 2008-09 and as of 31.3.2009, the loan outstanding stood at Rs. 5009.09
crore against 1915 MFIs. The loans were given for lending to the poor both in the Further,
NABARD has reported that under the Self Help Group-Bank Linkage Programme, as of 31
March 2009, there were more than 61.21 lakh saving-linked SHGs and more than 42.24 lakh
credit-linked SHGs and thus about 8.6 crore poor households have been covered under the Self
Help Group- Bank Linkage programme.The deposits outstanding from these Groups stood at Rs.
5545.62 crore and loans outstanding stood at Rs. 22679.85 crore.

This information was given by Minister of State for Finance, Shri Namo Narain Meena in a written reply
to a Question in Lok Sabha on Friday.

India’s once- booming Microfinance industry has fallen into the crosshairs of the country’s murky
politics. Will the industry survive and what could be the industry’s possible contours going
forward?

Microfinance has been very much in the news lately. The financial markets led by savvy Private
Equity funds, started taking notice of and investing in the industry’s rapid growth a few years
back, culminating in the highly successful first ever IPO of an Indian MFI in August of this
year. Unfortunately, the industry’s fortunes have steadily plunged downhill thereafter. This
paper connects the dots of the MFI industry scenario with other key economic and political
factors playing out in the country. The views discussed in this paper are strictly non-political, but
are an effort to link various situations leading up to a holistic case for the future.

On the one side, most of the post crisis headline news on Microfinance (i.e. from
September 2010) has been negative. ‘Getting it right on Microfinance’, ‘Microfinance in India is
like subprime lending’, ‘Anatomy of a crisis’, ‘Are MFIs showing Shylockian streak?’, ‘What’s
wrong with Microfinance Institutions in India?’ to name a few, paint a picture of an industry
struggling to survive. On the other side, there is increasing coverage and focus on
Inclusive Growth in India – meaning mainly financial inclusion, which could be a starting step
for some interesting developments in the midst of the growing political controversy.

To begin with, MFI industry fortunes can only be understood with an appreciation for the effect
this rapid industry growth has had, where it has increasingly impinged directly on the agenda of
state and federal level politics in India.

Background of the situation

One of the key mandates of our current government is Inclusive Growth – mainly
Financial Inclusion. Unfortunately, our national leaders have been spending more of their time in
handling/ responding to the several multi- billion rupees scams and digesting poor electoral
performance in a few key states in the country. The recent controversies in

Andhra Pradesh politics – dispute within the state, Chief Minister quitting, former Chief
Minister’s son rebellious act and the MFI saga – has led to some opposition parties playing the
political card by urging borrowers not to repay their loans to MFIs. Andhra Pradesh accounts for
around 30% of the MFI loans in the country and has witnessed an alarming number of suicides
by some debtors, purportedly due to harassment from MFI agents over repayment.

The Indian MFI industry which has close to Rs 30,000-crore in outstanding loans to 30 million
borrowers is going through a rough tide and has been challenged ever since the SKS
Microfinance IPO. Major Indian Public and Private Banks – State Bank of India, Bank of India,
Indian Overseas Bank, Punjab National Bank, Andhra Bank, SIDBI, Axis Bank and ICICI have
amongst the maximum credit exposure to MFI firms, estimated to be close to 70% of the total
credit outstanding to the industry.

Some of the figures lent to MFIs by banks, according to data from a rating company, are as
follows-

Bank Amount
SIDBI ~ Rs. 4000 crore
ICICI Rs. 2000 crore
SBI > Rs.1000 crore
Corporation Bank~ Rs. 600 crore
Andhra Bank Rs 320 crore

Source: CARE rating

In addition to their direct lending to MFI’s, most of the public and private banks have purchased
loan pools for millions of dollars from MFIs. These loan pools are also expected to be
under pressure, as the securitization mechanism exposes the investors to the ultimate borrowers
and a drop in repayment rates will subsequently affect them.

