AMRITA BUSINESS SCHOOL, BENGALURU | MICROFINANCE INSTITUTIONS | MARKET RESEARCH PROJECT | |

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Contents LIST OF TABLES 2 INTRODUCTION 2 WHY MICROFINANCE? 3 MICRO FINANCE SERVICE PROVIDERS 4 THE EMERGENCE OF PRIVATE MICROFINANCE INDUSTRY 4 MICRO FINANCE IS ALL AROUND US 5 LITRETURE REVIEW 6 SUMMARY OF Y. H. MALEGAM COMMITTEE REPORT 2011 14 Why Malegam Committee Report was Set up? 15 Key recommendation 16 PROFIT AND NON PROFIT ORGANIZATION 21 Differences between for-profit MFI’s and non-profit MFI’s 23 For Profit MFI 23 Non Profit MFI 24 METHODOLOGY 25 CAPITAL STRUCTURE AND ASSET ALLOCATION 25 DEPTH AND BREADTH OF OUTREACH 27 EFFICIENCY 28 PRODUCTIVITY 29 QUALITY OF THE PORTFOLIO 31 ANALYSIS OF NUMBER OF ACTIVE BORROWERS 33 PROFITABILITY AND SUSTAINABILITY 35 CONCLUSION 36 REFERENCES 36

LIST OF TABLES Table 1 Table of Comparision 12 Table 2 Comparison of Debt Equity Ratio 25 Table 3 Debt Equity Ratio 26 Table 4 Comparison of Depth and Breadth of MFIs for the year 2012 with 2010 27 Table 5 Comparison of Depth and Breadth of MFIs for the year 2011 with 2010 27 Table 6 Operating Expense / Loan Portfolio 28 Table 7 Industry Standard for Operating Expense / Loan Portfolio 29 Table 8 Productivity of MFI’s for the year 2010 29 Table 9 Productivity of MFI’s for the year 2011 30 Table 10 Industry standards for year 2010 30 Table 11 Quality of portfolio for the year 2010 31 Table 12 Quality of Portfolio for year 2011 31 Table 13 Quality of Portfolio for year 2012 32 Table 14 Quality of Portfolio for Industry 33 Table 15 RETURN ON ASSETS AND RETURN ON EQUITY FOR MFI’S 35 Table 16 BENCHMARK FOR 2010 35 Table 17 Sustainablility 35

INTRODUCTION
A range of institutions in public sector as well as private sector offers the microfinance services in India. They can be broadly categorized into two categories namely, formal institutions and informal institutions. The former category comprises of Apex Development Financial Institutions, Commercial Banks, Regional Rural Banks, and Cooperative Banks that provide microfinance services in addition to their general banking activities and are referred to as microfinance service providers. On the other hand, the informal institutions that undertake micro finance services as their main activity are generally referred to as Micro Finance Institutions (mFIs). While both private and public ownership are found in the case of formal financial institutions offering microfinance services, the mFIs are mainly in the private sector.
WHY MICROFINANCE?
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 $1,000 each will not differ greatly from the revenue that results from delivering one loan of $100,000, 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. []
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 28 studies of informal money lending rates in 14 countries in Asia, Latin America and Africa 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. []
MICRO FINANCE SERVICE PROVIDERS
The microfinance service providers include apex institutions like National Bank for Agriculture and Rural Development (NABARD), Small Industries Development Bank of India (SIDBI), and, Rashtriya Mahila Kosh (RMK). At the retail level, Commercial Banks, Regional Rural Banks, and, Cooperative banks provide microfinance services. Today, there are about 1,61,480 retail credit outlets of the formal banking sector in the rural areas comprising 13,000 branches of District level cooperative banks, over 15,480 branches of the Regional Rural Banks (RRBs) and over 38,400 rural and semi-urban branches of commercial banks besides almost 94,600 cooperatives credit societies at the village level. On an average, there is at least one retail credit outlet for about 4600 rural people. This physical reaching out to the far-flung areas of the country to provide savings, credit and other banking services to the rural society is an unparalleled achievement of the Indian banking system. An attempt is made here to deal with various aspects relating to emergence of private microfinance industry in the context of prevailing legal and regulatory environment for private sector rural and microfinance operators.
THE EMERGENCE OF PRIVATE MICROFINANCE INDUSTRY
The microfinance initiative in private sector can be traced to the initiative undertaken by Ms.Ela Bhat for providing banking services to the poor women employed in the unorganised sector in Ahmadabad City of Gujarat State. Shri Mahila SEWA (Self Employed Women's Association) Sahakari Bank was set up in 1974 by registering it as a Urban Cooperative Bank. Since then, the bank is providing banking services to the poor self-employed women working as hawkers, vendors, domestic servant etc. As on March 2010, the bank had a membership of 67,000. The deposit and loan portfolio stood at Rs 1050.49 million ($ 22.83 million) and Rs 466.69 million ($ 10.14 million) respectively. Though the bank is making profit, yet the SEWA bank model has not been replicated elsewhere in the country.
In the midst of the apparent inadequacies of the formal financial system to cater to the financial needs of the rural poor, NABARD sponsored an action research project in 1987 through an NGO called MYRADA. For this purpose a grant of Rs. 1 million ($22,222) was provided to MYRADA for an R&D programme related to credit groups. Encouraged by the results of field level experiments in group based approach for lending to the poor, NABARD launched a Pilot Project in 1991-92 in partnership with Non-governmental Organisations (NGOs) for promoting and grooming self help groups (SHGs) of homogeneous members and making savings from existing banks and within the existing legal framework. Steady progress of the pilot project led to the mainstreaming of the SHG-Bank Linkage Programme in 1996 as a normal banking activity of the banks with widespread acceptance. The RBI set the right policy environment by allowing savings bank accounts of informal groups to be opened by the formal banking system. Launched at a time when regulated interest rates were in vogue, the banks were expected to lend to SHGs at the prescribed rates, but RBI advised the banks not to interfere in the affairs of SHG management, particularly on the terms and conditions on which the SHGs disbursed loans to their members.
The uniqueness of the microfinance through SHG is that it is a partnership based approach and encouraged NGOs to undertake not only social engineering but also financial intermediation especially in areas where banking network was not satisfactory. The rapid progress achieved in SHG formation, which has now turned into a women empowerment movement across the country, laid the foundation for emergence of mFIs in India. MICRO FINANCE IS ALL AROUND US
The phenomenal success of microfinance has been strongly facilitated by the Indian Government, including the Reserve Bank of India (RBI), which furthered financial inclusion and nurtured MFIs over the years. The foremost initiative is the guideline on priority sector lending for all banks, which has incentivised debt funding to MFIs, even during the recent crisis. Until five years ago, the Indian microfinance industry was primarily sustained by donations/aid as commercial funders had little confidence in the repayment capacity of poor borrowers. Since then, this industry has proven itself to be highly profitable and these poor borrowers, who are largely unaffected by global macroeconomic shocks, have now withstood the test of time, their creditworthiness demonstrated by their continuous strong repayments.
There has been some degree of concern about lending by multiple MFIs to the same borrower, especially in urban areas. The lack of a national platform to share credit data on borrowers belonging to the bottom of the pyramid has thus been a challenge that the sector has been grappling with. The Credit Information Bureau India Limited (CIBL), an effort spearheaded by the Government of India and the RBI, with a database of over 155 million records and a membership base of over 200 financial institutions, has just entered into an agreement with 31 leading MFIs to set up a credit information bureau for micro-borrowers.
Of late, there have been instances of certain larger MFIs issuing listed debt instruments like commercial paper and non-convertible debentures. A 2009 media report[] stated that MFIs were looking to raise Rs. 1,000 crore or US$220 million this financial year through the issue of such instruments. Such securities (1) augment the investor universe by overcoming regulatory constraints and liquidity concerns; (2) reduce the cost of funding as a direct consequence of this increased universe and (3) enhance the probability of funders taking exposure for longer tenures, which will help fund micro-housing and other products having longer terms. Securitisations are on the increase, banks are enhancing exposure to MFIs and the emergence of guarantee funds is facilitating debt funding to the smaller players.[]

