A project report by Group 6, FYBBA- C

Introduction

Ten years into the second millennium and sixty five years after our India

gained independence, more than 37% of our country’s population lives

below the poverty line. More than 22% of the entire rural population and

15% of the urban population of India exists in this terrible financial

predicament. It is important to note that 30% of the country’s poor take

loans from MICROFINANCE INSTITUTIONS. This project gives a

comprehensive view of the status and contribution of this sector to our

economic growth and development. After much research, we have

identified the strategic plans followed by these path-breaking institutions

and analyzed their success with respect to generic management

strategies. The Indian microfinance industry is the world’s largest

microfinance industry. The objectives of these firms range from poverty

alleviation, women empowerment, promoting gender equality and

developing an entrepreneurial spirit within the population. With such

multi-faceted goals, STRATEGIC PLANNING becomes the foundation

on which all the business activities can be connected and aligned. A

strategic plan for such a unique business model must challenge

assumptions, gather input from the internal as well as external

environment and effective implementation. To get further insight into

these plans, we interviewed several experts, collected information from

reliable sources and ultimately focused our study on the working of

Hindusthan Microfinance Private Limited.

Methodology

Our group did a lot of research on the importance of strategic planning,

the types of strategic plans and the entire structural framework on

microfinance and its penetration in our country. For this purpose, we

studied numerous research papers, journals, business magazines and data

from the Microfinance Information Exchange.

Upon identifying the various types of microfinance firms, we

interviewed senior managers and employees in firms dealing with

microfinance. For this, we prepared a detailed questionnaire that

included questions on growth, marketing and organizational strategies as

well as the challenges and opportunities in microfinance today. We

visited a Post Office to inquire about the Small Savings Schemes, spoke

at length with a Senior Analyst from ICICI Microfinance and

interviewed the Managing Director as well as Vice President-Operations

of Hindusthan Microfinance Private Limited.

We decided to focus our research project to the workings of the latter

firm. After collecting all the relevant data, we conducted a

comprehensive analysis of the firm’s strategies. A SWOT analysis as

well as a PESTEL analysis has been thoroughly done to identify the

gaps and strengths of the firm. Upon brainstorming, we have also given

a few recommendations to the firm for superior performance.

Theories and Past Studies

Theories:

Microfinance theoreticians have advanced two theories regarding

their aims-an economic and a psychological. The economic theory

treats microfinance institutions (MFIs) as infant industries, while

the psychological theory differentiates microfinance entrepreneurs

from traditional money lenders by portraying them as "social

consciousness driven people."

Past Studies:

Global Partnerships Theory and Credit Lending Model

Global Partnerships expands opportunity for people living in poverty by

investing affordable capital and management expertise in select MFI

institutions (MFIs) in Latin America.

European Fund for Southeast Europe (EFSE)

Consulting services in credit risk and delinquency management for

leading rural MFI, including crisis management and loan portfolio

restructuring – Eastern Europe, 2009-2010

Analysis of root causes of high delinquency; reengineering of credit risk

management and loan collection (including the design of delinquency

policies and an arrears committee); development of risk procedure and

risk management reports; recommendations regarding development of

MIS reports to allow for appropriate risk management and loan portfolio

tracking; and training of credit staff and branch managers.

Private International Investment Group

Development of Business Plan for the establishment of a greenfield

commercial bank providing MSE and (home-collected) retail loans –

Russian Federation, 2009

Market review and competitive analysis; design of business strategy and

roll-out plan; development of operating model; financial modelling and

development of financial projections; and preparation of business plan

document.

Global Microfinance Group (GMG)

Establishment and development of a greenfield MFI – Argentina,

2004 to date

Design and establishment of greenfield microfinance institution,

including the establishment of lending operations (credit methodology,

operating model, incentive systems, policies and procedures, credit

process, loan collection, information systems, and so on); recruitment

and training of staff; implementation of proprietary credit information

system of GMG; senior management roles.

European Fund for Southeast Europe (EFSE)

Consulting services in support of the transformation of a leading

MFI into a regulated commercial bank – Eastern Europe, 2009

Gap analysis for transformation with special emphasis on organisational,

legal and financial aspects; feasibility check including development of

strategy and action plan for transformation; assistance in the elaboration

of business plan.