Public Sector —————————- Private Sector

Bank Amount Bank Amount

Bank of Rs.1.3 crores
Baroda Yes Bank Rs. 4.5 crores
Bank of India Rs. 2.8 crores
Axis Bank Rs. 13 crores
Corporation Rs. 6 crores
Bank IndusInd Bank Rs. 3.6 crores,
PNB Rs. 9 crores
HDFC Bank Rs. 9 crores
Union Bank Rs. 2 crores
Kotak Mahindra Rs. 1.3 crores
Canara Bank Rs. 3 crores. Bank

Source: Morgan Stanley Asia Pacific Report through Moneylife

THE RESULT

Stocks of banking companies, mainly the private sector have been under pressure lately after
having outperforming the market over the last few months. Banks with the highest MFI exposure
have witnessed the sharpest fall in their share price in the last week. Shares of Yes Bank fell by
around 10% in the three trading sessions last week, while those of Axis Bank and Oriental Bank
of Commerce fell by 9% each. But even though the impact on ICICI Bank and HDFC Bank is
somewhat similar to that on Axis Bank and Oriental Bank of Commerce, their shares fell at a
lower rate of 6% and 3.4%, respectively.

One of main concerns of the investors is the asset quality of microfinance institutions (MFIs),
which is under pressure after measures taken by the Andhra Pradesh (AP) government to
tighten regulations governing the industry which challenges the existing business model –
banning of the weekly collections from the borrowers. This has resulted in a sharp decline in the
repayment of loans across AP and the trend is spreading across the country mainly in areas such
as West Bengal, Madhya Pradesh, Orissa and Karnataka.

Source Microfinance exposure takes toll on banking stocks through Livemint

Latest Developments – the dots…

In spite of the current crisis, many MFIs have approached banks for emergency funds amounting
to Rs 10,000 Cr, admitting to suffering a severe liquidity crisis. As some banks in some states
have stopped lending to MFIs, many are worried that the crisis could deepen and threaten a
collapse. As per Vijay Mahajan, one of the pioneers of the Indian microfinance industry in India
and the President of Microfinance Institutions Network

(MFIN), the MFI industry will collapse and will be finished as early as first quarter of the
coming year in case the banks decline to support and lend to the microfinance institutions
because of the current environment in the MFI market.

Amid all the chaos, some of interesting developments in the economic and political environment
are:

• The Union Finance Minister clearly indicating not to “strangulate” the industry
and to finalize the regulatory architecture for microfinance institutions and
the

‘Microfinance Bill’ by early next year

 • MFI bill introduced in Andhra Pradesh assembly and Karnataka
government planning to establish a state funded microfinance
institution like Andhra Pradesh’s SHG-based SERP programme
• MFI regulation panel proposed by Orissa state government

• Nation’s largest lender – State Bank of India announced its 750-million euro
(about Rs. 4,650 crore) five-year bond issue and also awaiting government’s
nod to come out with a Rs. 20,000-crore rights issue improve its
capital base sometime in late December or early next year
• Union Bank’s direct entry in the MFI business

• Axis bank’s top management’s apprehension in relation to huge exposure to

the

MFI sector

• Major PSU Banks – Bank of Baroda and Indian Bank sign contracts with MFIs
to rein interest rates, ensuring MFIs do not charge interest rates beyond a
certain ceiling from their borrowers
• Corporation bank management’s mooted thought of converting the debt
from

MFIs to equity, for safeguarding risks in case of default

• Indian Banks’ Association proposal for roping in “Bollywood” film stars for
spreading the message of financial inclusion – to educate rural masses about
the benefits of bank accounts and other financial services
• One of the leading NBFC’s from the South, Muthoot Pappachan Group has
tied up with Accion of US to boost lending in microfinance sector and also in
the final stages of acquiring a leading MFI player in the North

The way forward – …Connecting the dots

The microfinance industry which was considered to be an instrument in realizing the goal of
financial inclusion, as they serve a segment of the population without access to banks, will
certainly face regulatory headwinds. The issue is primarily whether the proposed regulations
will be supportive of an industry that has emerged as a global frontrunner in combining social
and economic goals – or whether they will land up throttling the industry with unviable
requirements.

