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MICROFINANCE

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MICROFINANCE Powered By Docstoc
					2009




                        [MICROFINANCE]
 Group Member: Kuntal Banerjee         Roll No. CMS-1
               Shivkumar P. Pathak     Roll No. CMS-3
               Sujit Dayashankar Gupta Roll No. CMS-4
              Gaurav Manjrekar         Roll No.22
MICROFINANCE…………… A BRIEF INTRODUCTION
Microfinance refers to the provision of financial services to poor or low-income clients,
including consumers and the self-employed. The term also refers to the practice of sustainably
delivering those services. More broadly, it refers to a movement that envisions “a world in which
as many poor and near-poor households as possible have permanent access to an appropriate
range of high quality financial services, including not just credit but also savings, insurance, and
fund transfers. Those who promote microfinance generally believe that such access will help
poor people out of poverty. Traditionally, banks have usually not provided financial services to
clients with little or no cash income. Banks must incur substantial costs to manage a client
account, regardless of how small the sums of money involved. For example, the total revenue
from delivering one hundred loans worth $1,000 each will not differ greatly from the revenue
that results from delivering one loan of $100,000. But the fixed cost of processing loans -- of any
size -- is considerable: assessment of potential borrowers, their repayment prospects and
security; administration of outstanding loans, collecting from delinquent borrowers and so on.
There is a break-even point in providing loans or deposits below which banks lose money on
each transaction they make. Poor people usually fall below it.

In addition, most poor people have few assets that can be secured by a bank as collateral. As
even if they happen to own land in the developing world, they may not have effective title to it.
This means that the bank will have little recourse against defaulting borrowers.

when poor people borrow they often rely on relatives or a local moneylender, whose interest
rates can be very high. An analysis of 28 studies of informal money lending rates in fourteen
countries in Asia, Latin America and Africa concluded that 76% of moneylender rates exceed
10% per month, including 22% that exceed 100% per month. Moneylenders usually charge
higher rates to poorer borrowers than to less poor ones. While moneylenders are often
demonized and accused of usury, their services are convenient and fast, and they can be very
flexible when borrowers run into problems. Hopes of quickly putting them out of business have
proven unrealistic, even in places where microfinance institutions are very active.

Over the past centuries practical visionaries from the Franciscan monks who founded the
community-oriented pawnshops of the fifteenth century, to the founders of the European credit
union movement in the nineteenth century (such as Friedrich Wilhelm Raiffeisen) and the
founders of the microcredit movement in the 1970s (such as Muhammad Yunus) have tested
practices and built institutions designed to bring the kinds of livelihood opportunities and risk
management tools that financial services provide to the doorsteps of poor people. While the
success of Grameen Bank (which now serves over seven million poor Bangladeshi women) has
inspired the world, it has proved difficult to replicate this success in practice. In nations with
lower population densities, meeting the operating costs of a retail branch by serving nearby
customers has proven considerably more challenging.
Although much progress has been made, the problem has not been solved yet, and the
overwhelming majority of people who earn less than $1 a day, especially in the rural areas,
continue to have no practical access to formal sector finance. Microfinance has been growing
rapidly with $25B currently at work in microfinance loans. It is estimated that the industry needs
$250 billion to get capital to all the poor people who need it. The industry has been growing
rapidly and there have been concerns that the rate of capital flowing into microfinance is a
potential risk unless managed well.

Modern microfinance emerged in the 1970s with a strong orientation towards private sector
solutions. This resulted from evidence that state-owned agricultural development banks in
developing countries had been a monumental failure, actually undermining the development
goals they were intended to serve. Nevertheless public officials in many countries hold a
different view, and continue to intervene in microfinance markets.

There has been a long-standing debate over the sharpness of the trade-off between 'outreach' (the
ability of a microfinance institution to reach poorer and more remote people) and its
'sustainability' (its ability to cover its operating costs -- and possibly also its costs of serving new
clients -- from its operating revenues). While it is generally agreed that microfinance
practitioners should seek to balance these goals to some extent, there are a wide variety of
strategies, ranging from the minimalist profit-orientation of BancoSol in Bolivia to the highly
integrated not-for-profit orientation of BRAC in Bangladesh. This is true not only for individual
institutions, but also for governments engaged in developing national microfinance systems.

Microfinance experts generally agree that women should be the primary focus of service
delivery. Evidence shows that they are less likely to default on their loans than men. Industry
data from 2006 for 704 MFIs reaching 52 million borrowers includes MFIs using the solidarity
lending methodology (99.3% female clients) and MFIs using individual lending (51% female
clients). The delinquency rate for solidarity lending was 0.9% after 30 days (individual lending --
3.1%), while 0.3% of loans were written off (individual lending -- 0.9%). Because operating
margins become tighter the smaller the loans delivered, many MFIs consider the risk of lending
to men to be too high. This focus on women is questioned sometimes, however. A recent study
of microenterpreneurs from Sri Lanka published by the World Bank found that the return on
capital for male-owned businesses (half of the sample) averaged 11% while the the return for
women-owned businesses was 0% or slightly negative.

In developing economies and particularly in the rural areas, many activities that would be
classified in the developed world as financial are not monetised: that is, money is not used to
carry them out. Almost by definition, poor people have very little money. But circumstances
often arise in their lives in which they need money or the things money can buy.
In Stuart Rutherford‟s recent book The Poor and Their Money, he cites several types of need.

Lifecycle Needs: such as weddings, funerals, childbirth, education, homebuilding, widowhood,
old age.

Personal Emergencies: such as sickness, injury, unemployment, theft, harassment or death.

Disasters: such as fires, floods, cyclones and man-made events like war or bulldozing of
dwellings.

Investment Opportunities: expanding a business, buying land or equipment, improving housing,
securing a job (which often requires paying a large bribe), etc.

Poor people find creative and often collaborative ways to meet these needs, primarily through
creating and exchanging different forms of non-cash value. Common substitutes for cash vary
from country to country but typically include livestock, grains, jewellery and precious metals.

