A MAJOR RESEARCH PROJECT REPORT ON

A study of Microfinance Udaipur district

SUBMITTED IN THE PARTIAL FULLFILLMENT FOR DEGREE OF MASTER OF BUSINESS ADMINISTRATION 2009-2011

FACULTY OF MANAGEMENT STUDIES MOHAN LAL SUKHADIA UNIVERSITY UDAIPUR (RAJ.) SUPERVISED BY: DR. HANUMAN PRASAD FMS, Udaipur SUBMITTED BY: ABHISHEK JAIN MBA-RMAT PART II

CERTIFICATE

This is to certify that MR. ABHISHEK JAIN of MBA-RMAT PART-II of FMS, Udaipur has successfully completed his Project Titled A study of Microfinance Udaipur district. This project has been done in partial fulfillment for the award of MBA for the academic session 2009-2011. The student has remained in touch with me and has completed the project as per the norms and guidelines prescribed by the institute.

Date: Signature:

DR. HANUMANN PRASAD FMS, Udaipur

DECLARATION

I, ABHISHEK JAIN, a student of Faculty Of Management Studies, Udaipur, hereby declare that this project on A study of Microfinance Udaipur district is the record of authentic work carried out by me during the academic year 2011 and has not been submitted to any other university or Institute for the award of any degree. An attempt has been made by me to provide all relevant and important details regarding the topic to support the theoretical edifice with concrete research evidence. This will be helpful to clean the fog surrounding the various aspect of the topic.

Date: Place: Udaipur

(ABHISHEK JAIN)

ACKNOWLEDGEMENT

With regard to my Project related to A study of Microfinance Udaipur districtI would like to thank each and every one who offered help, guideline and support whenever required, to all the respondents who helped me in completion my survey. I express my profound gratitude to DR. HANUMAN PRASAD. I want to give my sincere thanks to his kind advice and guidance that had made my project successful. Many of the sound advices have been well taken by me and it is largely due to his patience that I was able to achieve my goals successfully. I would also like to thank my Facutly- Professor Dr. P.K. Jain (Director), Dr. Karunesh Saxena, Dr. Anil Kothari, Dr. Meera Mathur & Dr. Ashok Singh; and my Institution Faculty of Management Studies, Mohan Lal Sukhdia University, Udaipur, Rajasthan for providing me this magnificent opportunity to do research work and learn and for providing us such a wonderful opportunity. I will not miss the opportunity of expressing gratitude towards all my professors for the knowledge they shared with me which provided necessary ingredients to this project. Also I would like to give regards to my Parents and friends who have in some way helped me in completing this project.

ABHISHEK JAIN MBA-RMAT PART II (2009-2011)

Table of Contents

Introduction Evolution of microfinance Definitions and categories Microfinance market from an investment perspective Challenges Boundaries and principles Financial needs of poor people Ways in which poor people manage their money Informal financial service providers NGOs Survey Outcomes Conclusions and Recommendation Bibliography

6 9 10 12 16 18 20 21 24 25 30 31 32

INTRODUCTION
Introduction to microfinance
Microfinance is the provision of financial services to low-income clients or solidarity lending groups including consumers and the self-employed, who traditionally lack access to banking and related services. More broadly, it is a movement whose object is "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. Microfinance is a broad category of services, which includes microcredit. Microcredit is provision of credit services to poor clients. Although microcredit is one of the aspects of microfinance, conflation of the two terms is epidemic in public discourse. Critics often attack microcredit while referring to it indiscriminately as either 'microcredit' or 'microfinance'. Due to the broad range of microfinance services, it is difficult to assess impact, and very few studies have tried to assess its full impact. One of the key assumptions of microfinance programmes is that it can help the poor, especially women, to develop new income generating activities (IGA) or at least strengthen existing IGA. Available empirical studies give controversial results. While some studies give positive results , other studies emphasize the very limited effects in terms of IGA nd some time the drawbacks of microfinance: loans mainly used for non productive purpose or appropriated by males, women confined into the least profitable sectors, market saturation and displacement effects, etc. Indepth analyses report a diversity of women profiles and therefore a diversity of effects and results. For instance, shows that in Bangladesh, the effects of microcredit depend in part on caste and class. The two contexts are characterized by strong ifferences in terms of education, entrepreneurial experience, social norms, exposure, dependence on men and opportunities and size of local markets. In urban areas one finds real women entrepreneurs: through microcredit and other services they manage to upgrade their activities from petty trading to market-stall holders. By contrast, rural women seek merely to supplement the family budget. They operate mainly through imitation. Their main objective is to mitigate risk and diversify rather than upgrade pre-existing activities. The justification for diversification often stems from the seasonality of available livelihood opportunities. They depend heavily on NGOs for any new idea. From the report differences between women according to their position in the life cycle. Older women are much more "aggressive" in generating employment than the young generation
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(and just as productive as male entrepreneurs). The authors make the assumption that younger women are forced by domestic charges, high marginal value of home time during certain periods of their time. From Cameroon, Mayoux (2001) finds large disparities in the success and sustainability of women enterprises financed by microcredit. Rather than class background success also exists for women from very poor milieu - the difference seems to come from women's ability to mobilize and activate social networks. 2 advocate that microcredit for entrepreneurship is only possible beyond the minimalist proach .they are of the opinion that credit for enterprise development is important but can be achieved only with the provision of support services 3 preferable by other development promoters (government agencies, Non Governmental Oorganisations (NGOs), insurance companies, etc.) and not by the credit provider itself. Contrary to the minimalist approach, support services for livelihood promotion do have a long history in India promoted by the government, by the peoples movement, by the NGOs and the Corporate sector. Referring to the Government of India/ the unhappy summary of nearly 60 years of government-run livelihood programmes is that they were well-conceived but poorly implemented . Providing support services can be a challenge and there is more to successful enterprise development than provision of microcredit and support services together. Such efforts need to take some caution in their planning without undermining socio-economic dynamics. This is well demonstrated in Leach and Sitarams study on an NGOs effort to empower scheduled caste women in the silk-reeling industry in South India by transforming them from wage labourers to independent entrepreneurs. The biggest fallout of this project was its concentration on women to the total neglect of men; the decision authorities of the household. This led to women shouldering more labour and further subjected to intense ridicule from their husbands when things went wrong in this highly volatile and seasonal silk industry. The significance of socio-economic dynamics is much broader than pertaining to gender roles. This is explored in Nairs study on attitudes to income generation and work among fishermen. She discusses here how the introduction of microcredit financed fishing nets, increased the productivity of fishing activity technically but the average income and consumption levels of many of the households did not increase to any significant extent. She explains how this is linked to many fishermen cutting down on the number of fishing days. This reminds us not to forget that planning is not just done at the policy level but also at the beneficiary level where local social dynamics play a key role. Drawing on these lines, the paper suggests that further attention should be given to the socioeconomic dynamics and embeddedness of womens activities. Why women decide to involve themselves into such or such activity? What are their motivations?

