Documenti di Didattica
Documenti di Professioni
Documenti di Cultura
Submitted to
Mr. JRS Sharma
Professor
IBS – Gurgaon
Submitted By
Prateek Goel
Our special thanks to Mr. Goyal, librarian, IBS-G for the help that was offered as and when
required by us during the course of preparing the report.
Finally, we would like to express our gratitude to our friends and family, who have always
showed support in every assignment we undergo.
TABLE OF CONTENTS
1. Executive summary
2. Problem statement
3. Introduction
3.1. Background
3.2. Rural scenario
3.3. Reasons for commercial banks to venture into microfinance
4. ICICI Bank
4.1. Introduction
4.2. ICICI and Microfinance
4.3. ICICI’s foray into rural market
4.4. ICICI initiation to Microfinance
4.4.1.The SHG bank linkage model
4.4.2.The MFI intermediation model
4.4.3.ICICI partnership model
4.5. ICICI’s expansion of services
5. HDFC
5.1. Introduction
5.2. Recommendations to HDFC
6. Conclusion
7. References
EXECUTIVE SUMMARY
Microfinance refers to the provision of financial services to poor or low-income clients,
including consumers and the self-employed. 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 mobilize savings
• Limited management capacity in MFIs
• Institutional inefficiencies
• Need for more dissemination and adoption of rural, agricultural microfinance methodologies
However some of these challenges have been successfully met by the banks and MFIs in India.
This report aims at evaluating the viability of one of these banks ICICI in the field of
microfinance and to further suggest another grand player of banking sector HDFC as to how it
should venture this field.
ICICI is the biggest centralized private player in the Indian banking sector which has proved its
excellence in the direction of microfinance. ICICI Bank sees an opportunity to make profits in
untouched markets, while improving the lives of poor people. ICICI's microfinance portfolio has
been increasing at an impressive speed. From 10,000 microfinance clients in 2001, ICICI Bank is
now lending to 1.2 million clients through its partner microfinance institutions, and its
outstanding portfolio has increased from Rs. 0.20 billion (US$4.5 million) to Rs. 9.98 billion
(US$227 million).
This success is due to a series of innovative models and initiatives. While a model of
microfinance has emerged in recent years in which a microfinance institution (MFI) borrows
from banks and on-lends to clients, few MFIs have been able to grow beyond a certain point.
Under this model, MFIs are unable to provide risk capital in large quantities, which limits the
advances from banks. In addition, the risk is being entirely borne by the MFI, which limits its
risk-taking.
To address these constraints, ICICI Bank initiated a partnership model in 2002 in which the MFI
acts as a collection agent instead of a financial intermediary. This model is unique in that it
combines debt as mezzanine finance to the MFI.The loans are contracted directly between the
bank and the borrower, so that the risk for the MFI is separated from the risk inherent in the
portfolio. This model is therefore likely to have very high leveraging capacity, as the MFI has an
assured source of funds for expanding and deepening credit. ICICI chose this model because it
expands the retail operations of the bank by leveraging comparative advantages of MFIs, while
avoiding costs associated with entering the market directly.
Few other major strategies used by ICICI in microfinance which gave it an edge over other
commercial banks were SHG- Bank linkage, Intermediatory model, securitization, training new
partners and working with venture capitalists which are covered in detail further in the report.
HDFC Bank in India was set up in August 1994 with the approval of Reserve Bank of India. The
bank was promoted by Housing Development Finance Corporation Limited, a premier housing
finance company of India (set up in 1977).
With the growing competition in the urban sector now its necessity for HDFC to venture in the
rural sector. And the best route to the rural sector of India is microfinance. Rural sector demands
are much more than the current supply of financial aid. Moreover, microfinance has proved it
time and again that it the access and not the interest rates that are a constraint for the poor.
Another discovery followed, that the poor can and will save, and can indeed use a wide range of
financial services such as remittances facilities and insurance products. The most well known
and cited international example of a microcredit institution is the Grameen Bank in Bangladesh.
Further, other factors that justify the venture of HDFC into microfinance are the policy push by
the NABARD and government, the demand pull, the lower operating cost, cross-selling
opportunities, the entry of Processing and FMCG companies into the rural sector through the
similar route.