As Marguerite Robinson describes in The Microfinance Revolution, the 1980s demonstrated that
“microfinance could provide large-scale outreach profitably,” and in the 1990s, “microfinance
began to develop as an industry”. In the 2000s, the microfinance industry‟s objective is to satisfy
the unmet demand on a much larger scale, and to play a role in reducing poverty. While much
progress has been made in developing a viable, commercial microfinance sector in the last few
decades, several issues remain that need to be addressed before the industry will be able to
satisfy massive worldwide demand. The obstacles or challenges to building a sound commercial
microfinance industry include:

• Inappropriate donor subsidies

• Poor regulation and supervision of deposit-taking MFIs

• Few MFIs that meet the needs for savings, remittances or insurance

• Limited management capacity in MFIs

• Institutional inefficiencies

• Need for more dissemination and adoption of rural, agricultural microfinance methodologies

 The basic problem poor people as money managers face is to gather a „usefully large‟ amount of
money. Building a new home may involve saving and protecting diverse building materials for
years until enough are available to proceed with construction. Children‟s schooling may be
funded by buying chickens and raising them for sale as needed for expenses, uniforms, bribes,
etc. Because all the value is accumulated before it is needed, this money management strategy is
referred to as „saving up‟.
Often people don‟t have enough money when they face a need, so they borrow. A poor family
might borrow from relatives to buy land, from a moneylender to buy rice, or from a microfinance
institution to buy a sewing machine. Since these loans must be repaid by saving after the cost is
incurred, it is called „saving down‟. Microcredit is addressing only half the problem, and
arguably the less important half poor people borrow to help them save and accumulate assets.
Microcredit institutions should fund their loans through savings accounts that help poor people
manage their myriad risks.

Most needs are met through mix of saving and credit. A benchmark impact assessment of
Grameen Bank and two other large microfinance institutions in Bangladesh found that for every
$1 they were lending to clients to finance rural non-farm micro-enterprise, about $2.50 came
from other sources, mostly their clients‟ savings. This parallels the experience in the West, in
which family businesses are funded mostly from savings, especially during start-up.

Recent studies have also shown that informal methods of saving are very unsafe. For example
“those with no option but to save in the informal sector are almost bound to lose some money –
probably around one quarter of what they save there.

The studies have caused practitioners to reconsider a key aspect of the microcredit paradigm: that
poor people get out of poverty by borrowing, building microenterprises and increasing their
income. The new paradigm places more attention on the efforts of poor people to reduce their
much vulnerability by keeping more of what they earn and building up their assets. While they
need loans, they may find it as useful to borrow for consumption as for microenterprise. A safe,
flexible place to save money and withdraw it when needed is also essential for managing
household and family risk.

No systematic effort to map the distribution of microfinance has yet been undertaken. A useful
recent benchmark was established by an analysis of „alternative financial institutions‟ in the
developing world in 2004. It is counted approximately 665 million client accounts at over 3,000
institutions that are serving people who are poorer than those served by the commercial banks.
Of these accounts, 120 million were with institutions normally understood to practice
microfinance. Reflecting the diverse historical roots of the movement, however, they also
included postal savings banks (318 million accounts), state agricultural and development banks
(172 million accounts), financial cooperatives and credit unions (35 million accounts) and
specialized rural banks (19 million accounts).

Regionally the highest concentration of these accounts was in India (188 million accounts
representing 18% of the total national population). The lowest concentrations were in Latin
American and the Caribbean (14 million accounts representing 3% of the total population) and
Africa (27 million accounts representing 4% of the total population). Considering that most bank
clients in the developed world need several active accounts to keep their affairs in order, these
figures indicate that the task the microfinance movement has set for itself is still very far from
finished.
By type of service “savings accounts in alternative finance institutions outnumber loans by about
four to one. This is a worldwide pattern that does not vary much by region.

 At the end of 2006 it was tracking 704 MFIs that were serving 52 million borrowers ($23.3
billion in outstanding loans) and 56 million savers ($15.4 billion in deposits). Of these clients,
70% were in Asia, 20% in Latin America and the balance in the rest of the world.

As yet there are no studies that indicate the scale or distribution of „informal‟ microfinance
organizations like ROSCAs and informal associations that help people manage costs like
weddings, funerals and sickness. Numerous case studies have been published however,
indicating that these organizations, which are generally designed and managed by poor people
themselves with little outside help, operate in most countries in the developing world.

The microcredit era that began in the 1970s has lost its momentum, to be replaced by a „financial
systems‟ approach. While microcredit achieved a great deal, especially in urban and near-urban
areas and with entrepreneurial families, its progress in delivering financial services in less
densely populated rural areas has been slow. Another major goal of the microcredit movement
was to put the traditional moneylender, who typically charges at least 10% a month and often
much more, out of business. There is little evidence of progress towards this goal.

The new financial systems approach pragmatically acknowledges the richness of centuries of
microfinance history and the immense diversity of institutions serving poor people in developing
world today. It is also rooted in an increasing awareness of diversity of the financial service
needs of the world‟s poorest people, and the diverse settings in which they live and work.

Informal financial service providers

These include moneylenders, pawnbrokers, savings collectors, money-guards, ROSCAs, ASCAs
and input supply shops. Because they know each other well and live in the same community,
they understand each other‟s financial circumstances and can offer very flexible, convenient and
fast services. These services can also be costly and the choice of financial products limited and
very short-term. Informal services that involve savings are also risky; many people lose their
money.

Member-owned organizations

These include self-help groups, credit unions, and a variety of hybrid organizations like
„financial service associations‟ and CVECAs. Like their informal cousins, they are generally
small and local, which means they have access to good knowledge about each others‟ financial
circumstances and can offer convenience and flexibility. Since they are managed by poor people,
their costs of operation are low. However, these providers may have little financial skill and can
run into trouble when the economy turns down or their operations become too complex. Unless
they are effectively regulated and supervised, they can be „captured‟ by one or two influential
leaders, and the members can lose their money.
NGOs

The Microcredit Summit Campaign counted 3,316 of these MFIs and NGOs lending to about
133 million clients by the end of 2006. Led by Grameen Bank and BRAC in Bangladesh,
Prodem in Bolivia, and FINCA International, headquartered in Washington, DC, these NGOs
have spread around the developing world in the past three decades; others, like the Gamelan
Council, address larger regions. They have proven very innovative, pioneering banking
techniques like solidarity lending, village banking and mobile banking that have overcome
barriers to serving poor populations. However, with boards that don‟t necessarily represent either
their capital or their customers, their governance structures can be fragile, and they can become
overly dependent on external donors.

Formal financial institutions

In addition to commercial banks, these include state banks, agricultural development banks,
savings banks, rural banks and non-bank financial institutions. They are regulated and
supervised, offer a wider range of financial services, and control a branch network that can
extend across the country and internationally. However, they have proved reluctant to adopt
social missions, and due to their high costs of operation, often can‟t deliver services to poor or
remote populations. The increasing use of alternative data in credit scoring, such as trade credit
is increasing commercial banks' interest in microfinance.

