CHAPTER 1

INTRODUCTION
INTRODUCTION TO INSURANCE
Insurance is the equitable transfer of the risk of a loss, from one entity to another in exchange
for payment. It is a form of risk management primarily used to hedge against the risk of a
contingent, uncertain loss. An insurer, or insurance carrier, is a company selling the insurance;
the insured, or policyholder, is the person or entity buying the insurance policy. The amount
of money to be charged for a certain amount of insurance coverage is called the premium. Risk
management, the practice of appraising and controlling risk, has evolved as a discrete field of
study and practice.
The transaction involves the insured assuming a guaranteed and known relatively small loss in
the form of payment to the insurer in exchange for the insurer's promise to compensate
(indemnify) the insured in the case of a financial (personal) loss. The insured receives a contract,
called the insurance policy, which details the conditions and circumstances under which the
insured will be financially compensated.

INTRODUCTION TO MICRO FINANCE INSURANCE

Micro finance insurance is the protection of low-income people (those living on between
approximately $1 and $4 per day against specific perils in exchange for regular premium
payment proportionate to the likelihood and cost of the risks involved. This definition is exactly
the same as one might use for regular insurance except for the clearly prescribed target market:
low-income people. The target population typically consists of persons ignored by mainstream
commercial and social insurance schemes, as well as persons who have not previously had
access to appropriate insurance products.
The institutions or set of institutions implementing microinsurance are commonly referred to as a
microinsurance scheme.

Micro finance insurance, the term used to refer to insurance to the low-income people, is
different from insurance in general as it is a low value product (involving modest premium and
benefit package) which requires different design and distribution strategies such as premium
based on community risk rating (as opposed to individual risk rating), active involvement of an
intermediate agency representing the target community and so forth. Insurance is fast emerging

as an important strategy even for the low-income people engaged in wide variety of income
generation activities, and who remain exposed to variety of risks mainly because of absence of
cost-effective risk hedging instruments. Although the type of risks faced by the poor such as that
of death, illness, injury and accident, are no different from those faced by others, they are more
vulnerable to such risks because of their economic circumstance. In the context of health
contingency, for example, a World Bank study (Peters et al. 2002), reports that about one-fourth
of hospitalized Indians fall below the poverty line as a result of their stay in hospitals. The same
study reports that more than 40 percent of hospitalized patients take loans or sell assets to pay for
hospitalization.1 Indeed, enhancing the ability of the poor to deal with various risks is
increasingly being considered integral to any poverty reduction strategy (Holzmann and
Jorgensen 2000, Siegel et al. 2001). Of the different risk management strategies2 , insurance that
spreads the loss of the (few) affected members among all the members who join insurance
scheme and also separates time of payment of premium from time of claims, is particularly
beneficial to 1 Such high percentage is also noted by some MFIs in the utilization pattern of
loans advanced by them (see SHEPERD 2003 for example). 2 Depending on an individual
response to dealing with risks, the literature classifies all risk management practices into three
broad groups: risk reduction (RR), risk mitigation (RM) and risk coping (RC) strategies. The first
two are ex ante risk management strategies (that is, used before a risky event takes place)
whereas the third is an ex post strategy (that is after the event takes place). Insurance, similar to
savings and borrowings, is a part of risk mitigation strategy (Brown and Churchill 1999,
Holzmann and Joergensen 2000). 2 the poor who have limited ability to mitigate risk on account
of imperfect labour and credit markets.3 In the past insurance as a prepaid risk managing
instrument was never considered as an option for the poor. The poor were considered too poor to

be able to afford insurance premiums. Often they were considered uninsurable, given the wide
variety of risks they face. However, recent developments in India, as elsewhere, have shown that
not only can the poor make small periodic contributions that can go towards insuring them
against risks but also that the risks they face (such as those of illness, accident and injury, life,
loss of property etc.) are eminently insurable as these risks are mostly independent or
idiosyncratic. Moreover, there are cost-effective ways of extending insurance to them. Thus,
insurance is fast emerging as a prepaid financing option for the risks facing the poor. In this
paper, we analyse the early evidence on micro-insurance already available in this regard,
highlight the current initiatives being contemplated to strengthen microinsurance activity in the
country, and suggest specific ways that can help promote insurance to the target segment. The
paper is organised as follows. In section 2 we analyse the factors leading to the development of
micro-insurance in India. In section 3 we analyse the developments on the supply and demand
sides of micro insurance. In section 4, we highlight selected issues in extending insurance to low
income people; focusing on two specific issues, namely the effect of flexibility of insurance
premium and of combining micro-insurance with micro-finance. Section 5 concludes.