Since around 78% of the banks in the banking sector today in India are the public sector banks.
Its recommended for HDFC to venture into the microfinance by forming Joint Ventures with the
public sector banks so that they could better avail the subsidies and funds provided by the
government and NABARD.
Following the Microfinance models in their venture could be a fruitful approach. Microfinance
models provide the appropriate and among the best methodologies for these players to deliver
services to the lower income families.
PROBLEM STATEMENT
To evaluate the viability of ICICI Bank’s thrust on Microfinance and to advice HDFC Bank as to
why it should undertake similar Microfinance.
INTRODUCTION
The most important finding in the last two decades in the world of finance did not come from the
world of the rich or the relatively well-off. More important than the hedge fund or the liquid-
yield option note was the finding that the poor can save, can borrow (can indeed decide on loans
to fellow poor), and will certainly repay loans. This is the world of microfinance.
A bewildering range of players have jumped on to the microfinance bandwagon — for a variety
of reasons. There have been NGOs which gradually metamorphosed into lending institutions,
developmental professionals who have set up microfinance companies and banks that have
experimented with working exclusively with groups and therefore have ‘Microfinance branches’.
These range from not-for profits that see microfinance as having a role in ‘development’, to
commercial banks that view microfinance as ‘good, sound banking’, an excellent way of raising
deposits, and lending at low risk. In fact the success of groups in microfinance has attracted the
attention of wide-ranging players to use these groups for a range of purposes. Several
governmental schemes are being routed through microfinance, including a very large project
funded by the World Bank and being implemented in the state of Andhra Pradesh. Similarly
organizations like Hindustan Lever have looked at the potential of these groups as a channel for
retailing and have launched a program called ‘Project Shakti’ to tap the smaller villages through
the microcredit channel.
Microfinance leaders are gaining prominence and it is said that some of the leaders, particularly
women, have been taking a more active role in other social spheres, including contesting
elections for the panchayat and so on. The Indian microfinance sector is a museum of several
approaches found across the world. Indian microfinance has lapped up the “Grameen” blueprint;
it has replicated some aspects of the Indonesian and the Bolivian model. In addition to the
imported artifacts of microfinance, we also have the home-grown model of self-help groups
(SHGs).
BACKGROUND
For several decades, many economies, including the Indian, experimented with subsidized credit
for the poor. But the only tangible outcome perhaps was the increase in Non-Performing Assets
(NPA). Then came the realization that the core issue for the poor was access to credit rather than
the cost of credit. In fact one of the contributions of microfinance can possibly be the ‘end of
interest rate debate’.
Microfinance has proved time and again that it is access and not interest rates that are a
constraint for the poor. Another discovery followed, that the poor can and will save, and can
indeed use a wide range of financial services such as remittances facilities and insurance
products.
RURAL SCENARIO
In developing economies and particularly in the rural areas, many activities that would be
classified in the developed world as financial are not monetized: 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.
There are several types of needs:
Disasters: such as fires, floods, cyclones and man-made events like war or bulldozing of
dwellings.
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.
• Institutional inefficiencies
• Need for more dissemination and adoption of rural, agricultural microfinance methodologies
Demand Pull: There is a huge gap between demand and supply .The SHG bug spread among
NGOs rather quickly and they began going to banks to get SHGs linked. But the favourable
policy environment made it possible for NGOs and others to draw the banks out.The most recent
interest among banks, particularly regional rural banks, is perhaps because they are looking for
alternative markets given their present high liquidity. Their SHG portfolio,though small
volumetrically, is performing well (comparable to their prime clients).
Lower operating cost
Finally, for banks the operating cost of microfinance is perhaps much less than for pure MFIs.