With appropriate regulation and supervision, each of these institutional types can bring leverage
to solving the microfinance problem. For example, efforts are being made to link self-help
groups to commercial banks, to network member-owned organizations together to achieve
economies of scale and scope, and to support efforts by commercial banks to „down-scale‟ by
integrating mobile banking and e-payment technologies into their extensive branch networks.
There are currently a few social interventions that have been combined with micro financing to
increase awareness of HIV/AIDS. Such interventions like the “Intervention with Microfinance
for AIDS and Gender Equity” (IMAGE) which incorporates microfinancing with “The Sisters-
for-Life” program a participatory program that educates on different gender roles, gender-based
violence, and HIV/AIDS infections to strengthen the communication skills and leadership of
women "The Sisters-for-Life" program has two phases where phase one consists of ten one-hour
training programs with a facilitator with phase two consisting of identifying a leader amongst the
group, train them further, and allow them to implement an Action Plan to their respective
centres.
Microfinance in India
According to World Bank, out of the world‟s total population of 6 billion, a total of 1.2 billion
people, live on wages less than $1 (INR 50) per day; of which, the majority live in Asia. Almost
40% of the population of the South Asia region is poverty stricken. Further to this, India alone is
said to host about one third of the world‟s poor.
India‟s population little over 1 billion has its 70% people staying in rural or semi urban areas
with almost 260 million people living below poverty line. As in the past, poverty and rural
development remains the daunting challenge for India even today.
The estimates from Government of India show that over 250 million people are left without
proper access to credit despite a network of 33000 rural and semi urban branches of commercial
banks, 14000 branches of Regional Rural Banks and 92000 outlets of cooperatives. The poorest
people very often do not comply with the norms that banks lay down for credit seekers. They
neither have salary certificates or the required collateral to show as security against the loan.
Under such circumstances, the poorest citizens access credit mostly from informal finance
providers who charge very high rate of interest. Non-payment of principal or interest by the
credit seekers invites various kind of exploitation for him and his family.
To date in India, only an estimated 5 million poor people (mostly rural women) benefit from
microfinance services, leaving a vast unmet demand for developing credit, savings and insurance
activities which is termed as microfinance services targeted a sector referred to as non-bankable
even till date.
As designed by NABARD, the women who benefit from microfinance are able to access the
microfinance services by forming groups of 5 to 20 women, called self-help groups ("SHGs").
The group is intended to act as a semi-guarantor by making sure that each member repays her
loan in the stipulated time thereby positively contributing to the groups credit-worthiness. SHGs
are either linked to NGOs or to local banks. From the banks they can access funds @ 2-3% a
month and through NGOs providing micro-credit @ 15 to 20 % per annum. There is a possibility
of generating a credit demand of 25 billion Indian Rupees from savings from the poor in the
short term.
In India, these self-help groups more often than not are linked to NGOs who function as quasi
banks. The NGOs receive funds both by way of grants (currently most often through foreign
donors) as well as soft loans from government apex institutions such as NABARD and SIDBI
and through various other government institutions like Rashtriya Mahila Khosh and government
programme like CAPART and SGSY.
These NGOs lend the money to the individuals via the self-help groups at interest rates of 15-20-
24% per annum. In India, according to NABARD there exist over 1500 NGOs all across rural
India that implements microfinance programs. These NGO were mostly set up as social service
organizations that had health, education and community development as their primary social
agenda. They have slowly in the past decade incorporated microfinance as a part of their activity.
Running a microfinance program for a small group of women is perhaps a manageable task.
However once the scale (client-base start reaching the levels of 3000-5000-15000 women, the
NGOs face immense pressure as they are not geared in terms of skills, systems and infrastructure
and know-how to function like financial institutions. Managing the loan disbursement and loan
repayment of over 5000 members, which entails rolling money from a minimum of Rs. 35 lakhs
(USD 74,468) to 3.5 crores (USD 744680) starts becoming a huge challenge. Sometimes the
self-help groups directly link themselves to local banks and are able to access funds at lower
interest rates. However lending to the poor is still a concept that the banks are coming to terms
with. It presents a whole myriad of problems as servicing a poor client is demanding and perhaps
not in the bank‟s top priority.
Two important apex institutions (NABARD and SIDBI) support the development of
microfinance in India. Although there exists a few large Micro Finance Institutions (MFIs) like
SEWA in Ahmedabad, SHARE and BASIX in Hyderabad, MYRADA in Bangalore, CASHPOR
in Uttar Pradesh, and Working Women Forum and DHAN Foundation in Tamil Nadu, all
catering to more than several thousands of rural women, most of the several hundreds of
comparatively smaller Indian NGOs which provide microfinance to the poorest do not function
as MFIs and are in urgent need of capacity building.
Although good work is undertaken towards poverty alleviation by NGOs at the grassroots level,
there is no regulation framework set-up yet by the Reserve Bank of India despite the 1999 Task
Force recommendations on Supportive Policy and Regulatory Framework for Micro Finance.
Despite the active involvement of apex institutions and networks of such NGOs there is no
national network which could enable better capacity building and exchange of best practices.
There is therefore scope for microfinance sector to become even more professional and
transparent in India.
There also exists no comprehensive and detailed database of organizations providing
microfinance in India.


NABARD's Support

Scheme for providing technology support to NGOs for strengthening MIS of SHG
promotion and nurturing


NABARD'S Support for Capacity Building and Loanable Funds:-

NABARD provides capacity building assistance and financial support to its partners for the
promotion and broad basing of microFinance operations. As part of its efforts to link larger
number of SHGs to the banking system, NABARD also focuses on training and sensitization of
partner agencies, through various interventions.



Liquidity Support to Banks for SHG-bank Linkage:-

The National Bank continued to provide 100 per cent refinance assistance to banks for financing
SHGs. During 2004-05, Rs.29,942.25 million (US$ 696 million) was disbursed as loan to SHGs
loan was by various banking institutions. Banks had availed of refinance to the tune Rs. 9677.64
million (US$ 225 million) from NABARD. Cumulatively till 31 March 2005, the bank loans
disbursed to the SHGs aggregated Rs. 68,984 million (US$ 1604 million), while National Bank's
refinance availed of by the banks aggregated Rs. 30,859 million (US$ 718 million).
Financial Support to Partner Agencies:-

Promotional Grant Assistance to NGOs to function as SHPIs

NGOs already working in the social sector are encouraged to take up SHG promotion as an "add-
on" activity. This not only helped in complementing the core areas of activities of the
participating NGOs but also reduced overheads costs in formation and nurturing of groups.
NABARD provides a grant assistance of Rs 3000/- to NGOs for promotion and linking of each
SHG. This amount broadly covers training of members of SHG, stationery for the group,
incentive/part salary of NGO staff etc. Cumulatively, as on 31 March 2005, NABARD had
sanctioned a grant assistance of Rs.193.87 million, covering 1048 NGOs, for promotion,
nurturing and facilitating credit linkage of 139513 SHGs.


