A Project study on the Working and Credit Appraisal Process at Arth Microfinance Pvt. Ltd.

Arth microfinance private limited A Project study on the Working and Credit Appraisal Process at Arth Microfinance Pvt. Ltd.Submitted against Winter Internship Training Faculty of Management Studies Institute of Rural ManagementPranav Gupta1/8/2014

PGDM RM (2nd Semester)Batch 2013-15

INTRODUCTION

The Origin of MicrofinanceAlthough neither of the terms microcredit or microfinance were used in the academic literature nor by development aid practitioners before the 1980s or 1990s, respectively, the concept of providing financial services to low income people is much older.The credit cooperatives created in Germany in 1847 by Friedrich Wilhelm Raiffeisen served 1.4 million people by 1910. He stated that the main objectives of these cooperatives should be to control the use made of money for economic improvements, and to improve the moral and physical values of people and also, their will to act by themselves.In the 1880s the British controlled government of Madras in South India, tried to use the German experience to address poverty which resulted in more than nine million poor Indians belonging to credit cooperatives by 1946. During this same time the Dutch colonial administrators constructed a cooperative rural banking system in Indonesia based on the Raiffeisen model which eventually became Bank Rakyat Indonesia (BRI), now known as the largest MFI in the world.

EVOLUTION OF MICROFINANCE IN INDIA (1960 TO TODAY)Microfinance in India emerged as an effort to reach out to the un-banked, lower income segments of the population

1960 to 198019902000

Phase 1: Social BankingPhase 2: Financial Systems ApproachPhase 3: Financial Inclusion

1.Nationalization of private commercial banks1.Peer-pressure1.NGO-MFIs and SHGs gaining more legitimacy

2.Expansion of rural branch network2.Establishment of MFIs, typically of non-profit origins2.MFIs emerging as strategic partners to diverse entities interested in the low-income segments

3.Extension of subsidized credit3.Consumer finance emerged as high growth area

4.Establishment of Rural Regional Banks4.Increased policy regulation

5.Establishment of apex institutions such as National Bank for Agriculture and Rural Development and Small Indu- stries Development Bank of India5.Increasing commercialization

Policy Attention to Microfinance After 20001999 --- Official definition of microfinance by RBIAugust 2000 --- 'Micro Credit/Rural Credit' included in the list of permitted non-banking financial company (NBFC) activities considered for Foreign Direct Investment (FDI)2005 --- MFIs acknowledged for the first time in the Budget Speech by the Finance Minister Government intends to promote MFIs in a big way. The way forward, I believe, is to identify MFIs, classify and rate such institutions, and empower them to intermediate between the lending banks and the beneficiaries.January 2006 --- Announcement of the business correspondent modelFebruary 2006 --- Budget Speech by the Finance Minister promises a formal statutory framework for the promotion, development and regulation of the microfinance sectorMarch 2006 --- Comprehensive guidelines by RBI on loan securitizationJuly 2006 --- RBI master circular allows NGOs involved in microfinance to access External Commercial Borrowings (ECB) up to USD 5 million (INR 20.25 crores) during a year.March 2007 --- Finance Minister introduces the Micro Finance Sector Development and Regulation Bill 2007 in Lok Sabha

Entities in Micro Finance:-Indian Microfinance dominated by two operational approaches: SHG Initiated by NABARD through SHG Bank Linkage Program. Largest outreach to microfinance clients in the world. MFIs Emerged in the late 1990s to harness social and commercial funds. Today the number of Indian MFIs has increased and crossed 1000.MICROFINANCE IN INDIA

Microfinance based credit delivery mechanism ensures viable financial services to address issues like actualising equitable gains from development activities on a sustained basis, and plays a vital role in fighting poverty.National Bank of Agriculture and Rural Development(NABARD) has taken the lead in promoting microfinance in India. ItsSelf Help Group(SHG) model has created opportunities for commercial banks to lend to the poor. It has been encouraging voluntary agencies, bankers, socially spirited individuals, other formal and informal entities and also government functionaries to promote and nurture SHGs & Microfinance Institutions (MFIs)).Due to the Government's active promotion & special schemes, Commercial banks have actively started lending capital to SHGs & MFIs, which then further lend to their members overcoming the information asymmetries that the bank would normally have faced. Thus engaging a dormant source of financing for the needy, as in lending to the poor, banks face high risks and transaction costs, while the lack of borrower information and of collateral make it unattractive for the formal financial sector to lend to the very poor. India is said to be the home of one third of the worlds poor; official estimates range from 26 to 50 percent of the more than one billion population. About 87 percent of the poorest households do not have access to credit. The demand for microcredit has been estimated at up to $30 billion; the supply is less than $2.2 billion combined by all involved in the sector.