The banks already have a vast network of branches. To the extent that an NGO has already
promoted SHGs and the SHG portfolio is performing better than the rest of the rural (if not the
entire) portfolio, microfinance via SHGs in the worst case would represent marginal addition to
cost and would often reduce marginal cost through better capacity utilisation. In the process the
bank also earns brownie points with policy makers and meets its priority sector targets
Further, bank-groups are motivated by a number of cross-selling opportunities in the market, for
deposits, insurance, remittances and eventually mutual funds. Since the larger banks are offering
all these services now through their group companies, it becomes imperative for them to expand
their distribution channels as far and deep as possible, in the hope of capturing the entire
financial services business of a household. Banks and insurance companies have realized that
NGOs offer a gateway to the
large market of the lower-income households and that accounts for why a number of them, the
ICICI Group leading, are establishing business alliances with NGOs. As long as this enables the
spread of financial services to the underserved at competitive rates, I think it is a good thing that
is happening.
An alternative market
It does not take much analysis to figure out that the market for financial services for the 50-60
million poor households of India, coupled with about the same number who are technically
above the poverty line but are severely under-served by the financial sector, is a very large one.
Moreover, as in any emerging market, though the perceived risks are higher, the spreads are
much greater. The traditional commercial markets of corporates, business, trade, and now even
housing and consumer finance are being sought by all the banks, leading to price competition
and wafer thin spreads.
Both agri-input and processing companies such as EID Parry, fast-moving consumer goods
(FMCG) companies such as Hindustan Levers, and consumer durable companies such as Philips
have realised the potential of this big market and are actively using SHGs as entry points. Some
amount of free-riding is taking place here by companies, for they are using channels which were
built at a significant cost to NGOs, funding agencies and/or the government. In response to this,
BASIX has launched an initiative in retail mutual marketing called ‘Our Way’, where it has
encouraged, trained and financed SHG federations to act as wholesalers for not one but any
number of companies and capture the margins as well as bargain for higher discounts on the
strength of their ‘ownership of demand’. Once again, if this initiative works, it would not be such
a bad thing, for low-income households will get things 5-10% cheaper.
ICICI BANK
INTRODUCTION
ICICI Bank was originally promoted in 1994 by ICICI Limited (a development financial
institution for providing medium-term and long-term project financing to Indian businesses), and
was its wholly-owned subsidiary. After consideration of various corporate structuring
alternatives the managements of ICICI and ICICI Bank formed the view that the merger of ICICI
with ICICI Bank would be the optimal strategic and legal structure for both entities. Consequent
to the merger in January 2002, the ICICI group's financing and banking operations, both
wholesale and retail, have been integrated in a single entity.
ICICI Bank is India's second-largest bank with total assets of about US$ 38.5 bn at March 31,
2005 and profit after tax of US$ 461 million for the year ended March 31, 2005 (US$ 376
million in fiscal 2004). ICICI Bank has a network of about 610 branches and extension counters
and over 2,000 ATMs. ICICI bank is India’s second – largest bank (after the State Bank of India
) with total assets of about Rs 1,327 bn. And a strong network of branches and (no. of
ATMs) ATMs across the country . It offers a wide range of banking products and services to
corporate and retail customers through a variety of delivery channels, Investment banking , life
and non life insurance, specialized subsidiaries and affiliates venture capital and asset
management.
ICICI Bank set up its international banking group in fiscal 2002 to cater to the cross border needs
of clients and to offer products internationally. ICICI Bank currently has subsidiaries in the UK,
Canada and Russia, branches in Singapore and Bahrain and representative offices in the United
States, China, United Arab Emirates, Bangladesh and South Africa. ICICI Bank's equity shares
are listed in India and its American Depositary Receipts (ADRs) are listed on the New York
Stock Exchange (NYSE).
The banks activities range from financially supporting a network of village internet kiosks to
partnering with microfinance institutions in providing cheap loans. The Social Initiatives Group
(SIG) of ICICI bank is concerned with development and dissemination of a appropriate financial
services to the economically lagging rural populace .It is working towards providing four classes
of micro financial services : basic banking services, insurance services and financial services
including credit ,equity and leasing and derivatives.
A guideline of the RBI requires all private sector banks to allocate a minimum of 18 % of their
net credit to the agricultural sector .In consonance with this requirement and also due to its own
corporate commitments , the bank is aggressively pursuing its objectives for the rural sector. In
its pursuit to reach a larger rural populace , the bank is currently engaged in forming strategic
alliances with existing Microfinance Institutions .Besides the bank is also encouraging local
entrepreneurs to start up new microfinance institutions as franchisees.The bank is investing in
low cost technology networks that would help it keep the operational costs low . In accordance
with this , the bank is purchasing the high cost loans of existing MFIs and replacing them with
newer loans at lower interest rates. To ensure repayment , the bank has opened an escrow
account allowing the small borrowers the flexibility to repay as per their convenience.