LITRETURE REVIEW

The paper (CROMBRUGGHE,2007) focuses on the operational aspects of performance of Indian MFIs.T he broader social objectives of outreach and poverty alleviation of these MFIs into account by analyzing the indicators of operational performance conditional upon the observed values of the indicators of the social objectives. The paper looks at factors that contribute to self-sufficiency of MFIs and sheds light on the potential trade-offs or conflicts that may arise if MFIs try simultaneously to serve the poor (small loan size, low interest rates) and reach self-sufficiency. Simultaneously the determinants of repayment, profitability and costs, to see whether there may be a contradiction between high repayment rates and profitability or between high repayment rates and cost control.

Three sets of indicators of performance in the paper. The first set summarizes the self-sustainability level reached by the MFI; it includes the Financial Self-Sustainability (FSS) ratio and the Operational Self-Sustainability ratio (OSS). FSS includes a cost for own funds of the MFI, simply by applying the inflation rate to own funds, and is thus a more comprehensive measure of sustainability than OSS which includes all costs except the cost of own funds.
The second set of performance indicators describes the repayment of loans. We use mainly the portfolio at risk at 60 days past due (PAR 60). The third set of performance indicators relates to costs. We distinguish the total cost and the operating cost.

Their results suggest that the challenge of covering costs on small and partly unsecured loans can indeed be met, without necessarily increasing the size of the loans or raising the monitoring cost, thus MFIs can ensure sustainability through financial performance while keeping the focus on the poor. The variety of performances and operating parameters of the MFIs in our sample make it possible to suggest ways to increase the ability of MFIs to cover costs. On the revenue side, the current average interest rate and other charges of about 22% per rupee lent can be sustained without worsening the repayment performance of the borrowers, thus without triggering adverse selection or moral hazard effects. This is not enough, however, to cover operating and financial costs of more than 30% on average. Our estimates suggest that raising the interest rate can be done without harming profitability, despite some risk of increasing defaults.

( Sanjay, 2003) The paper talks about the various delivery models. They can be divided into two broad categories: group models and individual models. Group models include Self-Help Groups (SHG), the Grameen model, mixed model and joint-liability groups (JLG). The individual model corresponds to individual banking.

In the SHG model, the institution lends to groups of 10–20 individuals, mostly women who have created a SHG.

The Grameen model corresponds to the lending method initiated by Yunus in Bangladesh. With this model, the institution lends to. affinity groups of 5 individuals. These groups are very standardized in structure. They organize weekly meetings and saving is mandatory for members. Credit is not given to all members simultaneously, but all hope to have their turn and all stand for each other’s obligations. The groups are created under supervision of the MFI, according to a well-defined structure to facilitate access to microfinance services.

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.With the Joint liability model, the MFI gives individual loans to members of a group of 4 to 6 individuals, based on the mutual guarantee of each other’s loans. Members of a joint liability group are generally engaged in the same activity and they are not forced to save.

With the individual banking model, the MFI gives directly loans to clients as a standard bank. There is a bilateral relationship between the MFI and the borrower, but requirements such as collateral are less stringent than in standard banking contracts.

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.