Evolution of microfinance
Microfinance has been a success story over past decades. Nevertheless, core ele- ments of todays microfinance framework have been used for centuries. In Ireland, the author Dean Jonathan Swift initiated entities called loan funds. These funds accommodated microcredits to entrepreneurs starting in 1720. About one hundred years later, the government established a statutory basis resulting in a boom of loan funds. A second example is the German Sparkassen and cooperative banking system. The first Sparkasse was established 1778 in Hamburg. In addition to saving deposits, services included loans for businesses and farmers. In 1846, Frie- drich Wilhelm Raiffeisen and Hermann Schulze-Delitzsch founded cooperatives focusing on saving and lending deposits for sma ll businesses and farmers. All three mentioned German banking institutions are major retail banks today: Spar- kassen, Raiffeisen and Volksbanken. The roots of todays microfinance in emerging markets lie in the mid 1970s. Mohammed Yunus started in 1976 during a famine period to lend money to people of his community. Seven years later, Grameen Bank was founded and Bangladesh became a textbook example for microfinance. During the same period, ACCION in Brazil and Bank Rakyat in Indonesia developed similar microcredit business mod- els. Failed subsidy programmes are one of the major reasons for the popularity of these and other microfinance institutions in emerging markets. Local governments set up rural development programmes financed by development finance institutions (DFIs) such as the World Bank, its private sector affiliate, the International Finance Corporation (IFC) or the German Kreditanstalt fr Wiederaufbau (KfW). However, several factors led to a failure of these subsidised development aid programmes. Firstly, local banks were not able to work profitably with the regulated interest rates, because operating costs were too high in many regions. Secondly, many debt- ors considered the loans as donors of their government and hence did neither pay interest rates nor the credit amount at maturity. Thirdly, the rationing of credit pro- grammes fostered corruption in bank lending. Hence, locally originated microfinance proved to be the better solution. It has become one of the rare finan- cial and sustainable success stories of todays emerging and developing markets84 financial system.

Definitions and categories

Microfinance institutions (MFIs) provide various products for mainly low-income clients mostly in emerging and developing markets. Among those are credits, savings deposits, insurances and pension products.
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The main product of microfinance is the microcredit concept. A clear definition and segmentation of the loan and credit segment is crucial. In fact, three main credit types exist in emerging markets. Firstly, consumer credits are used to finance a non-durable good and hence have to be financed by the clients per- sonal income. Secondly, entrepreneurs can draw on a credit to establish a business or moderately expand an existing one. This kind of credit is referred to as micro- credits. The interest payment is generated out of the business cash flow. Due to the entrepreneurial concept of microcredit, generally no or only insufficient collaterali- zation is possible. Thirdly, corporate credits with adequate collateral exist. This is a common pattern of (small) business lending. As a consequence, the distinction of income-financed consumer credits and cash-flow-financed microcredits is a critical differentiation factor in microfinance.