ABOUT THE REPORT

TITLE OF THE STUDY
The present study is titled as "A PROJECT REPORT ON MICROFINANCE INSURANCE."

OBJECTIVES OF THE STUDY

To know the concept Micro-Insurance.

To know the different types of Micro-insurance.
To understand the micro insurance with reference to BASIX.
To study the micro finance with reference to Andhra Pradesh ACT.

DATA & METHODOLOGY

For the purpose of the present study secondary data has been taken into consideration.
Secondary data collected from Internet, journals and magazines.

LIMITATIONS OF THE STUDY

The present study has got all the limitation of the explanatory study method.

Presentation of the study:

The Present Study is arranged as follows:

Chapter 1: Gives an introduction to the title and to the report.

Chapter 2: Deals with profile of BASIX GROUP.

Chapter 3: Theoretical View.

Chapter 4: Case Study.
Chapter 5: Conclusion.

CHAPTER 2
PROFILE
PROFILE OF BASIX GROUP

BASIXis a livelihood promotion institution established in 1996 in India. It is headquartered

in Hyderabad, Telangana. BASIX and was established in 1996. Working with over a 3.5 million
customers, over 90% being rural poor households and about 10% urban slum dwellers, BASIX
operates in 17 states - Telangana, Andhra Pradesh, Karnataka, Orissa, Jharkhand, Maharashtra,
Madhya Pradesh, Tamil Nadu, Rajasthan, Bihar, Chhattisgarh, West Bengal, Delhi, Uttarakhand,
Sikkim, Meghalaya, Assam and Gujrat, 223 districts and over 39,251 villages. It has a staff of
over 10,000 of which 80 percent are based in small towns and villages.
BASIX is the brand name of a group of companies which are:

Bhartiya Samruddhi Investments and Consulting Services Ltd. (BASICS Ltd), the
holding company, through which equity and debt investments are made in the group
companies. It set up two fund based companies - Bhartiya Samruddhi Finance Ltd, a microfinance NBFC in 1997 and Krishna Bhima Samruddhi Local Area Bank Ltd in 2001. Both
were among the first in class. It also promoted BASIX Academy for Building Lifelong
Employability Limited, BASIX Consulting and Training Services Limited, BASIX Krishi
Samruddhi Limited, BASIX Sub-K iTransactions Limited and Ctran Consulting Limited.

Indian Grameen Servicesis a not-for-profit company, registered under the Section 25 of

the Companies Act. IGS was promoted by Professional Assistance for Development Action
(PRADAN). Established in the year 1987 by Vijay Mahajan, Deep Joshi and Sankar Datta,
IGS is engaged in Livelihood promotion through capacity building, research and
development. to extend a variety of commercial services, necessary for promoting livelihood
opportunities for a large number of rural producers. During 1988-1995, IGS focused initially
on identifying and developing livelihoods, then on provision of technical assistance and
support services, and finally on providing marketing support.

Bhartiya Samruddhi Finance Ltd. (Samruddhi), an RBI registered NBFC, engaged in

micro-credit, retailing insurance and providing technical assistance in agriculture, business,
and institutional development to its customers.

Krishna Bhima Samruddhi Local Area Bank Ltd. (KBSLAB), an RBI licensed bank
providing micro-credit and savings services in three backward districts, Raichur, Gulbarga,
and Mahbubnagar.

Sarvodaya Nano Finance Ltd. (Sarvodaya), an RBI registered NBFC, owned by

womens self-help groups, and managed by BASICS Ltd.

GROUP MISSION

To promote a large number of sustainable livelihoods, including for the rural poor and women,
through the provision of financial services and technical assistance in an integrated manner.
Basix will strive to yield a competitive rate of return to its investors so as to be able to access
mainstream capital and human resources on a continuous basis.