Snapshot of the Microfinance Industry

Time Line – Past Present Future
PESTEL (Before
crisis)
Political Low High Moderate
(interference)
Economic Very High Low Low*
(Interest)
Social High Medium Medium /
(Objective) High
Technical(Experti Low Medium High
se)
Environment (to High Low Medium*
venture into this
business)
Legal (Issues) Low High High

* Depending on nature of regulation that emerges

Going forward, the MFI promoters as well as for the Investors might not have the best news – at
least not to the extent they would have imagined couple of months back. In case the same
trend continues- borrowers defaulting, very limited access to capital, regulatory risks, ratings
with negative implications and political resistance, MFI’s would be faced with both solvency and
liquidity challenges. An IPO exit would remain a distant dream for the players, as well as their
private equity investors.

Analyzing and evaluating the sequence of events strategically, along with some crystal ball
gazing, the following might be the way forward for this industry

Potential Convergence between Banks and MFIs: Although current regulations maintain
a clear demarcation between scheduled commercial banks and MFIs (the large MFIs are mostly
regulated as NBFCs), the mutual advantages to each other are fairly obvious. MFIs can
significantly lower their cost of funds, and also remove potential hazards of dependence on
institutional liquidity through conversion to a banking model; banks can get into the financial
inclusion game through best practices from MFIs.

The convergence needs to be initiated through regulatory changes from the RBI, and the
resulting activity could either be organic or inorganic. Though the business model is different
between Banks and MFIs, there could be some interest from the Banks to acquire MFIs given
their exposure to the industry and also which could give them access to new and rural parts of the
country. SBI raising funds (may be part of it is to acquire MFIs), Union bank entry into this
business and Corporation’s bank intention to acquire stake in MFIs might be early signs from
Banks intending for consolidation in financial services space.
It might be premature to discuss the modalities of partnership at this point in time, but this idea
should certainly be explored by Y.H. Malegam and team, a sub-committee appointed by RBI to
study the industry and recommend ways to better its practices. This could be a win-win situation
for banks, regulatory bodies and mainly the customers – provided the banks give a decent
valuation for the MFIs. From the government’s perspective, this could be a one of the best
strategies to fulfill the Financial Inclusion objective as well as to get the situation politically
correct.

Partnership with Regional Rural Banks (RRB): As per the data till last financial year, there
were 82 RRBs (with a network of 15475 branches spread over 619 districts in 26

States and 1 Union Territory), of which only 3 RRBs out of 82 RRBs were incurring losses. In
addition, the RRB’s were given a target by the Finance Ministry to open 2000 branches by
March 2011 with the right banking technology platform as part of their financial inclusion
strategy. Partnership with MFIs could be one of the routes which could be explored by RRB’s
to have better access to similar client base and to fulfill their mandate of financial inclusion

Consolidation within the MFI industry: Consolidation amongst existing MFI players could
come about, in the situation that present stressed conditions continue for a further quarter or two.
Larger MFIs with good balance sheet, with appetite for risk till the regulatory framework is
worked out and also having the capacity digest an acquisition in this environment might look to
buyout other small/medium MFIs for their customers and loan books, at distressed valuations.
However, the challenges in this case as mentioned earlier remain - borrowers defaulting, very
limited access to capital, regulatory risks, ratings with negative implications and political
resistance.

Jaipuria Institute of Management, Jaipur (JIMJ) is conducting a national seminar on Micro finance in
collaboration, with National Bank for Agriculture and Rural Development (NABARD) on Monday the
8th March, 2010. JIMJ is a fast developing centre of management education singularly committed to
impart excellence within the student fraternity, the corporate world and the society at large.

The objective of this seminar is:

* To create awareness towards Inclusive Growth and significance of Micro Finance

* To familiarize with operational aspects of Micro Finance implementation by various stake holders and
NABARD Initiatives
* To motivate/ develop the mindset to get associated with Micro Finance activities in their future
endeavors
* To strengthen the team building and Capacity Building
* To encourage the students to enhance their knowledge through micro finance quiz

The areas to be covered during this seminar would be:

* Inclusive Growth & Micro Finance :An Overview, key elements and current status
* NABARD initiatives and SHG Model
* Financial Inclusion & Financial Literacy
* Sustainability of Micro Finance Operations
* Role of Management education in development and strengthening of Micro finance sector

