MICROFINANCE

Microfinance is an activity undertaken by the alternate sector (NGOs). Therefore, a loan given
by a market intermediary to a small borrower is not seen as microfinance.However when an
NGO gives a similar loan it is treated as microfinance. It is assumed that microfinance is given
with a laudable intention and has institutional and nonexploitative connotations. Therefore, we
define microfinance not by form but by the intent of the lender.
the Reserve Bank of India (RBI) has defined microfinance by specifying criteria for exempting
MFOs from its registration guidelines. This definition is limited to not-for-profit companies and
only two MFOs in India qualify to be classified as microfinance companies.

Microfinance in India started in the early 1980s with small efforts at forming informal self-help
groups
(SHG) to provide access to much-needed savings and credit services. From this small beginning,
the microfinance sector has grown significantly in the past decades. National bodies like the
Small Industries Development Bank of India (SIDBI) and the National Bank for Agriculture and
Rural Development
(NABARD) are devoting significant time and financial resources to Experiences, Options, and
Future Journal of Microfinance

India has one of most extensive banking infrastructures in the world. However, millions of poor
people in India do not have access to basic banking services like savings and credit. In the mid-
1990s, about 70% of India's population lives in rural areas which account for only 30% of the
bank deposits.

About 70% of the rural poor do not have bank accounts and 87% of them do not have
access to credit from banks.In the same period, the share of non-institutional agencies
including traders, money lenders, friends and relatives in the outstanding cash dues of
rural households was 36%.

In the past, both public and private commercial banks in India perceived rural banking as a
high-risk, high-cost business i.e. a business with high transaction costs and high levels of
uncertainty. Rural borrowers, on their part, felt that banking procedures were cumbersome
and that banks were not very willing to give them credit.

Commenting on the problems faced by the microfinance industry in India, YSP Thorat,
managing director of National Bank for Agriculture and Rural Development (NABARD), and
Graham AN Wright, an international expert in microfinance, wrote, "Poor credit-deposit ratios,
unsustainable lending and high-levels of non-performing assets often cripple much of this
infrastructure.

In 1954, All India Rural Credit Survey Committee recommended expansion of the cooperative
credit system to cater to the credit needs of the rural poor. The regional rural banks (RRBs)
were incorporated in 1976. By the mid-1970s, the banking sector was operating as a three-tier
system. The first tier consisted of commercial banks, RRBs formed the second tier, and
cooperative banks formed the third tier. About 49% of all scheduled commercial banks
operated from rural areas. In the early 1980s, the Indian government realized the need for
microfinance to provide the rural poor with savings and microcredit services. Loans available
through microcredit schemes were more accessible to the poor people as compared to bank
loans. It also compared favorably with non-institutional money lenders in terms of cost.
Levels of microfinance in INDIA

1)NGOs in India perform a range of developmental activities; microfinance usually is a sub-

component. Some of these NGOs organize groups and link them to an existing provider of
financial services. In some cases NGOs have a “revolving fund” that is used for lending. But in
either of these cases, microfinance is not a core
activity for these NGOs. An example is the Aga Khan Rural Support Programme India (AKRSP-
I). For AKRSP-I, the microfinance component is incidental to its work in natural resource
management.
Examples like MYRADA and the Self-Employed Women’s Association (SEWA) fall in the
same category.

2) At the next level NGOs helping the poor in economic activities. Their purpose is
developmental. They see microfinance as an activity that feeds into economic activities. For
instance, the South Indian Federation of Fishermen’s Societies (SIFFS) started as a support
organization for fishermen, providing technical and marketing support. It then arranged for loans
to its members through
banks. When the arrangement was not effective, it started providing
loans itself.

3) At the third level, organizations with microfinance at the core. They have developmental
roots, but are diverse in their operational details, orientation, and form of incorporation.This
paper focuses on organizations that have microfinance at the core. It also examines NGOs that
have created new MFOs to deal with the specialized function of microfinance. It deals with
issues of transformation of these organizations, moving from a
developmental root to a commercial sprout.

Types of Microfinance Institutions

Microfinance institutions develop and deliver a range of financial products for the poor. There
are three categories of microfinance institutions. They are:

NON-PROFIT MFIS/NGO MFIS

These are Societies under the Societies Registration Act, 1860 or corresponding State Acts.

Others in this category are Public Trusts under the Indian Trust Act 1882, and non-profit
companies under Section 25 of the Companies Act, 1956. There are several NGOs which are
registered as trust/society and have helped the SHGs form into federations. Federations are
formal institutions and carry out both non-financial and financial activities including social and
capacity building activities, SHG training, and promotion of new groups, apart from financial
intermediation.

These institutions cannot undertake financial intermediation activities on a large scale, as they
are prohibited from carrying out any commercial activities...
Microfinance - Major Players
The major players which were instrumental in the growth of microfinance industry in India
included NABARD, SIDBI, Rashtriya Mahila Kosh, FWWB and SHARE Microfin Limited.

NABARD

NABARD was established in 1982 to provide credit to the rural sector. NABARD was a pioneer
in microfinance programs in India.

The bank's vision is "to facilitate sustained access to financial services for the unreached poor in
rural areas through various microfinance innovations in a cost effective and sustainable
manner."

By 2005, NABARD's SHG-Bank Linkage program had emerged as one of the largest
microfinance programs in the world. NABARD also collaborated with NGOs, MFIs, banks and
governmental agencies in order to use other models of rural credit like the Grameen Model and
the individual banking model.

Encouraged by the success of the SHG program, NABARD planned to link 1 million SHGs by
2007 and reach 100 million rural poor...

The Future
Many private and foreign banks have unveiled their plans to enter the Indian microfinance sector
because of its very low NPAs and high repayment rate of more than 95% in spite of offering
loans without any collateral security.

The main reason for high repayment rates was that the loans were managed at the community
level. Borrowers took loans to improve their standard of living and start a small business. If the
repayment was done in time, only then were more loans given. According to Udaia Kumar,
Chairman and Managing Director, SHARE Microfin Limited, "In all cases there is no security
taken. We don't have a legal system. We build a relationship with the client. We motivate them,
train them, and give them the confidence that they have the capacity to handle. We ensure that
the money is used for the purpose that they have taken. We ensure that they make profits. Then
definitely they will come back with the repayment. Our repayment rates are 100%...
List of Top Microfinance Companies in India

Following are the top 10 Microfinance companies in India:

SKS Microfinance Ltd (SKSMPL)

Spandana Sphoorty Financial Ltd (SSFL)

Share Microfin Limited (SML)

Asmitha Microfin Ltd (AML)

Shri Kshetra Dharmasthala Rural Development Project (SKDRDP)

Bhartiya Samruddhi Finance Limited (BSFL)

Bandhan

Cashpor Micro Credit (CMC)

Grama Vidiyal Micro Finance Pvt Ltd (GVMFL)

Grameen Financial Services Pvt Ltd (GFSPL)