STRETEGIES AND ACTIVITIES

BASIX believes that micro-credit by itself is helpful for the more enterprising poor people in
economically dynamic areas. Less enterprising poor households need to cope with greater risks,
and so they need to start with savings and insurance before they can benefit from micro-credit. In
backward regions, poor people, in addition to microfinance, need a whole range of agricultural
and business development services (such as input supply, training, technical assistance, market
linkages) to be provided. To offer these services in a cost-effective manner, it is not possible to
work with poor households individually; they need to be organized into groups, informal
associations and sometimes cooperatives or producer companies. The formation of such groups
and making them function effectively requires institutional development services. Thus, BASIX
aims to provide all these services, which it calls the Livelihood Triad: Livelihood Financial
Services including micro-savings,micro-credit, and micro-insurance.Agricultural and Business
Development Servicesthrough local value addition, non-financial risk mitigation, productivity
improvement, and alternative market linkages Institutional Development Services ]which is a
conscious attempt to evolve and reinforce a set of behavioural norms and processes for an
informal or formal group of people to interact and transact in a sustainable manner, to achieve
the purpose for which the group came together.

Basix also provides sectoral and policy research services, feasibility studies and other
consultancy services using the analytical capability and implementation experience in various
companies within the group, with a focus on contributing to the knowledge and practice of
livelihood promotion. Its customers have included various international bodies, the Government
of India, and several state governments.

OUTREACH
BASIX works in 20,000 villages spread over 106 districts in the states of Telangana, Karnataka,
Tamil Nadu, Orissa,Jharkhand, Maharashtra, Madhya Pradesh, Rajasthan, Bihar, Chhattisgarh,
West Bengal, Delhi and Assam.
Since the inception of the group, BASIX has cumulatively disbursed a total of Rs 893 crore
(USD 220 million) through nearly 578,000 cumulative number of loans. The loan outstanding as
on March 31, 2007 was Rs 234 crore (USD 58 million) for the group with over 347,651
customers. As much as 41% of the loans went to the farm sector, which is severely impaired for
want of credit and 59% to women, who tend to be financially excluded.
Savings services were provided through KBSLAB, by linking urban BSFL customers with
banks/post offices and through Self-help groups in the case of Sarvodaya. The total coverage was
450,000.
BASIX covers the lives and livelihoods of its customers against various risks like death of self or
spouse, critical illness, hospitalization and permanent disability. Livelihoods are covered through
rainfall-index based crop insurance, livestock insurance and micro enterprise asset insurance and
deposit insurance to savings customers. In 2006-07, this coverage was extended to 473,932

persons/asset owners. Over 10,000 cumulative claims have been settled amounting to Rs 36
million.
BASIX provided Agriculture/Business Development Services for productivity enhancement,
non-insurance risk mitigation, local value addition and market linkages. These services were
extended to 72,000 producers. Fees collected towards providing such services amounted to Rs
1.6 crore.
BASIX provides Institutional Development Services to Self-Help groups, SHG federations,
Mutual Benefit Trusts, Producer Groups and Cooperatives, to enable producers to come together
for undertaking livelihood activities. These services were extended to 25,110 groups, with over
683,000 members. Fees collected towards providing such services amounted to Rs 2.4 crore.

ABOUT MFI

Bhartiyasamruddhi finance Ltd. (BSFL ), an NBFC promoted by Bhartiyasamruddhi Investment

and consulting services Ltd. ( BASICS ) , started opration in 1997. BSFL is one of the pioneers
in extending organizedmicrofinanceto those without access to banking and financial services.
The company has more than a decade of experience in microfinance , and has disbursed more
than Rs. 11 billion of loans since inception. BSFL adopts diverse lending models ( loans to
individual ,joint-liability group of farmers and federation of women shgs.the company is the first
Indian MFI to offer weather-based insurance to customers through tie-up with an insurance
company, and the first MFI with an institutional shareholdings structure.
BSFL provides microfinance and knowledge-based technical assistance.its customers include
small and marginal farmers ,ruralassistance,micro-enterprises, and federation and cooperatives
owned by self-help groups (shgs). As on September 30, 2008, it had a presence in 8 states across
india.