The new policy measures ensures profitability to all the parties involved. The smaller borrowers
are finding it convenient to repay the loans at lower interest rates . The MFIs are economizing on
resources , while the ICICI bank is finding it a profitable business opportunity to make inroads
into the rural segment without making compromises on profitability , as full repayment is
assured .
The bank also offers a variety of other products to the rural masses . Affordable loan schemes to
purchase buffaloes or credit for small tea shops are on its product catalogue .Then there are
schemes for life , non life and even for weather insurance( covering all kinds of climatic
uncertainties ).
Group of 20 poor
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SHGs
The women who had finished a year of promoting the requisite 20 groups were given the
designation of Social Service Consultant. These would travel within a radius of 15 kilometers, in
order to promote as many groups within their area as possible. Strict guidelines were set for
selection of SHG members and SHGs would focus on those who were illiterate and below the
poverty line so that there would be homogeneity in the socio economic background as well. The
SHGs followed the normal pattern of saving until they had internally collected an amount of Rs
6000 in a bank account held in the group's name, through a weekly payment of a small amount
by each member of the group. After this, the amount collected would be lent internally at 24%
p.a. This rate of interest was much less than was available from the informal lenders, and the
entire groups stood to gain as the interest was churned back into the group.
ICICI Bank achieved a high rate of growth, reaching 8000 SHGs in March 2003, with its team of
20 project managers. Within three years of the merger with Bank of Madura, ICICI Bank had
extended its reach to 12000 SHGs. However, the pace of outreach was still slow, and the Bank
began to experiment with other models of reaching the unreached. This was because existing
branches could be leveraged for outreach, but in areas where there were no ICICI Bank branches,
it would not be viable to set up branches solely for the purpose of rural outreach, as such
branches would have a very long gestation period and would costly in terms of overheads.
ATMs were also costly proposition and the infrastructure required was not in place in most of
the remote areas.
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the NGO. The SHGs had been repaying at very good rates, above 95%, yet there was a need to
control the quality of group formation and link it to credit discipline. ICICI Bank also worked
with Self Help Promotion Institutions to outsource the work of group formation institutions
whose core competence was in social intermediation. In this case, the alignment of incentives
remained the same, as the bank staffs were replaced by an external entity, who albeit with the
best of intentions and competencies, would not be able to vouch for the quality of groups created
by it. Thus, despite having good increase in outreach, the model failed to scale up further.
The MFI-Bank linkage model paved the way for taking a wider range of services to the
financially underserved populace. These financial services include provision of microinsurance
tailored to the cash flows and insurance needs of the low-income clients. The microinsurance
ensured the end client a support in case of accidents/ disablement as well as loan insurance in
case of death. This was a significant step towards reducing household vulnerabilities.
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The intermediation model at first looked scalable, but there seemed to be constraints in this
model as well. For instance there was a double charge on capital created, once at the level of the
Bank lending to the MFI and secondly at the level of the MFI on lending to the client. This
seemed to be a sub optimal lending structure due to the double counting that also, because the
small balance sheet size, unduly affected the risk perceived about the MFI, even if it had very
robust systems and processes. Other key challenges to performance were that the MFIs could
not grow and scale as fast as their capabilities would permit, because of severe capital
constraints. Most MFIs had potential access to large debt funds, but because of their small size
balance sheet (which would represent the very limited initial capital of the promoters); they were
constrained to operate with limited debt funding. In the complete absence of equity investors in
the microfinance institutions, there was hardly any scope for the MFI to scale up rapidly.