(Sharma,2012) An analysis of various MFI’s in India.The Sri Kshetra Dharmasthala Rural Development Project (SKDRDP) trust lends to self-help groups (SHGs), which, in turn, distribute loans to their members. SKDRDP, which has been lending to SHGs since 1995, is led by D. Veerendra Heggade, the Dharmadhikari and temple administrator of Sri Kshetra Dharmasthala, a famous centre of worship. Independent estimates today peg the temple’s assets at over `10,000 crore and annual revenues at `100 crore

In Varanasi, Cashpor, set up by microfinance veteran, David S. Gibbons, has been successfully serving the poor for more than a decade. it follows the Grameen model, Cashpor’s operations are restricted to 20 districts in eastern
Uttar Pradesh and Bihar. It has around 400,000 borrowers, all below the poverty line. its portfolio has grown, with loan disbursals rising from `471.86 crore in 2009/10 to `515.70 crore in 2010/11. Its share of non-performing assets (NPAs) also came down from 0.28 per cent to 0.25 per cent during this period. its operating surplus is also exempt from tax under Section 12A of the Income Tax Act. This has helped Cashpor reduce its interest rate by 4.5 percentage points (in July
2010, well before the Andhra crisis) to 25.76 per cent.

SKS Microfinance – which operates across 19 states and at one point was adding 100,000 new borrowers each week.

Bangalore-headquartered Sanghamithra Rural Financial Services is another not-for-profit. Despite a presence in Andhra Pradesh – where the new law led to a sharp dip in loan recoveries – it hardly has defaults and NPAs. That is because we do not lend to individuals. We lend to self-help groups and, more importantly, before lending, we invested in capacity building,Sanghamithra, has been growing at over 30 to 40 per cent per annum but in the last two years it has been down to 20 per cent.

Bangalore-headquartered Janalakshmi has managed to remain blemish-free. Founded by former Citibanker Ramesh Ramanathan and his wife, it has a unique MFI model. The couple set up two for-profit entities – a non-banking finance company, providing financial services to the urban poor and an affordable housing developer company – but transferred all their shares in these companies to a not-for-profit Section 25 company, Janalakshmi Social Services. Any returns the promoters earn from the forprofit entities are transferred to the not-for-profit body. So far, it has sustained itself on a $1-million grant from the Michael and Susan Dell Foundation. This will keep them going for the next two to three years. Thereafter, promoter returns from the for-profit entities could help fund further activities.
The main motive of the article was to emphasis MFI’s ,to look at serving the bottom of the pyramid, rather than hunting for a fortune.

Microfinance(Zohra,2011) has been a tool of development which has helped in an economic way also. It has helped in bringing financial inclusion in the country. It has been viewed as the most important tool of women empowerment. It has also helped in alleviating poverty at a very large extent. The unprivileged and unbanked sectors in India are provided with financial services and credit herby bringing about financial inclusion. The various functions that microfinance provides to low income population are as follows: * Working capital for business purposes * Loans to have access to basic necessities such as food, clothes, shelter and education * Serve as alternatives to loan provided by money lenders
But like other players such as banks or insurance companies the main components of microfinance are providing deposits, loans, payment services, money transfers and insurance to poor. This is because till now majority of India belongs to unbanked sector. Thus the microfinance sectors aims to improve the living of the poor income households. The most positive point of microfinance in India is that it are in various form and have different service models and thus provide products that are suitable to appropriate target segments.
The main reason for the existence of microfinance institutions in India are because of various factors which affected the reach of formal financial services. The high fixed and variable costs incurred by banks in servicing low income households. The number of less branches in remote locations due to financial unfeasibility due to low volume and high cost of operation failing to meet the requirements of rural population .The lack knowledge of financial knowledge by low income population. Therefore they find it difficult to contemplate existing financial products and services provided by microfinance institutions. The need for collateral to avail credit which the low income household find it difficult to provide for.

The regulatory structure of MFIs in India is defined in the case of former, RBI regulates the MFIs with prudential norms, governance requirements, filling of information and other supervisory mechanisms. MFIs as societies are registered under Societies Registration Act, 1860; MFIs as trusts are registered under Indian Trust Act, 1882; and MFIs as mutually aided cooperatives are governed by the respective state government acts. But these MFIs are not governed by the type of regulations applicable to other financial sector. They are either benevolently regulated or left out to self-regulation. The overall picture of regulation of MFIs is—“By loan volumes, 77% of the MFI sector is under RBI’s direct regulation. But 75% of MFIs are functioning outside regulation. These are typically societies and trusts having a small client base and limited loan volumes”. The primary emphasis is on the deposit taking MFIs and saving protection.

The two sets of dependent variables, e.g., outreach variables like number of active borrowers and loan size, an sustainability and profitability variables like OSS and Return on Assets (ROA) are considered. They are interchangeably used as predictor variables. Outreach is the most important indicator of performance of MFIs; measured by the number of active borrowers per staff, it indicates the effectiveness of MFIs’ attempt to reach the poor people, i.e., the social efficiency. This is indicated by the Number of Active Borrowers per Staff
(NBS) and regulation is assumed to have a positive impact on it.