CRISIL ANALYSIS ON KEY PARAMETERS

During 2007-08 9 (refers to financial year, april 1 to march 31), the companys loan
disbursements grew by 65.5 per cent over the previous year, to Rs.2.82 billion. As a result
of significant growth in advances over the past two years, BSFLs capital adequacy ratio
declined below 10 per cent as on September 30, 2008. However, the company raised Rs.
300 million capital on march 2009, allowing it to maintain capital adequacy above the
regulatory minimum as on march 31, 2009. Given BSFLS aggressive growth plans ,
CRISIL expects the companys capital adequacy to remain under pressure over the
medium term,unless more capital is infused during 2009-10.

BSFLs operation self-sufficiency (OSS) ratio has declined to 109 per cent during first six
months of 2008-09 from 116.84 per cent in 2006-07, because of a decline in gross
spreads.However CRISIL expects the oss ratio to improve in the medium term because of
increased processing fees ( effective November 2008 ) and yields.

BSFL has improved its assets quality over the years ,because of a revamp of its risk
management system , increasing diversification in its loan assets , and strong
relationships with borrowers.As a result,the on time repayment rate (OTRR) , improved
to 99.2 per cent for 2007-08, from 98.8 per cent in the previous year.CRISIL expects
BSFL to maintain its asset quality , and system and procedures at present levels over the
medium term.

CHAPTER 3

THEORETICAL VIEW
DEFINITION OF MICRO FIANANCE INSURANCE

Microinsurance is insurance with low premiums and low caps / coverage. In this
definition, "micro" refers to the small financial transaction that each insurance policy
generates. "General microinsurance product means health insurance contract, any
contract covering the belongings, such as, hut, livestock or tools or instruments or any
personal accident contract, either on individual or group basis, as per terms stated in
Schedule-I appended to these regulations"; and "life microinsurance product" means any
term insurance contract with or without return of premium, any endowment insurance
contract or health insurance contract, with or without an accident benefit rider, either on
individual or group basis, as per terms stated in Schedule-II appended to these regulations
as those within defined (low) minimum and maximum caps. The IRDAs characterization
of microinsurance by the product features is further complemented by their definition for
microinsurance agents, those appointed by and acting for an insurer, for distribution of
microinsurance products (and only those products).

 Microinsurance is a financial arrangement to protect low-income people against specific

perils in exchange for regular premium payments proportionate to the likelihood and cost
of the risk involved.The author of this definition adds that micro-insurance does not refer
to: (i) the size of the risk-carrier (some are small and even informal, others very large
companies); (ii) the scope of the risk (the risks themselves are by no means "micro" to the
households that experience them); (iii) the delivery channel: it can be delivered through a
variety of different channels, including small community-based schemes, credit unions or
other types of microfinance institutions, but also by enormous multinational insurance
companies, etc.
Microinsurance is synonymous to community-based financing arrangements, including
community health funds, mutual health organizations, rural health insurance, revolving
drugs funds, and community involvement in user-fee management. Most community
financing schemes have evolved in the context of severe economic constraints, political
instability, and lack of good governance. The common feature within all, is the active
involvement of the community in revenue collection, pooling, resource allocation and,
frequently, service provision.

HISTORY OF MICRO FINANACE INSURANCE

 Over the past centuries, practical visionaries, from the Franciscan monks who founded
the community-oriented pawnshopsof the 15th century to the founders of the European
credit union movement in the 19th century (such as Friedrich Wilhelm Raiffeisen) and the
founders of the microcredit movement in the 1970s (such as Muhammad Yunus and Al
Whittaker), have tested practices and built institutions designed to bring the kinds of
opportunities and risk-management tools that financial services can provide to the
doorsteps of poor people.While the success of the Grameen Bank (which now serves over
7 million poor Bangladeshi women) has inspired the world,[citation needed] it has proved
difficult to replicate this success. In nations with lower population densities, meeting the
operating costs of a retail branch by serving nearby customers has proven considerably
more challenging. Hans Dieter Seibel, board member of the European Microfinance
Platform, is in favour of the group model. This particular model (used by many
Microfinance institutions) makes financial sense, he says, because it reduces transaction
costs. Microfinance programmes also need to be based on local funds.

The history of microfinancing can be traced back as far as the middle of the 1800s, when
the theorist Lysander Spooner was writing about the benefits of small credits to
entrepreneurs and farmers as a way of getting the people out of poverty. Independently of
Spooner, Friedrich Wilhelm Raiffeisen founded the first cooperative lending banks to
support farmers in rural Germany.
The modern use of the expression "microfinancing" has roots in the 1970s when
organizations, such as Grameen Bank ofBangladesh with the microfinance pioneer

Muhammad Yunus, were starting and shaping the modern industry of microfinancing.
Another pioneer in this sector is Akhtar Hameed Khan.