MFIs on the other hand, were exposed to the entire risk of lending to the end clients, despite their
constrained risk appetite. Most MFIs were operating in a single geography, and the systematic
risk that they were exposed to was large. This put undue risk bearing on these organisations,
especially in the light of their limited geographical risk diversification capabilities. Banks,
which were lending ostensibly to the end- clients, could not get access to any information
regarding the repayment capacity, or repayment behaviour of the end clients, as the MFI not only
acted as an operating and servicing agent, but also assumed the entire risk. If the MFI collapsed
due to any internal organisational issues as opposed to client default, the entire client segment
which had demonstrated credit-worthiness would be deprived of a service provider. On the one
hand were the competencies of the Bank (which had a large amount of finances waiting to be
channelled into the sector) and on the other, the social intermediation expertise of the MFI
(which had a grassroots presence, customer outreach and contact, and could also achieve better
economies of scale if it scaled up and extended outreach faster). There was a need to combine
the strengths of both players, while also building in the correct incentives and using capital
parsimoniously to leverage the maximum value and client outreach from it. Furthermore, there
was a need for close supervision and information tracking so that at no stage would rapid
expansion lead to undetected default due to slackness in monitoring. Costs would have to be
recovered to ensure sustainability. The model would also have to incentivize growth and
preserve the incentives of the originator (of the portfolio) to maintain portfolio performance.
Hence ICICI decided to enter into partnerships with the NGOs on a long term basis. These
NGOs set up field organizations for the promotion and management of SHGs as a service
provider. ICICI Bank provides credit, savings and other services such as insurance directly to the
SHGs and NGO further helps in monitoring and collection activities. ICICI also provides
working capital assistance to NGOs to meet cost of promotion during initial years. NGO repays
working capital loan from donor funds (when available) or from service charges.
UNIQUE FEATURES
• ICICI Bank funds the cost of SHG promotion during initial years
• Marries the core competence of NGOs/MFIs with that of banks
• including social mobilization skills with Finance and lending directly to
• the borrowers through innovative channels.
• Model overcomes constraints of NGOs having complete dependence
• on donor funding and MFIs Capital Adequacy Requirements.
• ICICI’s partnership model hence proved to be unique with its features giving a
sustainable solution for the microfinance.
Weather Insurance: Launched India’s first index based rainfall insurance product which
compensates the farmer for loss in yield due to deficient rainfall
Health Insurance: A varied number of health insurances framed especially for farmers have
been launched.
Remittance: Domestic fund transfer facility between urban centre and villages especially to
cater to the migrant population. This plan proved to be a great success and equally useful for the
customers. Family back at home is now easily receiving money sent by the migrated family
members.
Commodity Derivatives: Enable price discovery and hedging against price risks by small
farmers through participation in commodity exchanges with NGO/MFIs serving as aggregators.
This comes from an outreach of to 3.2 million low-income clients. Simultaneously, the bank has
also increased its partner strength of microfinance institutions (MFIs) to 102, from 49, over a
period of one year. The bank plans to partner with 200-250 MFIs, each serving three districts in
the country, thus reaching out to 600 in all across the country, through a mix of its products and
channels.
Commenting on the same, ICICI Bank’s executive director Nachiket Mor said: "We are targeting
at partnering with 200-250 MFIs in the next few years." The bank also plans to develop a unique
rural banking proposition by capitalising on the partnership model instead of solely relying on
the branch-led approach.
Under the partnership model with MFIs, the bank forges an alliance with an MFI, wherein the
latter dons the promotional role of identifying, training and promoting microfinance clients, and
the bank finances the clients directly, based on the recommendations of a given MFI.
HDFC BANK
INTRODUCTION
HDFC Bank (NYSE: HDB), one of the first, new generation, tech-savvy commercial banks of
India, was incorporated in August 1994, after the Reserve Bank of India allowed setting up of
Banks in the private sector. The Bank was promoted by the Housing Development Finance
Corporation Limited, a premier housing finance company (set up in 1977) of India. Net Profit for
the year ended March 31, 2006 was Rs. 1,141 crores. Results of the latest quarter ended June
2007, indicate that the bank continues to grow in a steady manner.
The Housing Development Finance Corporation Limited (HDFC) was amongst the first to
receive an 'in principle' approval from the Reserve Bank of India (RBI) to set up a bank in the
private sector, as part of the RBI's liberalization of the Indian Banking Industry in 1994. The
bank was incorporated in August 1994 in the name of 'HDFC Bank Limited', with its registered
office in Mumbai, India. HDFC Bank commenced operations as a Scheduled Commercial Bank
in January 1995.