Sustainability of MFIs is indicated through OSS ratio. The ratio indicates the ability of MFIs to cover the financial expenses and operating expenses out of operating revenues. Some also include loan loss provisions in the numerator. ROA, which indicates profitability of MFIs, and
OSS are expected to be positively impacted by regulation. Other predictors of both the indicators considered are high outreach, maturity of MFIs, larger total assets, low portfolio risk, low operating expenses to loan (OEL), and all are expected to have some impact on the dependent variables. Precisely, it is expected that regulated and mature MFIs have better outreach and sustainability, so regulation was expected to emerge as a strong predictor variable.
When it comes to comparision of MFI and SHG the financial cost of borrowing was found to be much higher in the MFI model with an average effective interest rate (EIR) of 44.92 percent p.a while the SHG loans had a more bearable average EIR of 21.56 percent p.a. Also, the psychological difficulties associated with servicing the debt were found to be much higher in the case of MFI loans. The only aspect in which the MFIs positively outscored SHGs was the time required to process the loans. The operational efficiencies of MFIs facilitates „on-the spot‟ disbursals and is the major reason behind its successful existence. It was distressing to note that an overwhelming majority of the loans taken under both the models were used to finance consumption activities and not Income Generating Activities (IGAs), thereby necessitating a deep introspection into micro-finance as a whole. Also alarming was to note that the credit discipline within SHG system is collapsing due to the influence of MFIs.

Microfinance in India does not have a single form of organization contributing to the absence of a formal, central regulatory mechanism. Several factors have contributed to the recent turmoil in the microfinance industry. Absence of regulation is one of them. This paper looks into the need for regulation of Microfinance Institutions (MFI) aspects of regulation and international experiences in regulation that could guide the industry in India.
Microfinance in India has been viewed as a development tool which would alleviate poverty and enhance growth of the country through financial inclusion. Out of 6 lakh villages in India, only approximately 50000 have access to finance. India is a country which has the highest number of households which are excluded from banking. With the Andhra crisis of microfinance institutions and issues that microfinance institutions have a mission drift, the aim of the paper is to study the performance and efficiency of microfinance. A sample of microfinance institutions in India have been selected based on their ratings given by microfinance information exchange (MIX) for the study. The performance of these sample MFIs as well as their performance with respect to commercial banks in India have been studied using statistically tools. A microfinance institution is measured for financial sustainability based on its good financial accounts and the recognized accounting practices they follow. Data for the microfinance institutions have been collected from Microfinance information exchange (MIX) where few of the MFIs have started reported their financial data. The MIX has classified the MFIs based on various parameters such as level of disclosure, financial parameters etc and rated them accordingly. Out of the 88 MFIs in India reported on MIX, 24 MFIs are taken as samples, these samples taken were five star rated by MIX. The financial parameters of these MFIs are studied and compared with the financial parameters of commercial banks and their financial performance can be analyzed. The various parameters taken for analyzing the financial performance of MFIs and banks include: Financial structure, Profitability and Efficiency.
Table [ 1 ] Table of Comparision

Name of the Journal | Authors | Year of Publication | Main idea of the paper | Concepts | Variable | PERFORMANCE ANALYSIS FOR A SAMPLEOF MICROFINANCE INSTITUTIONS IN INDIA | Alain de Crombrugghe, Michel Tenikueand Julie Sureda | 2007 | The paper mainly explains the operations and Performance of MFI’s | Micro Finance | the Financial Self-Sustainability (FSS) Operational Self-Sustainability ratio (OSS), Portfolio at Risk(PAR) | Financial Services for Low Income Families: An Appraisal | Sanjay Sharma | 2003 | General overview of the various MFI delivery models | Self Help Group(SHG), Grameen Model, Mixed Model, Joint Liability Model | | Against the Grain | E. Kumar Sharma and K.R. Balasubramanyam | Business Today February 19 2012 | Analysis of various successful MFI’s in India | | | Comparison of performance of microfinance institutions with commercial banks in India | Prof Zohra Bi and Dr Shyam Lal Dev Pandey | September-2011 | Talks about the performance metrices of MFi’s | Microfinance Information Exchange, Profitability, Efficiency | OSS, Return On Assets (ROA), operating expense, Operating Expenses to loan. | Regulation Versus Outreach and Sustainability: A Study of the Performance of Microfinance Institutions in India | Ambika Prasad Pati | 2012 | The regulatory structure of MFI’s | Indian Trust Act | | Comparitive analysis of MFI and SHG-Banking models | George Paul and Sara Jhon P | 2011 | Compatitive analysis of MFI and SHG | | | Regulating Microfinance Institutions in India:A Conceptual a Framework | K.S.Ranjani | 2012 | Looks into the needfor regulation of Microfinance Institutions (MFI) aspects of regulation and international experiencesin regulation that could guide the industry in India. | Conceptual framework for regulation of MFI in India. | |

SUMMARY OF Y. H. MALEGAM COMMITTEE REPORT 2011
The RBI appointed Mr. Y. H. Malegam Committee (the Sub-Committee of the Central Board of Directors of Reserve Bank of India to Study Issues and Concerns in the MFI Sector related to the entities regulated by the Bank) has submitted its report to the RBI in January 2011.

The Sub-Committee composed of Shri Y.H. Malegam as Chairman, Shri Kumar Mangalam Birla, Dr. K. C. Chakrabarty, Smt. Shashi Rajagopalan and Prof. U.R. Rao as Members and Shri V. K. Sharma (Executive Director) – Member Secretary[]

Why Malegam Committee Report was Set up?