Microfinance in India can trace its origins back to the early 1970s when the Self
Employed Womens Association (SEWA) of the state of Gujarat formed an urban
cooperative bank, called the ShriMahila SEWA Sahakari Bank, with the objective of
providing banking services to poor women employed in the unorganised sector in
Ahmedabad City, Gujarat. The microfinance sector went on to evolve in the 1980s around
the concept of SHGs, informal bodies that would provide their clients with much needed
savings and credit services. From humble beginnings, the sector has grown significantly
over the years to become a multi-billion dollar industry, with bodies such as the Small
Industries Development Bank of India and the National Bank for Agriculture and Rural
Development devoting significant financial resources to microfinance. Today, the top five
private sector MFIs reach more than 20 million clients in nearly every state in India and
many Indian MFIs have been recognized as global leaders in the industry.

The Government of India and the RBI have a stated goal of promoting financial
inclusion.

According to recent RBI estimatesii, there are over 450 million unbanked people in
India, most of whom live in rural areas. The term unbanked refers to people who have

no access to formal financial services, but rather must rely on either family, or informal
providers of finance, such as the village moneylender. It is undisputed that access to
finance is critical for enabling individuals and communities to climb out of poverty. It is
also generally agreed that relying on the limited resources of village moneylenders
exposes the poor to coercive lending practices, personal risks and high interest rates,
which can be a much as 150% The goal of financial inclusion must include the private
sector. Therefore the Indian Government and the RBI have a policy of financial
inclusion. As part of this policy, the government requires Indian banks to lend to
priority sectors, one of which is the rural poor. Until recently, banks were happy to lend
money to MFIs who would then on-lend funds, primarily to poor women across rural
India. The banks havewelcomed this policy because historically they tended to charge
MFIs average interest rates of 12-13% and benefited from 100% repayment rates. Thus,
by lending to MFIs, banks have been able to meet their priority sector lending
requirements with what historically has amounted to a risk-free and very profitable
arrangement.

CURRENT ISSUES
Microfinance in India is currently being provided by three sectors: the government, the
private sector and charities. These three sectors, as large as they are, have only a small

fraction of the capital and geographic scale required to meet the overwhelming need for
finance amongst Indias rural poor.

The top 10 private sector microfinance providers in India together serve less than 5% of
the unbanked population of India approximately 20 million clients

For example,

SHARE Microfin Limited (SHARE) and AsmithaMicrofin Limited (Asmitha), two

of the five largest MFIs in India, have almost Rs 4,000 crore ($900MM) loaned to over 5
million poor women in 18 Indian states (prior to the crisis, the combined outstanding loan
portfolio had been as high as Rs 6,750 crore ($1.525BN)). Yet, despite the size of MFIs
like SHARE and Asmitha, only a fraction of the overwhelming need is being met.
Private sector MFIs have an essential role to play if the goal of financial inclusion is to be
realized, as neither the government nor charities have the capital nor business model
required to meet the insatiable demand for finance in rural India. As the public listing of
SKS Microfinance underscored, private sector institutions are able to attract increasingly
large amounts of private capital, in order to accelerate the growth of the industry, which is
essential to expanding financial inclusion as far andas fast as practicable.

LEGAL STRUCTURE OF MFI

A microfinance institution acquires permission to lend through registration. Each legal structure
has different formation requirements and privileges. Microfinance institutions in India are
registered as one of the following five entities:

 Non Government Organizations engaged in microfinance (NGO-MFIs), comprised of

Societies and Trusts
Cooperatives registered under the conventional state-level cooperative acts, the national
level multi-state cooperative legislation Act (MSCA 2002 ), or under the new state-level
mutually aided cooperative acts (MACS Act)
Section 25 Companies (not-for-profit)
For-profit Non-Banking Financial Companies (NBFCs)
NBFC-MFIs

MICRO FINANCE INSURANCE PRODUCTS

Microinsurance, like regular insurance, may be offered for a wide variety of risks. These include
both health risks (illness, injury, or death) and property risks (damage or loss). A wide variety of
microinsurance products exist to address these risks, including crop insurance, livestock/cattle
insurance, insurance for theft or fire, health insurance, term life insurance, death insurance,
disability insurance, insurance for natural disasters, etc.
Microinsurance has made a significant difference in countries like Mali, as MaximePrud'Homme
and BakaryTraor describe in Innovations in Sikasso. Still, many countries face continuing
challenges. Specifically in Bangladesh, micro health insurance schemes are having trouble with
financial and institutional sustainability, Syed Abdul Hamid and JinnatAra describe, but things
are improving.