The Seminar would have another unique feature of organizing a Micro Finance Quiz Competition for
student participants to appreciate their general awareness about social banking, Micro Finance,
operational/implementation issues, latest developments associated with this segment and other related
areas

Financing of Renewable Energy Projects for Microfinance

Institutions in India

Funding for Renewable Energy Projects

Indian Renewable Energy Development Agency (IREDA), established in 1987 as a Public

Limited Government Company, under the administrative control of MNRE, is a specialized
developmental financial institution with the objective to provide financial support to specific
projects and schemes for generating electricity and/or energy through new and renewable sources
and conserving energy through energy efficiency.

It offers term loans to renewable energy projects at rates slightly more favorable than general
commercial lending rates. As of March 31, 2010, IREDA financed 1,921 projects with a loan
commitment amounts totaling over Rs.121.8 billion.

Other government agencies that actively fund renewable energy projects are the Power Finance
Cooperation (PFC), the Rural Electrification Corporation (REC), and National Bank for
Agricultural and Rural Development (NABARD). Corporate financiers of renewable energy
projects in India are primarily concentrated on the large wind and hydropower projects, where
captive power generation and the application of accelerated depreciation benefits play a
significant role.

Of late, the growing awareness and favorable government policies & regulatory mechanisms
(both at Central & State level) have led to gradual increase in confidence of domestic
commercial banks providing loans to renewable energy projects.

Renewable Energy and Microfinance

A number of microfinance institutions (MFIs) facilitate the purchase of renewable energy

systems like solar cookers, solar lanterns, or small biogas plants in off-grid areas of the country.
The Self Employed Women’s Association (SEWA) is perhaps the most well-known example of
an MFI in India.

Status of Micro Finance in India, 2009-10

Umesh Chandra. Sarangi, Chairman, NABARD released a booklet on “Status of Micro
Finance in India, 2009-10” on 4 November 2010 at a function held at Head Office,
NABARD, Mumbai. The Booklet presents data on the number of Self Help Groups
(SHGs) having Savings Bank accounts with the banks, loans disbursed by the banks
during 2009-10 to SHGs and aggregate

loan outstanding as well as Non Performing Assets against SHGs as on 31 March

2010. As on 31 March 2010, there were 69.53 lakh SHGs having savings accounts
with banking sector of which 48.51 lakh SHGs were credit linked and having loans
outstanding amounting to `28038.28 crore. During 2009-10 banks have disbursed
loans to 15.87 lakh SHGs with loan amount of ` 14453.30 crore

NABARD has disbursed ` 22.55 crore as Revolving Fund Assistance to MFIs and the
outstanding assistance as on 31 March 2010 was at ` 33.27 crore. Under Capital
Support to MFIs NABARD had disbursed ` 7.87 crores during the year to various
MFIs and outstanding support as on 31 March 2010 was at ` 24.17 crore. NABARD
has also supported MFIs for their ratings

and released Grant assistance ` 15.83 lakh during 2009-10. NABARD has provided
Refinance assistance to Banks against their loan disbursement to SHGs and
released ` 3173.56 crore refinance assistance to Commercial Banks, Regional Rural
Banks and Co-operative Banks during the year and the cumulative refinance
provided aggregated to ` 12,861.65 crore under this sector.

NABARD also provides Grant assistance to various NGOs, Banks and individuals who
are engaged in promotion of SHGs as Selp Help Promoting Institutions and
sanctioned ` 28.78 crore to them during the year and thus taking the aggregate
sanctions to ` 107.66 crore. Government of India has set up Micro Finance
Development and Equity Fund (MFDEF) with the total corpus of ` 400 crore. with
NABARD which is contributed by Reserve Bank of India, NABARD and Banks.

18/01/11

MISSION OF NABARD ( National Bank Of Agriculture & Rural Development )

To promote sustainable and equitable agriculture and rural prosperity through

effective credit support , Related services , institutional development and other
innovative initiatives .

Should NABARD regulate micro finance?