Microcredits are business loans and by definition not consumer loans. These loans shall support and initiate business concepts, which finance their capital costs out of the business. The clear separation from income-dependent consumer financing enables high repayment rates. However, interest rates are relatively high compared to developed country rates. Firstly, credits are in local currency and therefore refer to local rates. Secondly, clients are widespread and the loan amount is comparably low. Thus, operating costs are on a very high level. Nevertheless, microfinance institutions offer rates which are far below money lender rates. Savings deposits are a further product and gain importance for microfinance in- stitutions. On the one hand, it is a refinancing option especially in situations when local currency credit markets are limited. On the other hand, it enables MFIs to increase the commitment of their creditors, because these often have savings depos- its as well. However, due to regulatory issues MFIs cannot accept deposits in all countries and in general a banking licence is a prerequisite. Also clients can profit from savings deposits, because they get the opportunity to deposit money and get a small interest on the amount. From a western perspective this argument may sound unfamiliar, but in several countries clients would otherwise have to pay a fee for a deposit instead of receiving interest.88 In conclusion, MFIs as well as clients can profit from savings accounts. Further products are offered in the segment of microinsurance and -pension. The product range is equally to common insurance and pension products, but con- tract sizes are very low and operational costs high. Overall, this market is still in an early stage of development. However, in some countries such as Bangladesh with Grameen Bank it is already emerging rapidly. As a result, even major players such as Allianz, Munich Re and Swiss Re have entered this high growth potential market.

Socially responsible investments rank high on investors agendas. In the Udaipur division, the volume of SRIs has increased by a compound annual growth rate of 13.6% in Rs 5,00,000 2010 while in SRI assets grew even faster by a CAGR of 27.3% . 1 In the Udaipur division, nearly a tenth of professionally managed assets is already related to socially responsible investment by now. These impressive growth rates demonstrate the growing weight investors attach to the social and environmental consequences of their investments. Amongst the great variety of SRIs, investments in microfinance have recently started to increasingly attract institutional and individual investors. 2 Currently, the microfinance sector is in a transition process from donor-driven NGO-dominated framework towards an increasing involvement of capital markets. The reasons are that, on the one and, some microfinance institutions have begun to explore new funding opportunities, e.g. by securitising microfinance loan portfolios; some microfinance institutions have even gone public. On the other hand, private-sector investors increasingly appreciate microfinance investments for their dual nature: First, they allow investors to adopt a social investment strategy geared toward poverty alleviation and social development in developing countries. Second, they simultaneously offer an attractive risk-return profile that is marked by largely stable financial returns, low credit default rates and low correlation to the mainstream financial assets as well as the general domestic economy. Some evidence even indicates that microfinance investments might be conducive to the efficient portfolio diversification. 3 This study takes a closer look at the role that institutional and individual investors might play in the medium-term development of the microfinance sector. What contribution can private investors make to scaling up microfinance and narrowing its immense funding gap? Which market volume is already captured by institutional and individual investors and which volume may private-sector investments in microfinance reach by 2015? What do typical microfinance investments look like and what are the associated benefits and risks for private-sector investors? What are the major constraints on the development of the microfinance sector? What role can microfinance play as an emerging investment opportunity in the context of investors efficient diversification of portfolios? We conclude by summarising our main findings and providing a medium-term market forecast for the development of institutional and individual microfinance investments.

Microfinance market from an investment perspective

Market overview

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The microfinance market is structured horizontally along the financial value chain . MFIs grant entrepreneurs a loan with a fixed interest rate in local currency. In the strict sense, the debtor uses the loan to finance an entrepreneurial business and serves the interest payments out of the business cash flows. In some cases, debtors also have a savings deposit at a MFI with a small or sometimes even no accruing interest. This is one of the main refinancing options for MFIs. Further refinancing includes debt obligations from microfinance investment vehicles (MIVs) or direct investor, local credit markets and equity investments.

A broad spectrum of service providers complements the microfinance market. Be- sides the above mentioned market participants of the direct value chain several segments of service providers emerged. The service providers are segmented in three categories. Firstly, DFIs offer technical assistance as well as subsidized funding. Secondly, service providers in a broader sense such as specified data providers, specialised accountants and lawyers as well as FX hedging special- ists serve the niche market. Finally, rating agencies complement the microfinance market. These companies either focus on microfinance such as MicroRate or agen- cies extended their business to microfinance such as Fitch. The microfinance market exhibits a mature market structure. However, the market is young and various segments as well as market participants are newly developed or incorporated. Nevertheless, the market is innovative and able to deal with nearly any kind of issue. But in some cases the processes are not defined strictly and mutu- ally agreed procedures are not arranged yet.