Most of the small-sized MFIs with a sizeable presence in Andhra Pradesh were on the brink of closure after the state government clamped down on agents with a new borrower-friendly ordinance.
Thus, the onslaught from the amended state ordinance, which was intended to check the coercive methods of recovery practiced by MFIs, had negative ramifications on the smaller lending institutions in the industry. The net impact of the new ruling led to poor repayment from the, now, empowered borrowers.
The constitution of the committee followed the turmoil in Andhra Pradesh’s microfinance sector, where a spate of suicides were linked to alleged coercive methods adopted by certain MFIs to recover loans.
In the wake of concerns being expressed on the high interest rates being charged by some MFIs, strong-arm tactics to secure repayments and cases of multiple lending, the Andhra Pradesh government passed a legislation regulating microfinance operations in the state. It mandated MFIs to specify their area of operation, rate of interest, recovery practices and operational systems to the government authorities. The law also mandated MFIs to seek the approval of the state government before issuing any fresh loan.
Recovery of loan instalments in Andhra Pradesh plunged to as low as 10-20% and fresh lending to borrowers in the southern state, which accounts for a quarter of the total microfinance business in India, also come to a grinding halt. However, India’s political bigwigs were well aware that they can not let the crisis-ridden microfinance industry to fall like nine pins. It would not only have wider rumblings on the finance sector, but also adversely impact remotely-situated small enterprises and individuals.
Key recommendation
1. A separate category be created for NBFCs operating in the Microfinance sector, such NBFCs being designated as NBFC-MFI.

2. A NBFC-MFI is defined as “A company (other than a company licensed under Section 25 of the Companies Act, 1956) which provides financial services pre-dominantly to low-income borrowers with loans of small amounts, for short-terms, on unsecured basis, mainly for income-generating activities, with repayment schedules which are more frequent than those normally stipulated by commercial banks and which further conforms to the regulations specified in that behalf”. It is suggested to define each component of this definition in the regulation.

3. The suggested conditions to be followed to classify a NBFC as a NBFC-MFI a). Not less than 90% of MFI’s total assets (other than cash and bank balances and money market instruments) are in the nature of “qualifying assets.” b)The criteria suggested to be satisfy the “qualifying asset” of NBFC-MFI are i) the loan is given to a borrower who is a member of a household whose annual income does not exceed Rs. 50,000; ii)the amount of the loan does not exceed Rs. 25,000 and the total outstanding indebtedness of the borrower including this loan also does not exceed Rs. 25,000; iii) the tenure of the loan is not less than 12 months where the loan amount does not exceed Rs. 15,000 and 24 months in other cases with a right to the borrower of prepayment without penalty in all cases; iv) the loan is without collateral; v) the aggregate amount of loans given for income generation purposes is not less than 75% of the total loans given by the MFIs; vi) the loan is repayable by weekly, fortnightly or monthly installments at the choice of the borrower. c) The income it derives from other services is in accordance with the regulation specified in that behalf. 1
4. A NBFC which does not qualify as a NBFC-MFI should not be permitted to give loans to the microfinance sector, which in the aggregate exceed 10% of its total assets.

5. The Committee recommended a “margin cap” of 10% in respect of MFIs which have an outstanding loan portfolio at the beginning of the year of Rs. 100 crores and a “margin cap” of 12% in respect of MFIs which have an outstanding loan portfolio at the beginning of the year of an amount not exceeding Rs. 100 crores. It also recommended an interest cap of 24% on individual loans.

6. In respect of transparency in Interest Charges, the committee has suggested the following recommendations: a) There should be only three components in the pricing of the loan, namely (i) a processing fee, not exceeding 1% of the gross loan amount (ii) the interest charge and (iii) the insurance premium. b) Only the actual cost of insurance should be recovered and no administrative charges should be levied. c) Every MFI should provide to the borrower a loan card which (i) shows the effective rate of interest (ii) the other terms and conditions attached to the loan (iii) information which adequately identifies the borrower and (iv) acknowledgements by the MFI of payments of installments received and the final discharge. The Card should show this information in the local language understood by the borrower. d) The effective rate of interest charged by the MFI should be prominently displayed in all its offices and in the literature issued by it and on its website. e) There should be adequate regulations regarding the manner in which insurance premium is computed and collected and policy proceeds disposed off. f) There should not be any recovery of security deposit. Security deposits already collected if any should be returned. g) There should be a standard form of loan agreement. 1
7. In order to minimize the adverse features of Multiple-lending, Over-borrowing and Ghost-borrowers, the committee has made the following recommendations. a) MFIs should lend to an individual borrower only as a member of a JLG and should have the responsibility of ensuring that the borrower is not a member of another JLG. b) a borrower cannot be a member of more than one SHG/JLG. c) not more than two MFIs should lend to the same borrower. d) there must be a minimum period of moratorium between the grant of the loan and the commencement of its repayment. e) recovery of loan given in violation of the regulations should be deferred till all prior existing loans are fully repaid.

8. All sanctioning and disbursement of loans should be done only at a central location and more than one individual should be involved in this function. In addition, there should be close supervision of the disbursement function.
9. It is recommended to establish one or more Credit Information Bureaus (CIB) and all MFIs are required to become members of such bureau. Till the operation of CIB, the responsibility to obtain information from potential borrowers regarding existing borrowings should be on the MFI.
10. In case of coercive methods used in recovery, the MFIs and their managements should be subject to severe penalties. b) The regulator should monitor whether MFIs have a proper Code of Conduct and proper systems for recruitment, training and supervision of field staff to ensure the prevention of coercive methods of recovery. Field staff should not be allowed to make recovery at the place of residence or work of the borrower and all individual loans.
11. The minimum net worth recommended for NBFC-MFI is Rs.15 crore.
12. Every MFI should be required to have a system of Corporate Governance in accordance with rules to be specified by the Regulator.
13. Provisioning for loans should not be maintained for individual loans but an MFI should be required to maintain at all times an aggregate provision for loan losses which shall be the higher of: (i) 1% of the outstanding loan portfolio or (ii) 50% of the aggregate loan installments which are overdue for more than 90 days and less than 180 days and 100% of the aggregate loan installments which are overdue for 180 days or more.
14. NBFC-MFIs should be required to maintain Capital Adequacy Ratio of 15% and all of the Net Owned Funds should be in the form of Tier I Capital.
15. Bank lending to the Microfinance sector both through the SHG-Bank Linkage programme and directly should be significantly increased and this should result in a reduction in the lending interest rates.
16. Bank advances to MFIs shall continue to enjoy “priority sector lending” status. However, advances to MFIs which do not comply with the regulation should be denied priority sector lending” status. It may also be necessary for the Reserve Bank to revisit its existing guidelines for lending to the priority sector in the context of the Committee’s recommendations.
17. In respect of assignment and securitization, MFI portfolio, the following are the recommendations: 1 a) Disclosure is made in the financial statements of MFIs of the outstanding loan portfolio which has been assigned or securitized and the MFI continues as an agent for collection. The amounts assigned and securitized must be shown separately. 2 b) Where the assignment or securitization is with recourse, the full value of the outstanding loan portfolio assigned or securitized should be considered as risk-based assets for calculation of Capital Adequacy. 3 c) Where the assignment or securitization is without recourse but credit enhancement has been given, the value of the credit enhancement should be deducted from the Net Owned Funds for the purpose of calculation of Capital Adequacy. 1 d) Before acquiring assigned or securitized loans, banks should ensure that the loans have been made in accordance with the terms of the specified regulations.