Supporting RRBs as SHPIs:-

In order to widen the spectrum of SHPIs, NABARD assisted five branches of Cauvery Grameena
Bank (CGB), an RRB in Mysore, in the year 1994, to test the feasibility of RRBs themselves
taking on the role of SHPIs. Under this programme, the bank staff at the identified branches were
provided with specific training in promotion, nurturing and financing of SHGs. This experiment
succeeded in grooming RRB staff to form SHGs. Having successfully oriented a few RRBs to
take up the role of SHPIs, it was felt necessary to find ways of reducing the per SHG cost
involved in promotion and nurturing of SHGs by bank staff, if the programme were to be broad
based across the country. Therefore, an alternative module was developed by NABARD,
involving lower cost, to support more RRBs. This module envisages support from NABARD for
training of staff of ten identified branches for each RRB, with provision to partly meet the costs
of awareness building, training and stationery for the SHGs, which are promoted by them.
NABARD provides grant assistance @ Rs1500/- per SHG to RRBs for formation and linkage.



DCCBs as SHPIs

In India cooperative institutions like District Cooperative Central Banks (DCCBs) and Primary
Agricultural Cooperative Credit Societies (PACS) have a long history being in existence for the
past several decades. They have the potential to emerge as major partners considering their
strong presence in rural areas for integrating SHG bank linkage programme in their existing
business activity. NABARD has therefore formulated a scheme for assisting DCCBs to form,
nurture and link self-help groups. NABARD provides grant assistance @ Rs1500/- per SHG to
DCCBs for formation and linkage. As at the end of March 2005, 55 DCCBs have been
sanctioned grant assistance aggregating Rs 23 million for promotion and linkage of 28,110
SHGs.
Farmers' Clubs as SHPI .

NABARD has been encouraging informal forums called Farmers' Clubs (FCs) to spread the

message of 'Development through Credit' and inculcate the repayment ethics among borrowers.
These clubs also have significant potential to work as SHPIs. Accordingly, a module was
developed to support them to function as SHPIs. The module envisages financial support to
nodal bank branches and FCs for meeting expenditure on (i) awareness building on SHGs among
volunteers and nodal branch staff, (ii) training of identified FC volunteers to work as facilitators
(iii) required stationery for SHGs promoted, (iv) reimbursement of expenditure incurred by the
facilitators in promotion of SHGs, and (v) incentives to the Farmers' clubs for acting as SHPI.
The module is now helping available independent facilitators like schoolteachers and primary
health workers to form and nurture SHGs.

Individual Rural volunteers:-

In regions of the country, where NGOs are not adequately represented, a special initiative has
been launched by NABARD in the year 2003 to rope in socially committed individual volunteers
like retired and active school teachers, post masters, village elders, anganwadi workers, members
of existing credit linked SHGs etc for formation of self help groups and linking them with banks.
This scheme is being implemented in 20 states of the country through regional rural banks/
district central cooperative banks. Volunteers are provided with a grant assistance of Rs 1200/-
per SHG for formation and linking them. As on 31.3.2005, a total grant assistance of Rs 5.96
million has been sanctioned to 13 Regional Rural Banks & 2 DCCBs for promoting 4525 SHGs
utilizing 430 Individual Rural Volunteers.


Capacity Building of Partner Institutions in microfinance:-

Comprehensive training of the staff of banks, NGOs and government agencies is the key to
collaborative partnership of these agencies, and this exercise includes designing of course
modules oriented towards a wide range of target audience. Suitable reading material and training
aids are developed and updated periodically. The programmes are regularly evaluated to help
modify their contents.

During 2004-05, NABARD scaled up its efforts towards providing financial and technical
support for training of staff of banks, NGOs and government agencies to induct them into the
linkage programme and further enhance their effectiveness in mF. NABARD supported the
conduct of following training programmes.

•   In all 2481 awareness creation and capacity building programmes were organised for SHG
    members in association with identified resource NGOs, covering 2,07,916 participants to
    inculcate skills for managing thrift and credit;

•   160 Awareness-cum-refresher programmes were conducted for CEOs and field staff of
     NGOs, which covered 4246 participants;

•    7 Trainers‟ Training Programmes were organised for 161 faculty members/officers of
     training institutes of various banks, which includes faculty members from co-operative and
     commercial banks.

•    Another 948 training programmes for bank branch managers/officers of commercial banks,
     co-operative banks and RRBs were conducted covering 42,812 participants.

•    Nineteen exposure visits to banks and institutions pioneering in mF initiatives were arranged
     in which 441 bank officials / NGOs participated;

•    To involve more bank officials in the SHG-bank linkage programme, 449 field visits to
     nearby SHGs for Block Level Bankers' Committee (BLBC) members were conducted
     covering 8204 officials;

•    Forty one programmes for the elected members of Panchayati Raj Institutions (PRIs) were
     conducted, covering 1198 participants to create awareness among them about the mF
     initiatives;

•    One exclusive workshop was organized for senior IAS officers through Lal Bahadur Sastry
     National Academy of Administration Mussoorie.

•    106 meets and seminars on microfinance were organized at various centers.

Number of stakeholders trained by NABARD (Cumulative position as on 31.3.2005)

                                                            No.              of No             of
Sl No Training programme for                                programmes          participants
                                                            conducted           trained.
1        Bankers                                            4822                152167
2        NGOs                                               937                 25613
3        Training of Trainers                               89                  2796
4        Government officials                               705                 32681
5        SHGs                                               14049               638325
6        Exposure visits                                    71                  1859
7        Field visits of BLBCs to SHGs                 1474                     23591
8        Training for elected members of Panchayat Raj
                                                       119                      4663
         Institutions
9        Others                                        1452                     96164
10       Meets & Seminars                              639                      38823
         Grand Total                                        24357               1016682
Revolving Fund Assistance (RFA) to MFIs

NABARD has been providing RFA on a selective basis to NGOs, SHG Federations and Credit
Unions and other agencies for on-lending to SHGs, to help them build their financial
intermediation capacity and to prepare them to take bank loans in future. Cumulatively Rs 273.2
million has been sanctioned as RFA to 32 agencies.