Microfinance users
The typical microfinance user is a debtor and client of a MFI. Generally, the per- son is to some extent a micro-entrepreneur working as a street vendor, farmer, fisherman, salesman, or service provider. Microfinance clients are also often de- scribed according to their poverty level. However, the idea of microfinance is not donating for the poor. In fact, it is enabling and supporting the entrepreneurial spirit. Some clients are truly entrepreneurs. They create and run a busi- ness, while others ecame entrepreneurs by necessity as the formal sector is less marked than in developed countries. The average loan size differs region, in Udaipur Division RS 20000 to Rs 1,00,000. The credits are in local currency, thus the interest rate refers to local currency rates and operating costs. The credit period is in the vast majority between 12 and 36 months, averaging around 18 months.
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The gender is a further important criterion in the microfinance segment. Overall, roughly 60% of the credits are allowed to women.95 Furthermore, in some areas in Udaipur Division ending is preferred as it generates social control. Another rarely stated reason for the group lending phenomenon is the loan amount. In Udaipur loans are on average roughly ten times higher than in other and therefore operating costs are assumed to be lower, which makes individual lending more profitable. This might be another factor allowing indi- vidual lending, besides the often stated cultural and social differences.

Microfinance institutions
MFIs are organizations offering microcredits and in some cases savings accounts. Hence, t he balance sheet assets are credits allowed to micro-entrepreneurs. The liability structure depends on the MFIs refinancing strategy, corporate status and regulatory issues . Adequate financing sources are equity, interna- tional capital markets, local capital markets, deposit MFI accounts and subsidies such as supranational funding or even donations. The refinancing strategy of MFIs is dependent on their development stage. Mature and wellknown MFIs are clustered as Tier 1. These institutions are in the majority of the cases banks, regulated by a governmental authority and also covered by rating agencies. Tier 2 MFIs are smaller and not all processes are perfectly structured yet. However, these institutes are candidates for a conversion into banks. The third group and majority of MFIs are NGOs or start-ups. These organizations are mostly unprofitable and often follow exclusively social objectives. As a result, MFIs can be clustered into a pyramid scheme with only a few mature institutions. Nevertheless, these Tier 1 and 2 MFIs grant about 90% of the loan sum. Microfinance investment vehicles (MIVs), local banks, development agencies, donators and international credit markets facilitate the refinancing of MFIs. The mature MFIs have access to local capital markets as well as investment funds to leverage their equity. Furthermore, these institutions generally have a banking li- cense and consequently accept deposits as further refinancing facility. For these reasons, mature MFIs are able to lever their equity up to seven times. The aver- age debt to equity multiple of Tier 1 and 2 MFIs is about three. However, the majority of MFIs operates less professional and refinances the microcredits with loans from development agencies or donations. The outstanding loan portfolio of about 1000 major MFIs was about Rs 1,00,000 according to The Mix database. Indeed, these data are not exclusively based on microcredits, but also
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contain consumer lending and small business lending. An amount of about Rs 50,000 seems more adequate according to estimates of various microfinance experts from MicroRate or responsAbility. These credits are funded by savings deposits, donations, paid in capital and borrowings. MFIs require local currency refinancing with matching maturities to their credits. But international investors such as investment funds or even governmental invest- ments prefer hard currency debt obligations. Accordingly, the MFI or the debtor would have to dare the currency risk. In case of strong currency devaluation, the risk taker could default. Thus, MFI and investor assign a reliable counterparty for foreign exchange risks. In some countries, the international capital market offers derivative instruments such as non-deliverable forwards. In the vast majority of cases, currency hedging can only be provided by local banks that take the risk for high premiums. Overall, the foreign exchange risk for international investors such as development agencies and MIVs has gained importance over the last years. The refinancing structure of MFIs is dominated by local sources. Savings ac- counts of microfinance clients make up on average 45% of the balance sheet. Additionally, roughly 30% are refinanced with domestic credit lines or equity in- vestments. Hence, less than 25% are financed by foreign investors. However, this still amounts to about financed from foreign sources such as MIVs and direct investments. The funding structure of MFIs differs regionally. Interestingly, the refinancing gap with respect to deposits is highest in Udaipur. In the other three main regions, roughly 50% of the loans are funded by deposits. However, the data quality regarding microfinance is rather poor. As a result, the tapping of various different refinancing sources especially client deposits requires a sound asset liability man- agement for MFIs and is critical to assess and manage financial risks. Microfinance investment vehicles Microfinance investment vehicles are funds or structured products that provide debt obligations to or take equity stakes in MFIs. In general, institutional and private investors have three channels to participate in the microfinance market. Firstly, they can invest directly in business projects of micro-entrepreneurs. Secondly, direct investments can be allocated to MFIs that accommodate a broad range of micro- credits with a regional focus. Finally, investors can place money with MIVs that allocate their portfolio to a diverse range of MFIs. Direct investments in a single project or a regionally based MFI may generate a high social impact, but also increase risks. Arguments such as regional diversifica- tion, selection skills and access to the market are a clear advice to fund investments. However, philantrophic
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investors and donators prefer the direct contact to their projects. Microfinance investment vehicles are an increasingly important funding instru- ment of MFIs. In 2007, MIVs accounted for about Rs 50000 of credit lines and equity investments. In 2009, the boom in microfinance investments slowed down. However, MIVs funding capacity increased also during the credit crises by about 30% per year. Especially governmental vehicles and private investors ensured money inflows. For this reason, MIVS currently have a refinancing capacity of 50,00,000Rs. Microfinance investment vehicles have different approaches. Firstly, pure micro- finance debt obligation funds exist. They often offer a return of Libor plus 200 basis points and charge around 2% management fees. The debt obligations have a matur- ity of 12 to 36 months and are widely diversified across regions. Secondly, some microfinance equity funds invest directly in equity stages of MFIs. These funds are set up like private equity funds with similar return expectations and fee structures. Thirdly, there are funds combining debt obligations with some equity exposure. Finally, structured vehicles have been set up. These credit loan obligations (CLOs) are less regulated, have a fixed maturity and offer no liquidity. From an investment perspective, these structures are not advisable as the whole investment is placed in one maturity and time horizon. However, long maturities of the debt obligations offer a premium. A further distinction criterion of microfinance investment vehicles is the foreign exchange approach. Almost every MIV purely invests in hard currency debt obliga- tion, despite the high costs for foreign exchange hedging. However, as investors get more and more experienced this might change in the future and local currency in- vestments will increase. Some MIVs do not allocate purely to microfinance investments. There are two major reasons for this. Firstly, raised capital cannot be invested at short notice. In the past, MFIs have often aligned the lending policy to the availability of refinanc- ing opportunities. The allowance of credits takes a while and currently the credit crisis also slowed down the need for microcredits. Secondly, cash or liquid assets enhance liquidity options of the fund. In case of withdrawals, the fund cannot liqui- date debt obligations as no secondary market exists. A strict asset liability management is crucial. However, interest payments and the short maturity of the debt obligations (on average about 18 months) lead to a constant cash flow. But reinvestments have to be arranged well in advance in the illiquid microfinance mar- ket environment. In conclusion, cash management is a major challenge for MIVs and hence some invest a smaller portion in other more liquid investments. The market for microfinance investments shows strong and sustained growth. Every other month, a new investment vehicle is launched. In most cases, the vehi- cles are managed by one of the three big market players BlueOrchard, responsAbility or Symbiotics and
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only distributed by a new market member. Be- sides, the debt obligations market for MFIs is a persons business. For example, a general market platform for debt obligations does not exist and access to brokers is limited. Hence, market entry is complicated and only a few companies have the skills and contacts to act successfully including the above mentioned as well as Developing World Markets and Triodos.