Microfinance: An Overview

Microfinance refers to a movement that envisions a world in which low-

income households have permanent access to a range of high quality

financial services to finance their income-producing activities, build

assets, stabilize consumption, and protect against risks. These services

are not limited to credit, but include savings, insurance, and money

transfers. Microfinance has widely helped the poor and provided them

the opportunities for starting their own business or enterprise by lending

a loan at minimal collateral. Microfinance clients are usually self-

employed, household-based entrepreneurs. Their diverse

“microenterprises” include small retail shops, street vending, artisanal

manufacture, and service provision. In rural areas, micro-entrepreneurs

often have small income-generating activities such as food processing

and trade; some but far from all are farmers. They take financial

intermediation, like this, seriously and devote considerable effort to

finding workable solutions.

Microfinance is a development strategy that provides credit and savings

services to the poor, particularly rural women, for income-generating

projects. In addition to providing economic benefits, microfinance is

also an effective vehicle for women’s empowerment.

Micro-financing Institutions are of the following types:

Government based Profit making Institute, Government based non-Profit

making Institute, A Profit making NGO, A Non-profit NGO. Be it any

of these institutions, the basic strategies are similar.

The Case For Microfinance Firms in India

According to the World Bank, India is categorized as a “low-income”

country. 70% of the population resides in rural areas, of which 60% of

people depend on agriculture. Consequently, there is chronic under-

employment and per capita income is only $ 3262. The country is a

victim of abject poverty,low rate of education, low sex ratio, and

exploitation. The major factor for such high incidence of rural poverty is

the low asset base. Rural people have very limited access to

institutionalized credit. Microfinance, when strategically planned and

implemented, can be an important tool for economic growth. A recent

survey conducted showed that there are approximately 147 microfinance

firms functioning well in India that are able to satisfy the needs of

people.

To focus our study on the strategic plans followed by microfinance

firms, we approached a new microfinance institution, Hindustan

Microfinance Private Limited that operates in Mumbai and provides

various small loans to people unable to attain credit at larger banks.

This bank gives loans to those who want to expand their business, start a

business or use money for emergent matters and helps clients improve

their financial management skills.

Hindusthan Microfinance Private Limited: A Company Profile

Mission: To offer credit and other financial products to the urban poor

of India.

Vision: To provide financial services to 200,000 clients by 2013 and

500,00 clients by 2015

Type of MFI: Non Banking Financial Corporation

Founded In: March 2008

Founder: Mr. Anil Jadhav

Clientele: 100% women

Strategic Plans of Microfinance Firms

There are various kinds of strategies that are implemented by

organizations for efficient running and effective achievement of goals.

They can be for overall growth, marketing, finance, personnel, product

mix, organizational or price. Here, we take a look at the strategies

followed by MFIs and more specifically, whether Hindusthan

Microfinance Private Limited executes these plans.

Growth Strategies:

In growing and competitive markets MFIs are likely to take more risks

to acquire new customers and expand their product offerings.

Hindusthan Microfinance Private Limited(HMPL) has adopted

ingredients from the Grameen Bank model. Earlier, microfinance

concentrated on rural areas, but off late, there has been a significant

increase in the microfinance activities provided to the urban areas. Even

the involvement of females in microfinance has risen from 20% to 97%

over a period of 33 years. HMPL currently does not engage in non-

financial services but seeing a demand for the same, plans to introduce

them in the near future. While HMPL concentrates on providing

financial resources only to the urban poor as of now, it plans to diversify

into the rural sector in Maharashtra by the month of January, 2011.

For the year 2009, microfinance in India has registered a growth rate of

a whopping 30% and world wide 13%.One of the risks of high-powered

growth is that MFIs may neglect customer services and relationships,

even losing the face-to-face relationships with their clients that are

critical to credit quality.

Market Penetration of HMPL from 2009-2010; Estimated Market

Penetration by March 2011

Financial Strategies:

Microcredit refers to very small loans given to those

who lack financial collateral and steady employment

to spur entrepreneurship. It is a very important part

of every microfinance firm’s financial strategy and

aims bringing it into mainstream financial systems.

HMPL provides credit loans to a group of 5-6

women at a time. The interest rates on the loans are

very high (29%- 35%) mainly due to the high

operational costs, low primary lending rates and low

return on equity. As per company policy, if the

borrower dies, the firm collects Rs. 100 from everyone who is utilizing

the services and the dead person’s account is written off. The company

does not take any deposits from its customers.