Role of Microfinance:-The micro credit of microfinance progamme was first initiated in the year 1976 in Bangladesh with promise of providing credit to the poor without collateral , alleviating poverty and unleashing human creativity and endeavor of the poor people. Microfinance impact studies have demonstrated that 1. Microfinance helps poor households meet basic needs and protects them against risks.2. The use of financial services by low-income households leads to improvements in household economic welfare and enterprise stability and growth.3. By supporting womens economic participation, microfinance empowers women, thereby promoting gender-equity and improving household well-being.4. The level of impact relates to the length of time clients have had access to financial services. Strategic Policy InitiativesSome of the most recent strategic policy initiatives in the area of Microfinance taken by the government and regulatory bodies in India are: Working group on credit to the poor through SHGs, NGOs, NABARD, 1995 The National Microfinance Taskforce, 1999 Working Group on Financial Flows to the Informal Sector (set up by PMO), 2002 Microfinance Development and Equity Fund, NABARD, 2005 Working group on Financing NBFCs by Banks- RBI

Activities in MicrofinanceMicrocredit: It is a small amount of money loaned to a client by a bank or other institution. Microcredit can be offered, often without collateral, to an individual or through group lending.Micro savings: These are deposit services that allow one to save small amounts of money for future use. Often without minimum balance requirements, these savings accounts allow households to save in order to meet unexpected expenses and plan for future expenses.Micro insurance: It is a system by which people, businesses and other organizations make a payment to share risk. Access to insurance enables entrepreneurs to concentrate more on developing their businesses while mitigating other risks affecting property, health or the ability to work.Remittances: These are transfer of funds from people in one place to people in another, usually across borders to family and friends. Compared with other sources of capital that can fluctuate depending on the political or economic climate, remittances are a relatively steady source of funds.

Development Process through Micro Finance

Production NeedsDonors and BanksMicro-FinanceGovernmentand Banks Implementing OrganisationsAwareness/Promotional WorkIndividualIndividualPromotion and Formation of SHGsConsolidation of SHGsMicro EnterpriseMicro EnterpriseSavingsConsumption NeedsCredit DeliveryRecoveryFollow-up MonitoringFarm RelatedIncome Generation (Sustainable & Growth Oriented)Non-Farm RelatedSelf-Sustainability of SHGsEconomic Empowerment through use of Micro-Credit as an entry point for overall Empowerment

About Arth Micro Finance Private Limited (AMFPL)

Arth is one of the four purusharthas- to be strived for- as described in Hindu scriptures. It alludes to the material well-being of a human being towards achieving a symbiotic evolution and a superior quality of well-being.

Microfinance serves as an umbrella term that describes the provision of banking services by poverty-focused financial institutions (microfinance institutions MFIs) to poor parts of the population that are not being served by mainstream financial services providers.

ARTH Finance is an MFI (Micro Finance Institution), under the banner of Kuldhara, working primarily in Jhalawar, Kota, Baran and Jaipur districts in Rajasthan, Mandsore district in Madhya Pradesh and Ahmedabad in Gujarat. ARTH Micro Finance is an associate of Indian Institute for Rural Development (IIRD), a Non Government Organization (NGO) with one and a half decade of experience in the development sector.

IIRD, a development agency, is engaged in livelihood, social and environmental projects. Realizing the need for micro finance services to enable project beneficiaries to take up livelihood activities, ARTH was created as a separate division to provide credit and insurance services to its existing members.

ARTH MICRO FINANCE PRIVATE LIMITED (AMFPL)is a Private Limited Company, originally incorporated on the 14th day of March, 1996 at New Delhi as M/s Chandra Cresec Private Limited under the provisions of The Companies Act, 1956.

The Name of M/s Chandra Cresec Private Limited was changed to M/s Arth Micro Finance Private Limited by a Resolution Dated 28th May 2009 and the Registrar of Companies at New Delhi has issued a Fresh Certificate of Incorporation dated 06th January 2010 in the name of M/s Arth Micro Finance Private Limited with Company Registration No as U65910DL1996PTC077169.

The Company is also Registered with the Department of Non-Banking Supervision of the Reserve Bank of India, New Delhi under the Reserve Bank of India Act 1934 as a Non Banking Financial Company since 27th April 2000 and the Registration Number given to it is B-14.01703. The Company is governed under the various Acts and Rules applicable to a Registered NBFC in India.

ARTH recognizes that the working poor can act in an entrepreneurial manner and are, in principle, creditworthy. For these micro-borrowers, microcredit is often the only alternative to paying excessive interest rates charged by unofficial moneylenders. They use financial services not only for business investment in their micro-enterprises but also to invest in health and education, to manage household emergencies, and to meet the wide variety of other cash needs that they encounter. Access to financial services enables poor people to increase their household incomes, build assets, and reduce their vulnerability to the crises that are so much a part of their daily lives.

Financial services thus reduce poverty and its effects in multiple concrete ways. And the beauty of it all is, as the programs approach financial sustainability, they have reached far beyond the limits of scarce donor resources.