Challenges
Traditionally, banks have not provided financial services, such as loans, to clients with little or no cash income. Banks incur substantial costs to manage a client account, regardless of how small the sums of money involved. For example, although the total gross revenue from delivering one hundred loans worth Rs. 50,000 each will not differ greatly from the revenue that results from delivering one loan of Rs.50,00,000. It takes nearly a hundred times as much work and cost to manage a hundred loans as it does to manage one. The fixed cost of processing loans of any size is considerable as assessment of potential borrowers, their repayment prospects and security; administration of outstanding loans, collecting from delinquent borrowers, etc., has to be done in all cases. 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 that breakeven point. A similar equation resists efforts to deliver other financial services to poor people. In addition, most poor people have few assets that can be secured by a bank as collateral. As documented extensively by Hernando de Soto and others, 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. Seen from a broader perspective, the development of a healthy national financial system has long been viewed as a catalyst for the broader goal of national economic development. However, the efforts of national planners and experts to develop financial services for most people have often failed in developing countries. Because of these difficulties, when poor people borrow they often rely on relatives or a local moneylender, whose interest rates can be very high. An analysis of studies of informal moneylending rates in Udaipur Division concluded that 76% of moneylender rates exceed 10% per month, including 22% that exceeded 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 active.
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Over the past centuries practical visionaries, 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 opportunities and risk-management tools that financial services can provide to the doorsteps of poor people. While the success of the Grameen Bank has inspired the world, it has proved difficult to replicate this success. In nations with lower population densities, meeting the operating costs of a retail branch by serving nearby customers has proven considerably more challenging. This particular model (used by many Microfinance institutions) makes financial sense, he says, because it reduces transaction costs. Microfinance programmes also need to be based on local funds. Although much progress has been made, the problem has not been solved yet, and the overwhelming majority of people who earn less than Rs 100 a day, especially in the rural areas, continue to have no practical access to formal sector finance. Microfinance has been growing rapidly with Rs50,00,000 currently at work in microfinance loans in Udaipur Division. It is estimated that the industry needs Crores to get capital to all the poor people who need it.The industry has been growing rapidly, and concerns have arisen that the rate of capital flowing into microfinance is a potential risk unless managed well. As seen in the State of Andhra Pradesh (India), these systems can easily fail. Some reasons being lack of use by potential customers, over-indebtedness, poor operating procedures, neglect of duties and inadequate regulations. Boundaries and principles Poor people borrow from informal moneylenders and save with informal collectors. They receive loans and grants from charities. They buy insurance from state-owned companies. They receive funds transfers through formal or informal remittance networks. It is not easy to distinguish microfinance from similar activities. It could be claimed that a government that orders state banks to open deposit accounts for poor consumers, or a moneylender that engages in usury, or a charity that runs a heifer pool are engaged in microfinance. Ensuring financial services to poor people is best done by expanding the number of financial institutions available to them, as well as by strengthening the capacity of those institutions. In recent years there has also been increasing emphasis on expanding the diversity of institutions, since different institutions serve different needs. 1. 2. 3. Poor people need not just loans but also savings, insurance and money transfer services. Microfinance must be useful to poor households: helping them raise income, build up assets and/or cushion themselves against external shocks. "Microfinance can pay for itself. Subsidies from donors and government are scarce and
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uncertain, and so to reach large numbers of poor people, microfinance must pay for itself. 4. 5. 6. 7. 8. 9. 10. Microfinance means building permanent local institutions. Microfinance also means integrating the financial needs of poor people into a country's mainstream financial system. "The job of government is to enable financial services, not to provide them." "Donor funds should complement private capital, not compete with it." "The key bottleneck is the shortage of strong institutions and managers." Donors should focus on capacity building. Interest rate ceilings hurt poor people by preventing microfinance institutions from covering their costs, which chokes off the supply of credit. Microfinance institutions should measure and disclose their performance both financially and socially. Microfinance is considered as a tool for socio-economic development,and can be clearly distinguished from charity. Families who are destitute, or so poor they are unlikely to be able to generate the cash flow required to repay a loan, should be recipients of charity. Others are best served by financial institutions. Debates at the boundaries There are several key debates at the boundaries of microfinance. Practitioners and donors from the charitable side of microfinance frequently argue for restricting microcredit to loans for productive purposessuch as to start or expand a microenterprise. Those from the private-sector side respond that because money is fungible, such a restriction is impossible to enforce, and that in any case it should not be up to rich people to determine how poor people use their money. Perhaps influenced by traditional Western views about usury, the role of the traditional moneylender has been subject to much criticism, especially in the early stages of modern microfinance. As more poor people gained access to loans from microcredit institutions however, it became apparent that the services of moneylenders continued to be valued. Borrowers were prepared to pay very high interest rates for services like quick loan disbursement, confidentiality and flexible repayment schedules. They did not always see lower interest rates as adequate compensation for the costs of attending meetings, attending training courses to qualify for
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disbursements or making monthly collateral contributions. They also found it distasteful to be forced to pretend they were borrowing to start a business, when they were often borrowing for other reasons (such as paying for school fees, dealing with health costs or securing the family food supply). The more recent focus on inclusive financial systems (see section below) affords moneylenders more legitimacy, arguing in favour of regulation and efforts to increase competition between them to expand the options available to poor people. Modern microfinance emerged 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 costsand possibly also its costs of serving new clientsfrom its operating revenues). Although 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. 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 for 34 MFIs reaching 65000 borrowers includes MFIs using the solidarity lending methodology (58% female clients) and MFIs using individual lending (51% female clients). The delinquency rate for solidarity lending was 2.4% after 30 days. 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%, whereas the return for women-owned businesses was 0% or slightly negative. Microfinancial services may be needed everywhere, including the developed world. However, in developed economies intense competition within the financial sector, combined with a diverse mix of different types of financial institutions with different missions, ensures that most people
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have access to some financial services. Efforts to transfer microfinance innovations such as solidarity lending from developing countries to developed ones have met with little success.