Collaboration with External Agencies

To support funding of various initiatives leading to designing of products and services, creation
and promotion of delivery mechanisms, setting up of new organisational structures and devising
systems and procedures which will help improve the access of the poor to institutional financial
services, a special fund, viz., Credit and Financial Services Fund (CFSF) Fund was set up in
NABARD in 1995, with the assistance of the Swiss Development Cooperation (SDC). Most of
the mF initiatives of NABARD have been funded through the CFSF.

NABARD has also collaborated with GTZ, Germany, since January 2000 primarily for
supporting initiatives in the field of training and capacity building, and development of an
appropriate MIS.



NABARD’S INITIATIVE:-

NABARD‟S has been playing the role of propagator and facilitator by providing a conductive
policy environment, training and capacity building besides extending financial support for the
healthy growth of the SHG- BANK linkage programme in the country. Over the years, various
promotional steps taken are enumerated as under:

      Conceptualization and introduction of pilot programme in February 1993 for linking 500
       SHGs with banks after consultations with Reserve Bank of India and NGOs.
      Introduction of Bulk Lending Scheme of pilot programme in 1993 for encouraging the
       NGOs which were keen to try group lending approach and other financial services
       delivery innovations in the rural areas.
      Devoloping conductive policy framework through provision of opening savings bank
       accounts in the names of SHGs (through they are informal groups), relaxation of co-
       lateral norms, simple documentation and delegation of all credit decisions and repayment
       terms to SHGs.
      Training and awareness building among the stakeholders.
      Provision of capacity- building support of NGOs/SHGs/banks.
      Mainstreaming the SHG-bank linkage programme as part of corporate planning and
       normal business activity of banks in 1996 and internalizing training, monitoring and
       review mechanism.
      Encouraging banks (RRBs and Co- Operative banks) for promotion of SHGs.
      Financial support to NGOs for promotion of SHGs.
   Encouraging rural individual volunteers in promotion and nurturing of SHGs.
   Close monitoring.
   Dissemination through seminars, workshops, occasional papers and print media.
   Constitution of a high powered task force to look into the aspects of policy and regulation
    of microfinance and suggest policy, legal, regulatory measures for smooth, unhindered
    growth of the microfinance sector.
   Setting up a Microfinance development in NABARD for meeting the promotional costs
    of upscaling the microfinance interventions. The fund has since been re-designed as
    microfinance development and equity fund (MFDEF).
   Initiating the credit rating of MFIs through accredited credit rating agencies in India by
    meeting 75 per cent of the cost of the rating as grant. This is done to enable the MFIS to
    approach banks for commercial borrowing and extending microcredit to the poor.

    EVOLUTION OF SHGs- BANK LINKAGE PROGRAMME:-

    The SHGs-bank linkage programme is the flagship microfinance intervention mechanism
    of NABARD. The launching of it‟s pilot phase in February 1992 could be considered as a
    landmark development in the annals of banking with the poor. The informal thrift and
    credit groups of the rural poor came to be recognized as bank clients under the pilot
    phase. The pilot phase was followed by setting up of a working group on NGOs and
    SHGs by the Reserve Bank of India in 1994, which came out with wide-ranging
    recommendation on internalization of the SHG concept as a potential intervention tool in
    the strategy of banking with the poor. The Reserve Bank of India accepted most of the
    major recommendations and advised the banks consider lending to the SHGs as part of
    their mainstream rural credit operations.

    An SHG is a small localized group of 10-12 persons from a homogeneous background. It
    is groomed by an NGO or a bank branch or a government agency called a self help
    promoting institution(SHPI). The members of the group are encouraged to collect regular
    thrift on a weekly or fortnightly or monthly basis and use the resources to give interest-
    bearing small loans to their members. The SHPI trains the members to maintain simple
    accounts of the collected thrift and loans given to members. The regular meetings also
    provide them a platform to discuss and resolve many social and common issues, thus
    strengthening their bonds. A savings bank account is opened with a bank branch and
    regular thrift collection and loaning to encourages the bank to provide larger loans to the
    group.

    The conceptual thinking behind the SHG philosophy and the bank linkage may be
    summarized as under:-

    1. Self help supplemented with mutual help can be a powerful vehicle for the poor
       people‟ efforts in achieving upward socio-economic transition.
    2. Participative financial services management is more efficient and responsive.
    3. The poor can save and bankable.
    4. The mismatch between the expectations of the poor and capabilities of the formal
       banking system needs to be minimized.
    5. The poor need not only credit support but also savings and other financial services.
        6. Small affinity groups of the poor, with initial outside support, can effectively manage
            and supervise microcredit among their members.
        7. Collective wisdom of the group and peer pressure are valuable collateral substitutes.
        8. SHGs could be a pre-microenterprise formative stage for a majority of the rural poor.
        9. SHGs as clients facilitate wider outreach, lower transaction costs and much lower risk
            costs.
        10. Empowerment and confidence building of the poor, especially of poor women, is a
            major outcome.

    INITIATIVE BY ICICI BANK FOR MICROFINANCE :-

 The case describes microfinance initiatives of ICICI Bank, the largest private sector bank in
 India. In spite of being a new entrant, ICICI Bank has been highly successful in the microfinance
 sector, primarily because of its innovative microfinance business models.

 The case discusses some of these models including Bank led & Partnership model. Other
 microfinance   ventures   of    ICICI   Bank     are   also  explained    in    detail.

 The case presents how ICICI Bank has made microfinance a viable business proposition for
 banks.

 In India, 400 million people spread across more than six million villages are estimated to be in
 need of micro-financing. The organized financial sector caters to the need of about 20 million
 people. ICICI Bank's micro credit initiatives involved lending small amounts to the people below
 poverty line. It provided basic banking services like savings and withdrawal along with micro-
 investment                products                 like              mutual                funds.

 This provided poor people with safer avenues for saving with little volatility. ICICI Bank was
 also instrumental in designing new structures through which microfinance institutions (MFIs)
 and non-governmental organizations (NGOs) could overcome capital constraints and expand
 their reach...

 The structures included buying the microfinance portfolios of MFIs either on a selective basis or
 buying the complete loans of a branch or a particular area, and also entering into partnership
 arrangements with MFIs. This helped in leveraging the operational strength of NGO/MFI with
 the financial strength of ICICI Bank. In the world's largest securitization4 deal, ICICI Bank
 purchased a portfolio of 42500 loans worth US$ 4.3 million from Share Microfin Limited in
 2004.

