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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 Management
Pranav Gupta
Batch 2013-15


The Origin of Microfinance
Although 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
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.

Microfinance in India emerged as an effort to reach out to the un-banked, lower income
segments of the population

1960 to 1980 1990 2000
Phase 1: Social Banking Phase 2: Financial
Systems Approach
Phase 3: Financial
1.Nationalization of
private commercial banks
1.Peer-pressure 1.NGO-MFIs and SHGs
gaining more legitimacy
2.Expansion of rural
branch network
2.Establishment of MFIs,
typically of non-profit
2.MFIs emerging as
strategic partners to
diverse entities
interested in the low-
income segments
3.Extension of subsidized
3.Consumer finance
emerged as high growth

4.Establishment of Rural
Regional Banks
4.Increased policy
5.Establishment of apex
institutions such as
National Bank for
Agriculture and Rural
Development and Small
Indu- stries Development
Bank of India

Policy Attention to Microfinance After 2000
1999 --- Official definition of microfinance by RBI
August 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 model
February 2006 --- Budget Speech by the Finance Minister promises a formal statutory
framework for the promotion, development and regulation of the microfinance sector
March 2006 --- Comprehensive guidelines by RBI on loan securitization
July 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:
Initiated by NABARD through SHG Bank Linkage Program.
Largest outreach to microfinance clients in the world.
Emerged in the late 1990s to harness social and commercial funds.
Today the number of Indian MFIs has increased and crossed 1000.

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. Its Self 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
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
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 Initiatives
Some 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 Microfinance
Microcredit: 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 Needs

Donors and Banks Micro-Finance Governmentand Banks
Implementing Organisations
Awareness/Promotional Work Individual

Promotion and Formation of
Consolidation of SHGs Micro Enterprise Micro Enterprise

Consumption Needs Credit Delivery
Follow-up Monitoring
Farm Related
Income Generation
(Sustainable & Growth
Non-Farm Related

Self-Sustainability of SHGs
Economic Empowerment
through use of Micro-Credit as
an entry point for overall
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

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

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.

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.


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

50 Weekly Inst. of Rs 300
including Rs. 50 of saving.
Payable in 50 weeks @13.85%
Ist 4 Refundable Inst.

Rs 12000
50 Weekly Inst. of Rs 400
including Rs. 50 of saving.
Payable in 50 weeks @13.85%
Ist 4 Refundable Instalments
Rs 15000
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
SWOT Analysis of AMFPL
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.

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

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

Competitive Interest rates of Competitors
Increasing number of Micro Finance and other financial Institutions.

Traditionally 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.

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.