Financial needs of poor people In Udaipur Division 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. In Stuart Rutherfords recent book The Poor and Their Money, he cites several types of needs: death. Disasters: such as fires, floods, cyclones and man-made events like war or bulldozing of Investment Opportunities: expanding a business, buying land or equipment, improving dwellings. 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, jewelry, 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" (2001, p. 54). 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
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Lifecycle Needs: such as weddings, funerals, childbirth, education, homebuilding, Personal Emergencies: such as sickness, injury, unemployment, theft, harassment or

widowhood, old age.

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 Ways in which poor people manage their money Rutherford argues that 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. Childrens 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, Rutherford calls this 'saving down'. Rutherford's point is that 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 risks.

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Most needs are met through mix of saving and credit. A benchmark impact assessment of Grameen Bank and two other large microfinance institutions in Udaipur Division found that for every Rs 50 they were lending to clients to finance rural non-farm micro-enterprise, about Rs125 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 unsafe. For example a study by us in Udaipur Division concluded that "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 work has 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 many vulnerabilities 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. Current scale of microfinance operations 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 Udaipur Division in 2011. We counted approximately 150 client accounts at over 30, institutions that are serving people who are poorer than those served by the commercial banks. Of these accounts, 105 were with institutions normally understood to practice microfinance. Reflecting the diverse historical roots of the movement, however, they also included postal savings banks (150 accounts), state agricultural and development banks , financial cooperatives and credit unions and specialized rural banks. Regionally the concentration of these accounts was in Udaipur Division representing good percentage 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."
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An important source of detailed data on selected microfinance institutions is the MicroBanking Bulletin, which is published by Microfinance Information Exchange. At the end of 2010 it was tracking 34 MFIs that were serving borrowers. As yet there are no studies that indicate the scale or distribution of 'informal' microfinance organizations 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. "Inclusive financial systems" 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. 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 worlds poorest people, and the diverse settings in which they live and work. Brigit Helms in her book 'Access for All: Building Inclusive Financial Systems', distinguishes between four general categories of microfinance providers, and argues for a pro-active strategy of engagement with all of them to help them achieve the goals of the microfinance movement.