Organization Strategies:

Over the past few years, with evolvement of Microfinance in our

country, there are various changes, which have taken place

organizationally. While earlier microfinance operated only with a social

objective, now more equity and funding is coming in that influences

their overall strategies. HMPL, primarily a microfinance institution has

sought “Non Banking Financial Company” status from RBI to get wide

access to funding, including bank finance. Partners include HDFC Bank,

Yes Bank, ABN Amro etc. However they still rely heavily on donations

from charities and trusts for adequate funding. The clientele is 100%

women who are known to be more responsible with money in rural

areas. The most sustainable strategy is to train the community in

leadership and managerial functions for them to become effective

participants. The organization is well-placed in terms of its reputation in

the industry as an organization with best practices.

Product Mix:

HMPL sells products ranging from a price of Rs. 5,000 to 50,000. The

ticket size is considerably low, considering there is limited financial

collateral provided by the clients. This also eases loan repayment.

HMPL follows a Joint Liability Group model like Grameen Bank, under

which, an average of 5 women form a group, and each of them take

liability for each other . Social collateral, is thus high and members

persuade the defaulter to repay the loan or the liability of the loan falls

on the group.

Personnel Strategies:

Human Resource has largely been a neglected area in the microfinance

institutions world-wide yet, the proper placement of right people in right

jobs is essential. HMPL selects field officers who have in-depth

knowledge of their neighboring areas and are trustworthy enough to

handle money and take up the responsibility of a few villages at a time.

Even individuals who have only passed their 10th

Board Examination are

given specialized training to effectively carry out the work and cut costs.

High salaries are given to the top management for strategizing and

designing plans.

Marketing Strategies:

Microfinance firms adopt different market strategies depending on their

scale of business. While large scale operating MFI’s would use

newspapers, magazines and television, small-based firms cannot afford

such activities. HMPL, a relatively small firm, resorts to mass meetings

and personal marketing on a regular basis with its clients. They use

social media platforms such as Facebook to advertise, and also have a

regular newsletter Hindusthan Monthly coming out soon.

Comprehensive Analysis:Strategic Plans of Microfinance Firm

S.W.O.T Analysis of Hindusthan Microfinance Private Ltd.

Strengths:

Good relationship with other local banks

for credit dependency

No collateral security

Variety of financial products

Being a NBFC, easy access to funds.

Greater accountability, transparency,

corporate governance

Weaknesses:

High operational and human resource costs

Heavy dependence on loans from donors and

charitable organizations-no financial stability

Loan recovery from the destitute

Lack of legal regulations

Non-financial services unavailable

Opportunities:

Suburban Areas provide a good potential

for future growth of company(most

population below BPL)

Introduction of new savings and credit

programs

Increased foreign aid

Raising money by listing shares in stock

market

Expansion in the north east section of

India

Linking bank with self-help groups

Threats:

Political interference

Shortage of Liquidity

Fluctuations in foreign currency, if dependent

on foreign aid

PESTEL Analysis:

The Macroenvironmental factors Hindusthan Microfinance

Private Limited must take into account while strategic planning

Political Factors: 1) Even after 6 decades of independence, the government and the RBI

have not been efficient enough to make laws for MFIs so transparency is

still missing. On charges of coercion due to non-payment, Andhra

Pradesh Microfinance Ordinance was passed on October 15, 2010. The

Ordinance requires MFIs to register with the state government and gives

the state government the power to shut down MFI activity. A number of

NBFCs have been affected by the ordinance.

2) There is political stress from the parties in the neighborhood on MFIs

to loan individuals who are not qualified for the loans (financially well

off).

3) Government often intervenes with MFIs because of heavy interest

rates charged by MFIs.

Economic Factors: A Micro finance Institution has more expenses compared to a normal

commercial bank. The same amount of money is being distributed

among a number of clients as compared to in a commercial bank. Thus

more space, stationery, efforts are required to store the data which in

turn increases the expense. To cover these expenses, the interest rates

charged are exorbitant.

Social Factors:

1) The clients that most of the NGOs focus on are women. Women

empowerment through Microfinance is the main mission of such firms.

They not only provide capital but also basic knowledge of starting any

business/ enterprise on their own. Later on these women can go and

consult other commercial banks for bigger loans.