Bank Led Model:-

 These loans were perceived to carry high risk as they had high default rates; the borrowers
 usually did not have any viable income generating opportunities nor did they possess any
 collateral guarantee. To fill the huge gap between demand and supply, an environment that was
 conducive for microfinance providers was required. ICICI Bank was promoted in the year 1994
 as the banking division of Industrial Credit and Investment Corporation of India Limited (ICICI).
 ICICI was a developmental financial institution incorporated in the year 1955, as a joint initiative
of Government of India, the World Bank and representatives of the Indian industry.

By the 1990s, ICICI had emerged as a diversified financial group that offered a wide range of
financial products through a network of subsidiaries and affiliates. In April 2002, ICICI merged
with ICICI Bank.

The bank led model was derived from the SHG-Bank linkage program of NABARD. Through
this program, banks financed Self Help Groups (SHGs) which had been promoted by NGOs and
government agencies.


Partnership Model:-

The SHG program had been fairly successful in several states of India, but the reach was limited
only to those areas where the bank's branches were operational. The partnership model of ICICI
Bank aimed at reaching those areas where the bank did not have any branches. This model aimed
at synergizing the comparative advantages and financial strength of the bank with social
intermediation, mobilization power and infrastructure of MFIs and NGOs. Through this model,
ICICI Bank could save on the initial costs of developing rural infrastructure and micro credit
distribution channels and could take advantage of the expertise of these institutions in rural areas.
Initially, ICICI Bank started off by lending to MFIs and NGOs in order to provide the necessary
financial support to their activities. Later, ICICI Bank came up with a plan where the NGO/MFI
continued to promote their microfinance schemes, while the bank met the financial requirements
of the borrowers.

In this context, following strategic, institutional and connectivity issues related to micro-finance
arise.

Strategic Issues

      Is there a prevailing paradigm for micro-finance?
      Are there clearly visible pattern across the country?
      Is there a clearly defined foundation building blocks such as organizing principles,
       gender preferences and operational imperatives?
      What are methodological issues?

       Institutional Issues

      Is there a need for a new institution?
      Should it operate all India or in a state?
      Where should it be located?
      Who can lead an institution of this sort?
      What will its contextual interconnections be?
      Who will be its beneficiaries?
       Connectivity Issues

      How should the Corporate Financial Sector be involved?
      What is the role of donor agencies?
      How should communities be involved?
      Are there political issues that should be explicitly considered?
      Are there government policy issues?

Strengths of Microfinance Sector:-

A synthesis that can be evolved out of the success of NGOs/CBOs engaged in microfinance is
based on certain preconditions, institutional and facilitating factors.

Preconditions to Success:

Those NGOs/ CBOs have been successful that have instilled financial value/ discipline through
savings and have demonstrated a matching value themselves before lending. A recovery system
based on social intermediation and various options including non-financial mechanisms has
proved to be effective. Another important feature has been the community governance. The
communities in which households are direct stake holders have successfully demonstrated the
success of programs. A precondition for success is to involve community directly in the program.
Experience indicates that savings and credit are both critical for success and savings should
precede credit. Chances of success more with women. Programs designed with women are more
successful.

Operating Indicators :

The operating indicators show that programs which are designed taking into account the
localized and geographical differences have been successful. Effective and responsive
accounting and monitoring mechanisms have been an important and critical ingradient for the
success of programs. The operational success has been more when interest rates are at or near
market rates: The experience of NGOs/CBOs indicates that low income households are willing
to pay market rates. The crucial problem is not the interest rates but access to finance. Eventually
in absence of such programs households end up paying much higher rates when borrowing from
informal markets. Some NGOs have experimented where members of community decide on
interest rates. This is slightly different from Thailand experience where community decides on
repayment terms and loan amount. A combination of the three i.e. interest rates, amount and
repayment period if decided by community, the program is most likely to succeed. A program
which is able to leverage maximum funds from formal market has been successful. Experience
indicates that it is possible to leverage higher funds against deposits.

The spreads should be available to meet operational costs of NGOs. Most of the directed credit
program in India like Kfw have a ceiling on the maximum interest rate and the spread available
to NGOs. A flexible rate of interest scheme would indicate a wider spread for NGOs. Selected
non-financial services, viz. business, marketing support services enhance success. Appropriate
incentives for borrowing and proper graduation of credit has been essential component of
success. A successful program can not be generalized for all needs and geographical spread. The
programs which are simple and replicable in similar contexts have contributed to success.
Betterment in quality of life through better housing or better economic opportunities is a tangible
indicator of success. The programs which have been able to demonstrate on some measurable
scale that the quality of life has improved have been successful. To be successful the program
productivity with outreach should match. The credit mechanism should be flexible meeting
multiple credit needs: The programs which have taken care of other needs such as consumption,
marriage etc. besides the main shelter, infrastructure or economic needs are successful.

Facilitating Factor

Another factor that has contributed to the success is the broad environment. A facilitative
environment and enabling regulatory regime contributes to the success. The NGOs/CBOs which
have been able to leverage funds from formal programs have been successful. An essential factor
for success is that all development programs should converge across sectors.

Weaknesses of Existing Microfinance Models
One of the most successful models discussed around the world is the Grameen type. The bank
has successfully served the rural poor in Bangladesh with no physical collateral relying on group
responsibility to replace the collateral requirements. This model, however, has some weakness. It
involves too much of external subsidy which is not replicable Grameen bank has not oriented
itself towards mobilising peoples' resources. The repayment system of 50 weekly equal
instalments is not practical because poor do not have a stable job and have to migrate to other
places for jobs. If the communities are agrarian during lean seasons it becomes impossible for
them to repay the loan. Pressure for high repayment drives members to money lenders. Credit
alone cannot alleviate poverty and the Grameen model is based only on credit. Micro-finance is
time taking process. Haste can lead to wrong selection of activities and beneficiaries.

Another model is Kerala model (Shreyas). The rules make it difficult to give adequate credit
{only 40-50 percent of amount available for lending). In Nari Nidhi/Pradan system perhaps not
reaching the very poor.

Most of the existing microfinance institutions are facing problems regarding skilled labour which
is not available for local level accounting. Drop out of trained staff is very high. One alternative
is automation which is not looked at as yet. Most of the models do not lend for agriculture.
Agriculture lending has not been experimented.