Informal financial service providers

These include moneylenders, brokers, savings collectors, money-guards, and input supply shops. Because they know each other well and live in the same community, they understand each others 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' . Like their informal cousins, they are generally small and local, which
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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 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 dont 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 selfhelp 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. Microcredit and the web Due to the unbalanced emphasis on credit at the expense of microsavings, as well as a desire to link Western investors to the sector, platforms have developed to expand the availability of microcredit through individual lenders in the developed world. In comparison, the needs for microcredit are estimated about crores as of end 2011. Most experts agree that these funds must
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be sourced locally in countries that are originating microcredit, to reduce transaction costs and exchange rate risks. There have been problems with disclosure on peer-to-peer sites, with some reporting interest rates of borrowers using the flat rate methodology instead of the familiar banking Annual Percentage Rate. The use of flat rates, which has been outlawed among regulated financial institutions in developed countries, can confuse individual lenders into believing their borrower is paying a lower interest rate than, in fact, they are. Evidence for reducing poverty Some proponents of microfinance have asserted, without offering credible evidence, that microfinance has the power to single-handedly defeat poverty. This assertion has been the source of considerable criticism.Research on the actual effectiveness of microfinance as a tool for economic development remains slim, in part owing to the difficulty in monitoring and measuring this impact. The Innovations for Poverty Action/Financial Access Initiative Microfinance Research conference, economist noted there are only one or two methodologically sound studies of microfinance's impact. The BBC Business Weekly program reported that much of the supposed benefits associated with microfinance, are perhaps not as compelling as once thought. A point was raised concerning a comparison between two groups: financed through microcredit and one control group. The results of this study suggest that many of the benefits from microcredit are in fact loaned to people with existing business, and not to those seeking to establish new businesses. Many of those receiving microcredit also used the loans to supplement the family income. The income that went up in business was true only for men, and not for women. This is striking because one of the supposed major beneficiaries of microfinance is supposed to be targeted at women.The conclusion was that whilst microcredit is not necessarily bad and can generate some positive benefits, despite some lenders charging interest rates between 40-60%, it isn't the panacea that it is purported to be. He advocates rather than focusing strictly on microcredit, also giving citizens in poor countries access to rudimentary and cheap savings accounts. To further the point stated, microfinancing the general tendency of a small business initially supported on credit to gain profits with time and generate micro savings. In his latest study, the famous two time pulitzer prize winner, Nicholas Donabet Kristof states that there is no evidence
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of any negative influence of micro financing but countless examples of people now looking at the bigger picture and saving for better things have surfaced. The example, where the number of savers has grown to twice as much as the number of borrowers, further strengthens his theory. Sociologist found that much of the evidence on the effectiveness of microfinance for alleviating poverty is based in anecdotal reports or case studies. Initially found over articles on the subject, but included only the limited which used enough quantitative data to be representative, and none of which employed rigorous methods such as randomized control trials similar to those reported by Innovations for Poverty Action. One of these studies found that microfinance reduced poverty. Two others were unable to conclude that microfinance reduced poverty, although they attributed some positive effects to the program. Other studies concluded similarly, with surveys finding that a majority of participants feel better about finances with some feeling worse. Microfinance and social interventions 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 Sistersfor-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 has also been combined with business education and with other packages of health interventions. A project undertaken in Peru by Innovations for Poverty Action found that those borrowers randomly selected to receive financial training as part of their borrowing group meetings had higher profits, although there was not a reduction in "the proportion who reported having problems in their business". Other criticisms Most criticisms of microfinance have actually been criticisms of microcredit, delivered in the absence of other microfinance services such as savings, remittances, payments and insurance. For example, there has been much criticism of the high interest rates charged to borrowers. The
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real average portfolio yield cited by the sample of 35 microfinance institutions that voluntarily submitted reports to the MicroBanking Bulletin in 2011 was 42.3% annually. However, annual rates charged to clients are higher, as they also include local inflation and the bad debt expenses of the microfinance institution. Muhammad Yunus has recently made much of this point, and in his latest book argues that microfinance institutions that charge more than 15% above their longterm operating costs should face penalties. Milford Bateman, the author of Why Doesn't Microfinance Work?, argues that microcredit offers only an "illusion of poverty reduction". "As in any lottery or game of chance, a few in poverty do manage to establish microenterprises that produce a decent living," he argues, but "these isolated and often temporary positives are swamped by the largely overlooked negatives." Bateman concludes that "The international development community is now faced with the reality that, overall, microfinance has been a development policy blunder of quite historic proportions." Here Bateman, like many writers, confuses microfinance as a broad sector with microcredit, a single microfinance intervention (see delineation above). The role of donors