MFIS HAVE BEGUN OFFERING A WIDE RANGE OF INSURANCE

PRODUCTS. THE MOST PREVALENT ARESUMMARIZED HERE.
LIFE INSURANCE
Term Life Insurance provides coverage against the death of the insured for a specified
term; the amount paid out (face value) is pre-determined. Outstanding balance life
insurance, also called credit life insurance, is a type of term life insurance that will pay
off a loan balance in the event of the death of the borrower.

 Permanent Life Insurance provides similar coverage, but has no specific term and also
has a cash value that can be drawn down or borrowed against like a savings account. The
cash value equals the premiums paid, less the cost of providing the insurance, plus
interest earned on the premiums.
Endowment Life Insurance carries a cash value but provides protection for a fixed term.
At the end of that term (assuming no payout for death during the term) the policyholder
receives a fixed payout equal to the policys cash value and interest earnings.
Live Savings Insurance is most commonly offered by credit unions. Generally, the credit
union purchases a group policy for its members that provides a members beneficiaries
with a multiple of the members deposit balance in the event of the members death.

Term life insurance is the product that is most frequently offered by microinsurers, particularly
outstanding balance life insurance. This product has the most limited coverage, but is also the
least expensive. In effectively canceling the related debt it relieves surviving family members of
part of the financial burden associated with death. From the perspective of most MFIs, the
products more important benefit is institutional, as it lowers loan default rates and collection
costs.
Other lessons learned by the MFIs concerning life insurance include:
Insurance cannot be offered universally elderly individuals and people with pre-existing
terminal illnesses must be excluded to maintain the financial stability of the provider.
Using mandatory, group policies reduces the insurers costs and potential for abuses of
policies, but insurers then have a reciprocal obligation to make sure that clients are
satisfied with the product.

 Both staff training for marketing and client education about the nature of insurance and
the mechanics of making payments and submitting claims is critical.

TYPES OF MICRO INSURANCE

LIFE INSURANCE:
Life insurance pays benefits to designated beneficiaries upon the death of the insured.
There are three broad types of life insurance coverage: term, whole-life, and endowment.
Term life insurance policies provide a set amount of insurance coverage over a specified
period of time, such as one, five, ten, or twenty years. This insurance is appropriate when
the policyholder's need for coverage is temporary. Compared with other life insurance

policies this is not very complicated for the provider to offer. This is the most widely used
life insurance policy in low-income communities in developing countries.
Whole life insurance is a cash-value policy that provides lifetime protection. This is
hardly offered in low-income markets in the developing countries Endowment life
insurance pays the face value of insurance if the policyholder dies within a specified
period. It thus has a longer time horizon that the term life insurance. This is also not
offered widely in developing countries.
HEALTH INSURANCE
Health insurance provides coverage against illness and accidents resulting in
physical injuries. MFIs have realized that expenditures related to health problems
have been a significant cause of defaults and people's inability to continue
improving their economic conditions. Several MFIs have therefore, either started
their own health insurance programs or have linked their clients to existing
programs. While actual coverage varies, many health insurance providers cover
for limited hospitalization benefits for certain illnesses, and for costs of physician
visits and medicine. Some insurance providers also make available primary health
care services such as immunization and contraceptives.
PROPERTY INSURANCE
Property insurance provides coverage against loss or damage of assets. Providing
such insurance is difficult because of the need to verify the extent of damage and
determine whether loss has actually occurred. It is difficult for most MFIs to
guard against such moral hazard. A few, however, do provide such coverage.

SEWA in India, for example, provides insurance against damage to home and
productive assets. Grameen Bank in Bangladesh offers its clients insurance
against the death of livestock and COLUMNA in Guatemala provides insurance
against fire damage.