      Risk Management : yield risk and price risk
      Insurance & Commodity Future Exchange could be explored

All the models lack in appropriate legal and financial structure. There is a need to have a sub-
group to brainstorm on statutory structure/ ownership control/ management/ taxation aspects/
financial sector prudential norms. A forum/ network of micro-financier (self regulating
organization) is desired.
A New Model (Paradigm )

A new paradigm that emerges is that it is very critical to link poor to formal financial system,
whatever the mechanism may be, if the goal of poverty allieviation has to be achieved. NGOs
and CBOs have been involved in community development for long and the experience shows
that they have been able to improve the quality of life of poor, if this is an indicator of
development. The strengths and weaknesses of existing NGOs/CBOs and microfinance
institutions in India indicate that despite their best of efforts they have not been able to link
themselves with formal systems. It is desired that an intermediary institution is required between
formal financial markets and grassroot. The intermediary should encompass the strengths of both
formal financial systems and NGOs and CBOs and should be flexible to the needs of end users.
There are, however, certain unresolved dilemmas regarding the nature of the intermediary
institutions. There are arguments both for and against each structure. These dilemmas are very
contextual and only strengthen the argument that no unique model is applicable for all situations.
They have to be context specific.

Dilemmas

          Community Based                         Investor Owned

                 Community Managed
                 Community              (self)         Professionally managed
                  financed                              Accepting outside funds for on-
                 Integrated     (social     &           lending
                  finance)                              Minimalist (finance only)
                 Non profit / mutual                   For profit
                  benefit                               For all under served clients
                 Only for poor                         Externally regulated
                 'Self regulated'


The four pillars of microfinance credit system (Fig. 1) are supply, demand for finance,
intermediation and regulation. Whatever may the model of the intermediary institution, the end
situation is accessibility of finance to poor. The following tables indicate the existing and desired
situation for each component.
DEMAND


         Existing Situation                         Desired Situation

                                                           Organized
               fragmented
                                                           Differentiated        (for
               Undifferentiated
                                                            consumption, housing)
               Addicted, corrupted by capital &
                                                           Deaddicted from capital &
                subsidies
                                                            subsidies
               Communities not aware of rights
                                                           Aware of rights and
                and responsibilities
                                                            responsibilities




SUPPLY
         Existing Situation                  Desired Situation

               Grant               based
                                                   Regular        fund       sources
                (Foreign/GOI)
                                                    (borrowings/deposits)
               Directed     Credit      -
                                                   Demand responsive
                unwilling and corrupt
                                                   Part of mainstream (banks/FIs)
               Not      linked       with
                                                   Add savings and insurance
                mainstream
                                                   Reduce dominance of informal,
               Mainly focussed for credit
                                                    unregulated suppliers
               Dominated




INTERMEDIATION


         Existing Situation                     Desired Situation

               Non specialized                        Specialized     in    financial
               Not oriented to financial               services
                analysis                               Thorough in financial analysis
               Non profit capital                     For profit
               Not linked to mainstream FIs           Link up to FIs
               Not organized                          Self regulating
REGULATION


           Existing Situation                            Desired Situation

                     Focussed on formal service
                      providers      (informal     not
                                                                include/informal recognise
                      regulated)
                                                                 e.g. SHGs
                     regulating the wrong things e.g.
                                                                Regulate rules of game
                      interest rates
                                                                Coherence and coordination
                     Multiple and conflicting (FCRA,
                                                                 across regulators
                      RBI, IT, ROC, MOF/FIPB,
                                                                Enabling environment
                      ROS/Commerce)
                     Negatively oriented




Possible Alternatives/Options

The three options that emerge out of above discussion regarding structure of intermediary
institution is discussed below.

Option-I

                   One possible option is to increase the flow of funds to informal lenders to
                    supplement their own funds. The formal sector will take advantage of the lower
                    transaction costs and risk premia of the informal sector so as to reach the low
                    income group borrowers beyond the profitable reach of the formal sector. As for
                    the beneficiaries, inspite of the transaction cost of the formal and the informal
                    sector being transferred on to them, the cost of borrowing will remain low as
                    compared to what exists through money lenders.

                    In addition, access to the formal sector funds could promote competition within
                    the informal sector and check the exhorbitant profits being made in this sector. It
                    also promotes allocative efficiency by offering a broader choice for the productive
                    use of savings by beneficiaries, irrespective of which sector they are mobilised by.

                    Thus this approach of promoting linkages combines the strengths of both sectors
                    to supplement the resources of the informal sector. Here it is imperative to avoid
                    the pitfall of discouraging informal savings by substituting cheaper formal funds
                    for informal lenders.

                    The existing modes of borrowing for the low income group through the Co-
                    operative Societies like Thrift and Credit Co.op Societies are already gaining
                    momentum. The Formal Financial Institutions can establish linkages with these
                    co-operative bodies. Funds could be channelised from the formal financial
                    institutions at market rates to the low income group beneficiaries through the
intermediaries like the co-operative bodies stated above. The credit worthiness of
the intermediaries would be the basic security for the loans advanced by the
formal financial institutions. However, the savings mobilised by the
intermediaries from the informal sector could also be accepted as collaterals.

The intermediaries could then lend to groups of beneficiaries. The transaction cost
of the formal sector would be transferred on to the intermediaries who would pass
on the same to the beneficiaries.

In the process, the intermediaries would also charge additional fees to borrowers
to cover their costs. It would also aid them in strengthening themselves. However,
it would be aimed to make the funds reach the beneficiaries at applicable rates of
the two institutions.

The intermediaries would accept the savings from groups as collaterals and would
transfer the same to the formal sector for getting the deposits serviced better. Thus
the two way flow of funds would benefit both the formal and informal sector.

The beneficiaries would benefit as the cost of borrowing would be low for them
and their savings would be safe and would be serviced better.

An analysis of community-based finance systems highlights the high
establishment costs of NGOs. They suggest that loan service costs are lower
amongst co-operative societies, as compared to NGO-linked CBFIs, because of
decentralized loan administration and availability of voluntary staff. The NGO-
linked CBFI operations are generally supported by grants from national and
international donor agencies.

NGO-linked CBFIs must aim at an adequate scale of operation and while it may
be supported by grants to meet establishment costs in the initial period,
dependency on such grants should be reduced over time. An adequate interest rate
spread must be available to meet the transactions costs. CBFIs should be able to
recover all costs through its financial operations, by building up their capacity for
financial management, through training and interaction with the Formal sector
institutions.



Option-II

Since it is now being felt that the existing structures are inadequate to meet the
housing and economic credit needs of the participating community, an Institution
that would combine the strengths of an NGO and the expertise of a financial
institution, with participation from the community will be appropriate.