CREDIT POLICY AT AMFPL

Main objective of AMFPL : Empower the down-trodden, by providing micro loans, especially to poor women Strengthen the financial status of women, who do not have direct access to banks or other financial institutions Assist them in their pursuit of income generating activities Equip the poor to make their own choices and build their way out of poverty in a sustained and self-determined way Deliver the social benefits on an ongoing, permanent basis and on a large scale

AMFPL lends credit by way of its products. Following are the features of their prevailing products :

Objective of Study To understand Credit Appraisal Process at AMFPL Understand Operational process at Arth Microfinance. To identify loopholes in credit mechanism. To measure extent of market effectiveness of the products

Credit Decision :

A credit decision over a loan file is of utmost importance for any Micro Finance Institution. Credit decision not only places a dominant role in profitability but also in sustainability of the financing company. Credit manager is the man behind approval or rejection of a loan file. Even though a credit mangers designation offers a prestige with it, the job is not that simple.A bad credit decision can hamper overall objective of the organization.Credit managers decision at AMFPL is influenced by certain factors about borrowers. These factors that play an important role as follows : Age factor : Loanee must be married and age must be below 58 years. Members should be having their own house. Loanee should be physically fit and mentally sound at the time of taking the loan. Mutual relationship among the members. Viability and productibility of their work Family Income and number of dependants

Field Investigation (FI) :

Field investigation is an enquiry made by the lender through their staff.These staff conducts an enquiry on the applicant by visiting their residential and business premises. It can be rightly said that an FI staff makes a complete scan of the applicant and tries to find every relevant information like family details, years at residence, experience in business, nature of business and its setup etc. This information is collected by meeting applicants at the addresses provided & cross questioning. Also, reference checks are made by neighbors so as to find out overall credibility of the applicant in the society. AMFPL doesnt provide loan to the applicant belonging to negative area and having negative profile. These profiles are considered to be risky due to factors such as black money, non-fixed income & repossession of the asset is problematic from these profiles. All the norms are provided to the FI staff and they send their overall response as positive or negative based on their findings and norms kept in concern. FI staff also checks their record of the borrowers who have made defaults in loans taken from previous financiers. An overall positive FI report increases the comfort level of the credit manager and decisions can be taken with ease. This gives an indication to the credit manager and thus prevents from a wrong credit decision.

Loan Disbursement Procedure :

Credit is disbursed to the members at the office only . All the members are called to the AMFPLs branch office to impart the product knowledge , procedure , rules and regulations and credit is disbursed after satisfying the following series of activities : Members should present a blank agreement paper attested by the Notary. Photo of the Applicant with their Spouse. Filling up of the form. Documents Required : Aadhar Card , Voter ID , Electricity bill of all members. The form should be Signed / Thumb impression should be taken. Form should also be signed by Spouse or other adult family member. Deciding of Time & Date for weekly Collection of installment. Application , processing & registration fees is charges @ 3% of the loan amount by AMFPL , which is non-refundable. Another 1% for Insurance of the Members (Met Life Insurance) One copy in the form of passbook should be issued to members and another is kept as records.

With Staff strength of 70 professionals across 14 branches in Rajasthan , Madhya Pradesh and Gujrat , AMFPL has touched more than 22000 lives in 2596 groups and still growing.SWOT Analysis of AMFPL Strengths: Experienced Credit Manager & Sales Team. Healthy Environment Very Competitive interest rate(13.85%) and also high saving rate. Low ratio of Bad Debts Strategic presence in Jaipur Effective Guidelines.

Weaknesses: Limited Credit power Complicated and hectic operational procedure Less Market focused product.

Opportunities: Indulging more staff in customer creation and extending service area. Promoting Savings products in high density customer areas, so to be benefit the existing goodwill (locality) and enhancing customer base. Launching flexi / variety of products

Threats: Competitive Interest rates of Competitors Increasing number of Micro Finance and other financial Institutions.CONCLUSION, IMPLICATIONS AND RECOMMENDATIONS

ConclusionTraditionally women have been marginalized. A high percentage of women are among the poorest of the poor. Microfinance activities can give them a means to climb out of poverty. Microfinance could be a solution to help them to extend their horizon and offer them social recognition and empowerment. Numerous traditional and informal system of credit that was already in existence before micro finance came into vogue. Viability of micro finance needs to be understood from a dimension that is far broader- in looking at its long-term aspects too.India is the country where a collaborative model between banks, NGOs, MFIs and Womens organizations is furthest advanced. It therefore serves as a good starting point to look at what we know so far about Best Practice in relation to micro-finance for womens empowerment and how different institutions can work together.Also thank to women's capabilities to combine productive and reproductive roles in microfinance activities and society has enabled them to produce a greater impact as they will increase at the same time the quality of life of the women micro-entrepreneur and also of her family.

SUGGESTION Credit is important for development but cannot by itself enable very poor women to overcome their poverty. A Healthy feedback must be invited from the field staff to create more harmonious relationship and better knowledge of the market demand . Making credit available to women does not automatically mean they have control over its use and over any income they might generate from micro enterprises. In situations of chronic poverty it is more important to provide saving services than to offer credit. A useful indicator of the tangible impact of micro credit schemes is the number of additional proposals and demands presented by the loanees to public authorities. As the poor are vulnerable it is not sufficient for us just to provide micro credit, but to have a series of support systems provided at the appropriate time.

Government can contribute most effectively by setting sound macroeconomic policy that provides stability and low inflation.