18. It is recommended to examine the creation of one or more "Domestic Social Capital Funds" in consultation with SEBI to fund MFIs. Further, MFIs should be encouraged to issue preference capital with a ceiling on the coupon rate and this can be treated as part of Tier II capital subject to capital adequacy norms. 1
19. In order to monitor the Compliance, the following recommendations are made 1 a) The primary responsibility for ensuring compliance with the regulations should rest with the MFI itself and it and its management must be penalized in the event of non-compliance 2 b) Industry associations must ensure compliance through the implementation of the Code of Conduct with penalties for non-compliance. 3 c) Banks also must play a part in compliance by surveillance of MFIs through their branches. 4 d) The Reserve Bank should have the responsibility for off-site and on-site supervision of MFIs but the on-site supervision may be confined to the larger MFIs and be restricted to the functioning of the organizational arrangements and systems with some supervision of branches. It should also include supervision of the industry associations in so far as their compliance mechanism is concerned. Reserve Bank should also explore the use of outside agencies for inspection. 5 e) The Reserve Bank should have the power to remove from office the CEO and / or a director in the event of persistent violation of the regulations quite apart from the power to deregister an MFI and prevent it from operating in the microfinance sector. f) The Reserve Bank should considerably enhance its existing supervisory organisation dealing with NBFC-MFIs.

20. The exemption from the provisions of State Money Lending Acts was recommended on account of interest margin caps and increased regulation suggested by the Committee

21. In respect of The Micro Finance (Development and Regulation) Bill 2010, the committee subject to Smt.Rajagopalan's reservations above, recommend the following:
a) The proposed Act should provide for all entities covered by the Act to be registered with the Regulator. However, entities where aggregate loan portfolio (including the portfolio of associated entities) does not exceed Rs. 10 crores may be exempted from registration.
b) If NABARD is designated as the regulator under the proposed Act, there must be close co-ordination between NABARD and Reserve Bank in the formulation of the regulations applicable to the regulated entities.
c) The micro finance entities governed by the proposed Act should not be allowed to do the business of providing thrift services. 22. The Committee also felt that the need for a separate Andhra Pradesh Micro Finance Institutions (Regulation of Money Lending) Act will not survive if the Committee’s recommendations are accepted, 23. The cut-off date suggested for implementation of the recommendations is April 1st, 2011. In particular, the recommendations as to the rate of interest, it is recommended that it should be made effective to all loans given by an MFI after March 31st 2011.
PROFIT AND NON PROFIT ORGANIZATION
A regulated for-profit microfinance institution is a business, not a charity. It is common t have charity work towards the objective of alleviating poverty. But as the transition occurs from NGO to regulated institution, the question rises whether or not a forprofit entity can continue to uphold a mission of reducing poverty while meeting its fiduciary duty to maximize profits. Normally, shareholders or investors in a for-profit business want to maximize returns. Shareholders or donors in a non-profit microfinance organization want to further that organization’s social goal, whatever that may be.
Each separate organization has created bottom line goals and objectives that it hopes to achieve. For-profit financial institutions generally do not subsidize interest rates, which keeps rates above 60 percent per year in many cases. The main point is whether the poor can afford these high interest rates.

Differences between for-profit MFI’s and non-profit MFI’s
For Profit MFI
Primary reason for interest in SPM? 1. Increased interests from social investors. 2. Avoiding negative impact on operations and/ or reputation risk.

Challenges and obstacles 1. Board members concerned about the use of funds and often see social performance only as a cost centre, much less a way to improve financial performance. 2. Beyond the financial, may have a lack of un-derstanding of social performance and why it is necessary or useful; may see SPM simply as a diversion.Tips for securing board buy-in 1. Emphasise the board’s role in overseeing the MFI’s adherence to its mission rather than discussing the need to improve social per-formance. 2. Show quick results from SPM-related activities that include improved operational or financial performance. 3. Find social investors that may reward the MFI with better terms for achieving social goals.Non Profit MFIPrimary reason for interest in SPM? 1. Mission/outreach fulfillment. 2. Historical reasons for creating the MFI. 3. Socially minded board members and employ-ees.Challenges/Obstacles 1. Board members’ lack of direct investment in the MFI may cause them to ask fewer questions and generally trust executive management without challenging them. 2. Longstanding board members may resist change.Tips for securing board buy-in 1. Test board members’ perceptions about how the MFI is doing against hard evidence about actual performance. You could undertake a market seg-mentation or poverty assessment to verify out-reach, or arrange an internal social assessment or social audit. 2. Provide case studies/examples from peers – competition can be just as fierce a driver of so-cial performance. | |