has also been questioned. The Consultative Group to Assist the Poor (CGAP) recently commented that "a large proportion of the money they spend is not effective, either because it gets hung up in unsuccessful and often complicated funding mechanisms (for example, a government apex facility), or it goes to partners that are not held accountable for performance. In some cases, poorly conceived programs have retarded the development of inclusive financial systems by distorting markets and displacing domestic commercial initiatives with cheap or free money. There has also been criticism of microlenders for not taking more responsibility for the working conditions of poor households, particularly when borrowers become quasi-wage labourers, selling crafts or agricultural produce through an organization controlled by the MFI. The desire of MFIs to help their borrower diversify and increase their incomes has sparked this type of relationship in several countries, where hundreds of thousands of borrowers effectively work as wage labourers for the marketing subsidiaries of Grameen Bank. Critics maintain that there are few if any rules or standards in these cases governing working hours, holidays, working conditions, safety or child labour, and few inspection regimes to correct abuses. Some of these concerns have been taken up by unions and socially responsible investment advocates Other criticism was raised by the IPO (Initial Public Offering) of a MFI in 2007. As the company
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put its shares on Stock Exchange it was able to generate very high profits that were achieved by rising interest rates on their micro-loans that at some point reached 86% per year. In May 2011 India's biggest MFI, SKS Microfinance also went public. In both instances Muhammad Yunus publicly stated his disagreement, saying that the poor should be the only beneficiaries of microfinance. Microcredit has been blamed for many suicides in India: aggressive lending by microcredit companies in Andra Pradesh is said to have resulted in over 80 deaths in 2010. The authorities discovered that 500 aid from Udaipur Divisin and other division contributed to the Grameen Bank was being diverted by Mohammed Yunus and his closest associates to a company that was engaged in an entirely different sector. When the alarm is raised about the relationship, more than 50 aid money had already been transferred to the For-Profit company Grameen Phone. The whole matter had been kept a secret until now. The film reports that money was set aside by the very most central person of microloans establishing a secret company in order to not pay tax. The film also documents that when Hillary Clinton visited a village in Bangladesh, women from outside were transported into the village and out of the 50 to 80 people in the village who had received microloans, none were ever asked for their views regarding microloans. Only 3 or 4 of the people in the village had been able to successfully build a house using microloans and at least one man in the village considered attempting suicide. The film suggests that the house which Hillary Clinton was shown as an example of microloan success was actually a house uninvolved with any microloan. even visiting the same places following a 2-year interval, and found the same results, namely. The condition of people got worse because of the high interest rates and mafia-like ways of collecting interest payments from the poor. The film interviewed the mother of a girl who lit herself on fire to commit suicide after her sewing machine was repossessed. The documentary also looks at the effectiveness of Grameen Bank along with its "miraculous" stories of transforming peoples lives and concludes that it has had little impact on poverty in all these years. In one segment the home of the celebrated original grameen loan-taker Sufiya Begum in Udaipur division village. Celebrated in grameen folklore that is. He finds some very uncomfortable stories and comes to know that she died in poverty and all her daughters today are beggars.
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SURVEY OUTCOMES
A survey of 200 target population was done with the objective of gaining insight into the popularity and use of microfinance in Udaipur division. 32% of the respondants had heard of microfinance 20% of those who had heard about microfinance had opted for it.which is pretty close to the national average 18% Of those who had opted for microfinance, 45% agreed that microfinance is easily available, rest 55 % were not satisfied with the availability. 46% of those who had opted for microfinance found the process of taking microfinance hasslefree while the rest 54% wanted the process to be simplified. 38% of those who had opted for microfinance were given personalized plans to suit their needs. 68% of those who had opted for microfinance found the repayment options suitable as per their needs. 54% of the microfinance opters found the interest rate justified.The rest of them demanded a deficit in the interest rate of microfinance.

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Conclusions and Recommendation

From our research and analysis conducted on the local level, we conclude that microfinance is certainly a boon for growth of small level investors, and farmers. But there is a lack of knowledge and awareness among the target audience. Which should be addressed properly if the benefits of this scheme has to be penetrated deeper into the masses. Moving on, the interest rates should be lowered to attract more potential consumers. Another noteworthy point is that the availability of finance should be improved so as to serve a larger bunch of potential customers. Single window clearance and reduction of red tapism is suggested so as to reduce the inconvenience that the customers face. In general the respondants were satisfied with the repayment options and the relaxation given to those who were in dire need. From the point of view of the bank, the main concern lies in the fact that the return received from numerous microfinance loans is equivalent to one loan of big amount, but the hassle in handling so much more loans is more than that of a single loan. To address this issue, the process of providing microfinance should be simplified and uniformity should be inculcated in the process.. One more point to look at is the high percentage of defaulters which lead to heavy losses to the bank, to curb this problem, a higher percentage of assets should be kept as assets in custody of the company, and recovery mechanisms should be empowered with more powers.

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Bibliography

-The Indian Journal of Finance

-Investing in microfinance- Philip M. Becker

-En.wikipedia.org/wiki/microfinance

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