Thus, the concept of Development Association for Savings and Credit (DASC)
could be utilised to address the issue of providing better access to housing finance
and economic loans for the participating community in the project area. The
                 DASC is built on the strength of the informal groups to create and improve access
                 to skills, resources and markets. These Groups mobilize savings from their
                 constituent members and other formal/informal sources. The funds mobilized are
                 thus used for meeting the credit needs of the members. The DASC is proposed to
                 be a registered company which will affiliate the Groups based on affiliation
                 criteria and have community representation on its decision making body.

                 The DASC will be initiated with the objective to create an alternate, self-
                 sustainable, community based financial organization appropriate to meet the
                 shelter development and livelihood needs of the weaker section belonging to the
                 rural community.

                 The long term perspective of DASC will include :

                 Establishment of a resource centre for shelter and livelihood development for the
                 weaker sections of the society.

                 Demonstration of a viable community based credit system in operation where the
                 communities have access to and control over financial resources based on their
                 own strength.

                 Developing group based approach as a sustainable development paradigm for
                 community development.

Option-III

                As mentioned before, a review of the cooperatives and NGOs illustrates a wide
                 variety of arrangements as well as different stages of development of community-
                 based financial institutions. In all cases, the strength of the community based
                 systems is their close rapport and linkages with the community and its members.
                 The broad arrangement involves a bulk loan from the Formal Financial Institution
                 to the Community Based Financial Institution (CBFI) with specified terms and
                 conditions for lending to households. The CBFI will have the responsibility for
                 loan origination and servicing and therefore would also bear the credit risk.

                 In terms of specific arrangements, two forms of intermediation are envisaged by
                 the strategy. The multi-tiered structure is one in which the bulk loans from the
                 Formal Sector are routed through a Federation or Apex Agency or an NGO,
                 which in turn lends to a primary CBFI. In the single-tiered structure, the Formal
                 Sector Institution deals directly with the CBFI. It is felt that the administrative
                 costs incurred with lending through the multi-tiered model are much higher than
                 under the single-tier model.

                 In promoting these linkages between the Formal Institutions and CBFIs, directly
                 or through the NGO, it is important that basic financial principles are developed
                 for giving bulk credit to community-based financial institutions. The purpose of
               the loan, credit terms and underwriting criteria should be clearly defined for the
               bulk credit that is provided to the CBFI.

               It is essential that a delinquency risk fund (DRF) be placed as a deposit with the
               Formal Institution to cover delinquency risk which may draw against the DRF if
               the CBFI fails to make a regularly scheduled loan payment. In order to meet the
               the DRF requirment, CBFIs should be encouraged to start a savings scheme. An
               appropriate legal status for the CBFI to be able to receive the bulk credit is
               essential. This may involve a simple registration under the Societies Act. The
               legal form should permit the receipt of bulk credit for on lending to the individual
               members.

Business Plan:

Here we want to introduce a little bit change in the system of microfinance. In the present
scenario with banks providing the finance (Loan) directly to the SHG or SAP Group and
indirectly through NGO-MFI or SHG Federation.

Here in the total systems the banks and NGO-MFI fill unsafe because there is no provision for
collateral and the members of SHG and SAP Group are not liable to say that what is the end use
of money which is provided them for their productive activity.

That is why our initiative is to Introduced a CHIT FUND Activity. We insist the SHG or SAP
Group to form a Chit Fund register under chit fund act of 1982.

Once it is a achieved then the Members of that particular group may use the funds in broader
way and that can full fill their requirement. And at the same time financial institution also in the
safe position as long as the group activities exist inside the Chit Fund.

The financial institution also be aware about the end use of the money.

They can take risk for enhance the loan amount in year to year basis.
Projection for 5 Years:
                          Projection for the five years in Microfinance

                                   2009         2010         2011          2012          2013
 No of Branches                       3            5            7            10            15
 No. of staffs                       20           30           40            55            80
 Total no. of
 Borrowers                         5400         9000       12600          18000         27000

 Income
 Total amount of
 Loan                         21600000 41400000 64800000              99000000 153000000
 Interest income
 (22%)                          4752000     9108000 14256000          21780000      33660000
 Insurance prmium
 (2%)                           432000   828000 1296000    1980000   3060000
 Total Income                 26784000 51336000 80352000 122760000 189720000

 Expenduture
 Total amount of
 Loan                         21600000 41400000 64800000              99000000 153000000
 Amount of capital              105000    80000    90000                150000    275000
 Amount of Wages
 and Salary                     1440000     2340000      3360000       4950000        7680000
 other expenses
 rent,/electricity/Mis.         144000   230400   336000    480000    864000
 Total Expenditure            23289000 44050400 68586000 104580000 161819000
 EBITA                         3495000 7285600 11766000 18180000 27901000
 Interest (12%)                2592000 4968000 7776000 11880000 18360000
 Net Income                     903000 2317600 3990000     6300000   9541000




Notes:

It is a Non profit organisation so the tax is not levied on this type of organizations Tax is NIL under
sanction 32(b) of Income tax act. Because it is a Act of society development.

No .of staff in 2009 :15 operational /field officers and 5 head office officers
CONCLUSION:-
Some valuable lessons can be drawn from the experience of successful Microfinance operation.
First of all, the poor repay their loans and are willing to pay for higher interest rates than
commercial banks provided that access to credit is provided. The solidarity group pressure and
sequential lending provide strong repayment motivation and produce extremely low default rates.
Secondly, the poor save and hence microfinance should provide both savings and loan facilities.
These two findings imply that banking on the poor can be a profitable business. However,
attaining financial viability and sustainability is the major institutional challenge. Deposit
mobilization is the major means for microfinance institutions to expand outreach by leveraging
equity. In order to be sustainable, microfinance lending should be grounded on market principles
because large scale lending cannot be accomplished through subsidies.

A main conclusion of this paper is that microfinance can contribute to solving the problem of
inadequate housing and urban services as an integral part of poverty alleviation programmes. The
challenge lies in finding the level of flexibility in the credit instrument that could make it match
the multiple credit requirements of the low income borrowers without imposing unbearably high
cost of monitoring its end-use upon the lenders. A promising solution is to provide multi-purpose
loans or composite credit for income generation, housing improvement and consumption
support. Consumption loan is found to be especially important during the gestation period
between commencing a new economic activity and deriving positive income. Careful research on
demand for financing and savings behaviour of the potential borrowers and their participation in
determining the mix of multi-purpose loans are essential in making the concept work.

Eventually it would be ideal to enhance the creditworthiness of the poor and to make them more
"bankable" to financial institutions and enable them to qualify for long-term credit from the
formal sector. Microfinance institutions have a lot to contribute to this by building financial
discipline and educating borrowers about repayment requirements.