The Micro Financial Sector (Development & Regulations) Bill 2007 has been under
the scanner of late. The bill proposes to make the National Bank for Agriculture and
Rural Development (nabard) the regulator of micro-finance sector in the country.
Until now, the Reserve Bank of India has been regulating financial organisations
involved in collection of public deposits.

The proposal, however, has sparked a debate. While a section feels that it will bring
about legitimacy in the system, others say the move is not appropriate because
nabard does not have experience in the regulatory field . The government, however,
maintains that the move is necessary to give the sector a much-needed boost.

"The micro-finance bill will address ambiguity in the collection of savings to ensure
depositors' protection,' says Amitabh Verma, joint secretary, Union ministry of
finance.Adds V Satyamurti, ceo of All India Association for Micro Enterprise
Development: "There are micro-finance institutions (mfis) which operate without
clarity on regulations relating to moneylending, non-banking finance activities and
income tax. The bill will help such organisations.'

According to the bill, all societies, trusts and mfis, but not self-help groups, need to
register with nabard before beginning operations. nabard will frame penalties for
violation of norms. Verma says those who violate norms will be punished heavily
The bill stipulates Rs 5 lakh as the minimum corpus before an entity starts
mobilising deposits. Some groups feel that a low minimum capital requirement may
bring in players who will venture into micro-finance by accepting deposits from the
poor.

The bill does not propose any cap on interest rate, which the National Association of
Community Development Finance Institutions (sa-dhan) is in favour of. "For us, the
issue is not about interest rate, it is about a range of financial services made
available for the poorest and low-income households,' says Mathew Titus, executive
director, sa-dhan, founded by leading mfis like Sewa Bank, Basix and Pradan.

Smita Premchander, general secretary of Sampark, a Karnataka-based ngo,

however, says the bill does not address the problems faced by rural cooperative
credit institutions or rural banks, which were created for disbursing credit to the
poor and marginalised. Cooperatives also oppose the bill. "Amendment of the
Cooperatives Societies Act is still due. The move to bring about the micro-finance
bill is not justified,' says Rama Reddy, president of Hyderabad-based Cooperative
Development Foundation.

The ministry of finance estimates that about 2.3 million shgs practise a bank- mfi-
shg linkage model and about Rs 12,500 crore worth of credit has been disbursed.
This aside, another 2.3 million shgs are covered under the Swarna Jayanti Rozgar
programme, with Rs 7,500 crore in credit already given. nabard data shows that
more than 1.6 million shgs have received loans of more than Rs 6,00 crore from
commercial banks and the average loan amount per beneficiary works out to be
around Rs 2,000, which is too small to enable poor families to fight poverty.
Besides, sources in the banking industry say the total demand for microcredit in
India is estimated to be close to Rs 200,000 crore."Microcredit in its present form is
not in a position to address the livelihood issues of poor,' says Vijay Mahajan,
managing director of Basix.
There is need to expand the paradigm from microcredit to ‘livelihood finance' by
extending services such as savings, insurance cover, nutrition, health, education
and vocational training, experts say.

The phenomenal growth of Indian microfinance sector and its potential for further
expansion attracts everyone in terms of product deepening, diversification
and expansion of geographical spread.

The Self Help Group-Bank Linkage Programme (SBLP), pioneered by NABARD in

1992, has emerged as the largest and the fastest growing community based
microfinance programme in the world resulting in credit-linkage of more than 4.85
million SHGs as on 31st March 2010.

The Microfinance Institutions (MFIs) too have emerged as strong players in

supplementing the role of formal financial institutions in providing microfinance
services to the poor. However, despite various policy interventions aimed at
upscaling the efforts to bring in the excluded families, particularly the weak and
vulnerable members of society including those who live on the fringe of forests,
tribals, etc., within its fold, financial exclusion continues to deprive millions of
people living below a sustainable level of income. The comparatively
disadvantageous groups like various tribal communities struggling to have assured
means for livelihood need to be approached in an entirely different manner than
what is generally designed for people living in other parts of the country.

There is also a need to debate on the sustainability of SHG-Bank Linkage programme itself
which has completed about 20 years of its existence in various forms in the country and now
regarded as the world‟s largest community based programme. The issue needs to be
viewed from the angle whether an SHG member in the rural area has really gained the
competence and confidence of providing a physical collateral security for his/her credit needs
from the formal banking system.