METHODOLOGY * What we are trying to do is to compare the performance of an MFI for one year with its performance for the next year. * Then we take the average of the four top performing NGO’s and NBFI’s assuming it to be a best sample representative for an NBFI or NGO. We do not consider the NGO and NBFI’s that are not performing well because we were unable to find datas for the year of 2011 and 2012. * We have analyzed the performance of a MFI based on factors like Capital structure and asset allocation, depth and breadth of outreach, efficiency, productivity, Quality of portfolio, analysis of active borrowers and profitability
CAPITAL STRUCTURE AND ASSET ALLOCATION
Debt Equity ratio is used to determine the capital structure. If the ratio is equal to 1 then it means the company is sourcing its fund equally from debts and equity. Lower the debt equity ratio means lesser the risk of the firm to interest rate and credit rating fluctuations. But when the debt equity ratio is lesser compared to the industry standards, it means they are not utilizing their debt capacity properly. Considering the current situation.
Table 2 Comparison of Debt Equity Ratio Name of the insititute | Current legal status | Debt Equity | Industry Standard | SKS | NBFI | 1.38 | 3.9 | Spandana | NBFI | 5.54 | 3.9 | GFSPL | NBFC | 4.38 | 3.9 | SHARE | NBFI | 7.15 | 3.9 | BANDHAN | NGO | 0 | 4.4 | SKDRP | NGO | 43.17 | 4.4 | SAHARA | NGO | 8.43 | 4.4 | CAPHOR | NGO | 15.24 | 4.4 |

SKS has a lower debt equity ratio than the market which means they are underutilizing their debt capacity, share has a high debt equity ratio which is not a good sign. The debt equity ratios of SKDRP
And Caphor is very high compared to the industry standards. The companies are in serious trouble. They will be highly exposed to interest rate and credit risks.
Based on Table 2 we can say SKS are trying to utilize their debt capacity, Spandana, Share, Sahara have efficiently managed their debts, same is the case SKDRP and Caphor this may be mainly due to the fact that their NGO’s but still their debt equity ratio is too high, and it will become hard for them to sustain in the market.

Table 3 Debt Equity Ratio | Debt Equity Ratio | Name of the insititute | 2010 | 2011 | 2012 | SKS | 1.38 | 2.75 | NA | Spandana | 5.54 | 1.28 | NA | SHARE | 7.15 | 1.9 | NA | BANDHAN | 0 | 6.24 | 5 | SKDRP | 43.17 | 39.95 | NA | SAHARA | 8.43 | 5.83 | 4 | GFSPL | 4.38 | 5.27 | NA | CAPHOR | 15.24 | 11.89 | NA |

DEPTH AND BREADTH OF OUTREACH
Depth of outreach is measured by average loan size, average loan size per GNI per capita for. Lower value the value of both indicates that the MFI’s are good at reaching poor. Number of borrowers and GLP measures breadth of outreach. All MFIs have large number of borrowers so they are good.
Table 4 Comparison of Depth and Breadth of MFIs for the year 2012 with 2010

Table 5 Comparison of Depth and Breadth of MFIs for the year 2011 with 2010

During the year of 2012 there is a significant decrease in the average loan/ borrower. The decline of a NGO MFI is more significant than that of an NBFI. We cannot attribute this change to the release of the Malegam Committees recommendations because the recommendations were released during January 2011. There was a significant decrease in the number of borrowers of MFI but the average loan per GNI did not show much of a decrease as compared to the year between 2010 and 2012. So we can safely conclude that the decrease in attribute is not due to the recommendations of Malegam committee and we can further see whether there are operation inefficiencies which caused the decrease. Or still the market has not responded properly to the MFI.

EFFICIENCY

Table 6 Operating Expense / Loan Portfolio

Table 7 Industry Standard for Operating Expense / Loan Portfolio | 2010 | NBFI | 31.70% | NGO | 29.60% |

Comparing the companies with the market, we find that Indian MFIs is performing better than the Industry on a whole. They are operating with better efficiency than the market. Comparing the companies by itself we do not see any drastic change of operating efficiencies during the years 2010 and 2011 due to the unavailability of data’s we are unable to see whether the operations of a MFI is affected by the Malegam committee recommendations.
PRODUCTIVITY
Comparing the productivity for the both year we do not find much significance between years. But between an NGO and NBFI we find a clear distinction. Comparing cost per borrower and cost / loan we do not have proper information but cost effectiveness is quite good for an NGO compared to NBFI but for the 2011 both are performing almost similar. In case of employee productivity, we find that NBFI’s employees are more productive than NGO’s comparing the borrower/staff and Loan per staff.

Table 8 Productivity of MFI’s for the year 2010

Table 9 Productivity of MFI’s for the year 2011 The data of the year 2012 was unavailable so no proper comparison could be made in this context.
Table 10 Industry standards for year 2010 | COST PER BORROWER | COST/LOAN | BORROWER/STAFF | LOAN PER STAFF | NBFI | 346 | 287 | 120 | 126 | NGO | 151 | 131 | 151 | 158 |

Comparing the performances of MFI’s with the industry, we find that MFI’s are outperforming industry in terms of productivity. With the difference in the borrower/staff and loan per staff quite high in turns means the employees in the MFI’s are very efficient. But compared to market standards such a high borrower/ staff may also mean that employees may be working above their capacity, or working more than what they should have been working for the same level of pay.
QUALITY OF THE PORTFOLIO

Table 11 Quality of portfolio for the year 2010

Table 12 Quality of Portfolio for year 2011 Table 13 Quality of Portfolio for year 2012