Currently HDFC Bank has 758 branches, 1,716 ATMs, in 325 cities in India, and all branches of
the bank are linked on an online real-time basis. The bank offers many innovative products &
services to individuals, corporate, trusts, governments, partnerships, financial institutions, mutual
funds, insurance companies.
It is a path breaker in the Indian banking sector. In 2007 HDFC Bank acquired Centurion Bank
of Punjab taking its total branches to more than 1,000. Though, the official license was given to
Centurion Bank of Punjab branches, to continue working as HDFC Bank branches, on May 23,
2008.
RECOMMENDATIONS TO HDFC
Microfinance is one of the major alternative market given their present high liquidity. It does not
take much analysis to figure out that the market for financial services for the 50-60 million poor
households of India, coupled with about the same number who are technically above the poverty
line but are severely under-served by the financial sector, is a very large one. Moreover, as in
any emerging market, though the perceived risks are higher, the spreads are much greater.
HDFCs positioning as of today in Indian market is as an urban centralized private bank .Given
that most of our banks are in the public sector, public policy (including frowns and nods from the
Finance Minister), does have some influence on what they will or will not do. For example the
policies were followed by diligent, if meandering, promotional work by NABARD.
Hence if HDFC comes up with joint ventures with the public sector banks working in this
direction they shall have a free ride availing various government subsidies and financial
policies.
The following is a typology of major methodologies shall be employed by HDFC bank for the
delivery of financial services to low income families:
The SHG is the dominant microfinance methodology in India. The operations of 15-25 member
SHGs are based on the principle of revolving the members’ own savings. External financial
assistance – by MFIs or banks – augments the resources available to the group-operated
revolving fund. Savings thus precede borrowing by the members. NABARD has facilitated and
extensively supported a programme which entails commercial banks lending directly to SHGs
rather than via bulk loans to MFIs. NABARD re-finances the loans of the commercial banks to
SHGs.
IBPs entail the provision by MFIs of financial services to individual clients – though they may
sometimes be organised into joint liability groups, credit and savings cooperatives or even SHGs.
The model is increasingly popular for microfinance particularly through cooperatives. In the case
of cooperatives, all borrowers are members of the organisation either directly, or indirectly by
being members of primary cooperatives or associations which are members of the apex society.
Creditworthiness and loan security are a function of cooperative membership within which
member savings and peer pressure are assumed to be a key factor.
Grameen Model
This model was initially promoted by the well known Grameen Bank of Bangladesh. These
undertake individual lending but all borrowers are members of 5-member joint liability groups
which, in turn, get together with 7-10 other such groups from the same village or neighbourhood
to form a centre. Within each group and centre peer pressure is the key factor in ensuring
repayment. Each borrower’s creditworthiness is determined by the overall creditworthiness of
the group. Savings are a compulsory component of the loan repayment schedule but do not
determine the magnitude or timing of the loan.
Mixed Model
Some MFIs started with the Grameen model but converted to the SHG model at a later stage.
However they did not completely do away with Grameen type lending and smaller groups. They
are an equal mix of SHG and Grameen model. Others have chosen to adapt either the Grameen
or the SHG model to cater to their markets while some organisations like BASIX use a number
of delivery channels and methodologies (including lending to SHGs) to provide financial
services.
CONCLUSION
Microfinance refers to small-scale financial services for both credits and deposits — that are
provided to people who farm or fish or herd; operate small or microenterprises where goods are
produced, recycled, repaired, or traded; provide services; work for wages or commissions; gain
income from renting out small amounts of land, vehicles, draft animals, or machinery and tools;
and to other individuals and local groups in developing countries, in both rural and urban areas
REFERENCE
Business communication by Raymond Lesikar and John Pettit – Irwin AITBS Books
Professional Communication by Aruna Koneru – Tata Mcgraw –Hill publishing Company Ltd
www.wikipedia.org
www.moneycontrol.in
www.intomicrofinance.com
www.unpan1.un.org