Further, on account of unemployment and under-employment in various rural parts of the

country, sizeable rural population migrates to semi urban and urban areas of the country
in search of employment. One of the problems relating to migrant workers is the lack of
opportunity to husband their daily small savings at their places of work and remittance of their
saved money to their native place. If the issue of remittance is tackled in a manner suitable to
migrant workers and their family members (recipients), it will definitely create a dent on the
poverty of the migrant workers‟ families.

Further if the migrant workers are SHG members, their families can pay the thrift/ repay the loan
installment without any default and thus can continue their effective membership in the SHGs of
their villages.

Of late, the experiments like Joint Liability Groups, producers groups, etc., have led to the
increased application of micro-finance approaches in meeting the credit needs of the
agricultural sector. However, much has to be done in bringing the small farmers, marginal
farmers, tenant farmers, share croppers and oral lessees into the microfinance movement so as to
provide opportunities for them to sustain their farming operations leading to increased income
for their families.

The microfinance sector across the globe, over the past few years, has shown tremendous growth
in terms of its efficiency and outreach which was made possible due to various experiments
done by diverse stakeholders in different parts of the world. However, in spite of best efforts of
the Rural Financial Institutions (RFIs) and the MFI sector, the magnitude of financial exclusion
is truly staggering. Further, one of the key challenges facing the policy makers today is how to
make the growth process more inclusive. In this background, it is felt that results of various
successful models/ experiments need to be widely disseminated amongst all the
stakeholders in order to provide suitable options, particularly to those practitioners who are
concentrating in regions where microfinance has not yet penetrated.

These challenges call for a need on the part of all the stakeholders in the microfinance sector to
come together and share their experiences on the issues identified for the seminar. They may
adopt and implement innovative approaches after learning from experiences and
innovations made by other experts in various fields of microfinance.

Rural community in developing countries have no access to modern forms of energy. The world
bank funding through the Governments and through local village banks forms a very good
network of reaching the people who need the loans to purchase renewable energy systems.

Despite advancement in technology and reduction of the cost of solar systems cost per watt peak,
the rural communitys disposable income would not let them purchase these systems. On the
other hand renewable energy vending companies did not have capacity to loan out systems to
their customers because of the limited cash flow broblems these companies face. These
companies also do not have loan recovery mechanism in place to ensure proper payment for the
installed systems. So the result was that the rural electrification was not possible.

Now the people of the rural community can go to their local banks or village micro credit banks,
apply for a solar loan and work out payment plans suitable to their individual incomes, which
can be easily verified by the staffs of the microfinance institutions. Then the microfinance
institution will sign an aggrement with the Governments rural electrification agency (REA) and
the vending company. The microfinance institution will place an order with the vending
company for the total number of systems required by its members. And the vending company
will go ahead to supply and install solar systems for the identified customers.

Roles of the 3 parties

1. REA, to ensure quality of the system supplied by the vendor and to do an energy audit on each
system and to give the government subsday on successfull compleetion of the job to the vending
company.
2. SACCO, to identify the end user customer who needs a solar system, acertain their capacity to
pay the loan, extend the loan and ensure they receive a quality solar system. To idendify suitable
solar vending companies.
3. Solar vending company, to ensure quality supply of solar system, install it and see it is in
proper working condition and to recover payment from the saccos and subsdy from the
governmet after successfull installation.

The rural community will be serviced with the solar home systems (SHS). But each of the
SACCO can have one off grid renewable Village power supply system, which can supply the
whole village.

The following advantages can be got from such a system.

1. Community projects like water pumping, community hall, tele-center, health clinics, Internet
café etc.
2. Surplus power is sold to the national grid if the renewable energy system is near the grid.
3. Better security for the power supply
4. Small factory and processing equipment for the benefit of the village and as a money
generation activity.
5. Bio fuel generator, bio fuel cooking stove. Lantern and making of soap from glycerol will
serve as a stimulus for people to grow Jatropha as a cash bio fuel crop.