When we take into consideration Table 10 and Table 11 the two main things that would attract our attention is the portfolio at risk for the two NGO’s the portfolio at risk and the risk coverage has dramatically improved for Bandhan and dramatically decreased for SKDRP. Caphors risk coverage has improved drastically but we can see that it had maintained the portfolio at Risk. Banks recognize the importance of keeping low portfolio at risk and having major part of their risk covered. Back up or risk coverage is always essential because it is very evident that after the release of Malegam committee report banks had to go default because of their rough methods of collecting their loans back as we have discussed earlier. So if the risk is covered it would give better confidence to the company for itself and also for people who would wish to invest in an MFI as well as funding from commercial banks. From table 3 and table 4 we can say that the increase in the risk coverage ratio or decrease in portfolio at risk is due to the increase in the number of borrowers and loan amount which would give a better financial climate to the investors who would wish to invest in the banks. But we cannot contribute the decrease of risk coverage ratio for SKDRP because no related datas are given. The MFI Caphor we see the same increase in the number of borrowers and loan.
Table 14 Quality of Portfolio for Industry

It is very evident that MFI’s like to keep investing rather than keeping away money to cover risk. The ratio when compared to the industry is quite low and Portfolio at risk is very high which in a way supports the reason of Malegam committee being established. The increased belief for MFI’s to make profit is quite clearly visible.
ANALYSIS OF NUMBER OF ACTIVE BORROWERS

Figure 1 Comparision of Number of Active borrowers for NBFI, NGO and Credit Union

Figure 2 Number of Active Borrowers for Profit and Non Profit Organizations

From both figure1 and figure 2 it is clearly visible that during the year 2011 there was a sharp decrease in the number of active borrowers which clearly shows the low confidence of people on MFI’s and the advent of the Malegam committee report. Without the recommendations we could have seen people totally losing faith on MFI’s, during which even government realized how important a scheme like this is to the economy of the country. This is clearly proved by the support the government is rendering to the MFI’s to make it stronger. Other than that fact we can say Indian MFI’s are having a good outreach.
Figure 3 Cost per Borrower

After initial high cost per borrower the NBFI is managing it s costs, but if an increase in the cost per borrower is again seen may be due trying to persuade borrowers in AP to repay and those elsewhere to maintain their payments.

PROFITABILITY AND SUSTAINABILITY

Table 15 RETURN ON ASSETS AND RETURN ON EQUITY FOR MFI’S

Table 16 BENCHMARK FOR 2010

Table 17 Sustainablility | Sustainability | Institute | 2010 | 2011 | Bandhan | OSS | OSS | Cashpor | OSS | OSS | GFSPL | OSS | Non-OSS | SHARE | OSS | Non-OSS | SKDRDP | OSS | Non-OSS | SKS | OSS | Non-OSS | SPANDANA | OSS | Non-OSS | SAHARA | OSS | OSS |

Return on equity is the profit that a company generates with the money shareholders have invested and return on asset is how efficient the management is using its assets. The ROA and ROE is very good for the MFI’s during the year of 2010 but the year 2011 except for Bandhan and Cashpor all other MFI’s have registered high loss or high negative profitability. With SKS going to the most negative profits. We can tell this is due to the recommendations but we do not have sufficient data to prove our logic. OSS which stands for operational self sufficiency, we can clearly see that except Bandhan and Cashpor no other MFI is operationally self sufficient. The benchmark for the year 2010 is not good.

CONCLUSION
Based on the analysis we can conclude that Indian MFI’s are quite good when compared to benchmark. But still due to insufficiency of information available a wholesome analysis was not possible. We cannot come to conclusions about the effects of Malegam committee report with the available data set. But it is clearly visible that the MFIs performance is going down and badly needs attention. Hopefully the Malegam committees recommendation do have a positive impact on the MFIs and help to reinsure confidence in the mind of borrowers and investors. A detailed analysis of proper dataset with the current methodology could help us analyze the impact of Malegam committee report better.
REFERENCES
1) Sharma .E. Kumar and K.R. Balasubramanyam (2012), Against the Grain, Business Today, February 19th, pages 78 to 80. 2) Crombrugghe. Alain de, Michel Tenikue and Julie Sureda (2007), PERFORMANCE ANALYSIS FOR A SAMPLE OF MICROFINANCE INSTITUTIONS IN INDIA. 3) Sharma. Sanjay (2003),Financial Services for Low Income Families: An Appraisal 4) Weinberg, R brian (2008). For-profit versus non-profit microfinance: How are the poor affected, 20-28. 5) Imp-act consortium, making microfinance work for the poor, differences between for- and non-profit MFIs: governance issues. 6) Deepti K C. Effects of Reserve Bank of India (RBI) Regulations on Priority Sector Lending for Micro Finance Institutions (MFIs) 7) Dr. Seibel H D (2007). The role of Microfinance in Rural Microenterprise development. 8) Kline K, & Santadarshan S (2011). Microfinance in India: A New Regulatory Structure. 9) Malegam Y H (2011). Report of the Sub-Committee of the Central Board of Directors 10) of Reserve Bank of India to Study Issues and Concerns in the MFI Sector 11) Sinha S (2003). Financial services for Low Income Families: An Appraisal. 12) CRISIL (2009). India Top 50 Microfinance institutions. 13) CRISIL (2011). M-Cril Microfinance Review 2011. 14) Guntz S (2011). Sustainability and Profitability of microfinance institutions 15) McIntosh C, & Wydick B (2004). Competition and microfinance. 16) Sinha S (2003). Financial services for Low Income Families: An Appraisal. 17) CRISIL (2009). India Top 50 Microfinance institutions.

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