2) Many times, the better halves of such deprived women use them as a

source of retrieving money from MFIs and use it for their own personal

whims and fancies.

3) Certain sectors of the Indian society are still not broad minded enough

to let women come forward and start their own business/enterprise. Thus

MFIs lose most of their clientele due to such social backwardness.

4) MFIs provide loans to people with very low collateral. There are

individuals who take loans from MFIs but do not utilize it for the stated

purpose or repay it on time with the proper interest rates turning into bad

debts and thus a loss for the Institution.

Technological Factors: Technology can reduce transaction costs and improve transparency in

delivering financial services, both of which can translate into increased

access and lower costs for many lower-income clients. Challenges

include the high cost and limited availability of existing technological

solutions, lack of widely available local technical support to support

MIS software, consumer adoption rates of technology, lack of basic

communications infrastructure in many remote places etc. Despite the

appeal of advanced delivery technologies, relatively few financial

institutions have successfully deployed them to reach poor and low-

income clients. Developing a solid management information system still

remains one of the most important tasks facing microfinance institutions,

particularly those scaling up.

Environment Factors: India has a history of highly innovative watershed projects in which

downstream landholders share benefits by compensating landless people

upstream for providing an environmental service. Most current projects,

however, take alternative measures that ignore the issue of

environmental services. Evidence from 70 villages in Maharashtra

suggests the presence of poverty alleviation trade-offs, highlighting the

potential value of more explicitly addressing compensation for

environmental services.

Legal Factors:

As of now no laws have been passed regarding MFIs. But two-three

months down the line, laws and amendments are prone to take place.

The Indian government proposes to introduce a bill to regulate

microfinance institutions. India's central bank currently does not regulate

interest rates charged by micro lenders, but issues a fair practice code on

interest rates to non-banking financial companies.The Department of

Financial Services proposes to introduce the Micro Finance

(Development & Regulation) Bill, 2010, after taking into account the

views of RBI (Reserve Bank of India) and the Malegam Committee

recommendations.

A commercial bank is a type

of financial intermediary and a type

of bank. Commercial banking is also

known as business banking. It is a

bank that provides checking accounts,

savings accounts, and money market

accounts and that accepts time

deposits.

They give loans only on collateral

basis.

Commercial banks are readily

available in all parts of country

They provide loans at a high rate of

interest

Ex-icicibank,hdfc bank etc.

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.

They give loans to self help groups

without taking a collateral.

Microfinance companies are scarce

and not readily available

They provide loans at nominal rate of

interest

Ex-hindusthan microfinance

pvtltd,grameen bank etc.

Comparison between Commercial Banks and Microfinance Banks

Recommendations for Hindusthan Microfinance Private Limited

The firm must expand to rural and semi-rural areas in the state of

Maharashtra as soon as possible as over 20% of the population in

these areas lives below the poverty line.

The firm must conduct market surveys on a regular basis to assess

the growing needs of clients. They must make an effort to deliver

non-financial services such as business training, management of

family budget, literacy training, health services, access to social

workers, gender sensitization to facilitate financial sustainability.

With the number of mobile handsets increasing in India, they

should explore Credit Sms-the future of microfinance as a viable

option. By helping MFIs integrate mobile payments into their

business strategies, it will eliminate geographic barriers to

financial inclusion while simultaneously allowing users to generate

robust auditing trails and client credit histories.

Conclusion

We firmly believe that an integrated approach to servicing clients can

enhance microfinance’s effectiveness as a poverty alleviation tool. The

fight to alleviate poverty is too great a task for anyone or any one

discipline to combat it alone. As an entrenched and recognized leader in

this mission, microfinance can serve as a bridge beyond banking and

development. It can be the link that brings together the services and

products available today to the people who need them most. Only

through a collective effort will we have the best chance of succeeding.

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http://www.tmtctata.com/Emerging_Markets_and_Blue_Ocean_St

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http://www.microfinancegateway.org/gm/document-

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http://web.mit.edu/watsan/Docs/Other%20Documents/KAF/Sera

fini%20-%20Microfinance%20of%20KAF%20in%20Nepal.pdf

http://www.ibscdc.org/Case_Studies/Strategy/Business%20Mode

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http://www.mixmarket.org/

http://en.wikipedia.org/wiki/NBFC_%26_MFI_in_India

http://www.hindusthanmfi.com/