DISABILITY INSURANCE
Disability insurance in most cases is tied to life insurance products. It provides
protection to the policy holder and her family, should she or some of her family
suffers from a disability. This is not very widely offered by Micro insurance
providers. FINCA, Uganda and CARD in Philippines are examples of MFIs
providing clients with disability insurance.

CROP INSURANCE
Crop insurance typically provides policy holders protection in the event their
crops are destroyed by natural calamities such as floods or droughts. The
experience with crop insurance in developing countries and even in the developed
economies has had mixed results.
To improve the ability of rural farmers to repay loans from agricultural
development banks (ADBs), many governments developed crop insurance
programs in the 1970s and 1980s. These programs typically provided loan

repayment and occasionally income supplements to farmers suffering crop yields

below an established minimum.
Similar programs were developed in countries as diverse as Brazil, India, the
Philippines and the USA. In each country the results were disastrous, with
expenses (administrative and claims) far outstripping revenues. Reasons for the
failure of crop insurance have included: bad program design (such as failure to
bring into account the incentives faced by the policy holders), covariant risks
typical of rain-fed agriculture systems dependent on only one or two crops, and in
some cases / unanticipated catastrophic natural calamities.
DISASTER INSURANCE:
Disaster insurance is through a reinsurance arrangement that broadens the risk pool
across countries and regions, and protects insurers against catastrophic losses.

UNEMPLOYMENT INSURANCE
Unemployment insurance is typically offered by the public sector. Private
insurance companies are usually not involved in it. This insurance provides cash
relief to individuals who become unemployed involuntarily and who meet certain
government requirements. It also helps unemployed workers find jobs.
Unemployment insurance attempts to stabilize the economy by enabling people to
maintain their purchasing power.

REINSURANCE
Reinsurance is the shifting of part or all of the insurance originally written by one
insurer to another. This is a central feature of the operations of all commercial
insurers.
Reinsurance reduces an insurer's risk exposure and acts as an effective source of
financing and a valuable source of actuarial expertise. Reinsurance can be used to
stabilize profits, instead of having large fluctuations in financial outcomes year to
year. It allows smaller insurers to share risk with other insurers in different
regions or countries, effectively developing sufficient large risk pools by
combining the risks of many insurers.
Despite its obvious benefits reinsurance is largely unavailable for micro-insurers.
Access to reinsurance can spur both the development of new micro-insurers and
the growth of existing ones. An example of an MFI using reinsurance is that of
FINCA International, Uganda which has entered a partnership with American
International Group (AIG) to provide its clients life and disability insurance.

BENEFITS OF MICRO FINANCE INSURANCE

Microfinancing produces many benefits for poverty stricken, or low- income households. One of
the benefits is that it is very accessible. Banks today simply wont extend loans to those with
little to no assets, and generally dont engage in small size loans typically associated with
microfinancing.

Through

microfinancing

small

loans

are

produced

and

accessible.

Microfinancing is based on the philosophy that even small amounts of credit can help end the
cycle of poverty. Another benefit produced from the microfinancing initiative is that it presents
opportunities, such as extending education and jobs. Families receiving microfinancing are less

likely to pull their children out of school for economic reasons. As well, in relation to
employment, people are more likely to open small businesses that will aid the creation of new
jobs. Overall, the benefits outline that the microfinancing initiative is set out to improve the
standard of living amongst impoverished communities (Rutherford, 2009).

LIMITATIONS OF MICRO FINANCE INSURANCE

There are also many challenges within microfinance initiatives which may be social or financial.
Here, more articulate and better-off community members may cheat poorer or less-educated
neighbours. This may occur intentionally or inadvertently through loosely run organizations. As
a result, many microfinance initiatives require a large amount of social capital or trust in order to
work effectively. The ability of poorer people to save may also fluctuate over time as unexpected
costs may take priority which could result in them being able to save little or nothing some
weeks. Rates of inflation may cause funds to lose their value, thus financially harming the saver
and not benefiting collector (Rutherford, 2009).

MICROINSURANCE DELIVERY MODELS

One of the greatest challenge for microinsurance is the actual delivery to clients. Methods and
models for doing so vary depending on the organization, institution, and provider involved. As
DubbyMahalanobis states, one must be thorough and careful when making policies, otherwise
microinsurance could do more harm than good. Tricky challenges In general, there are four main
methods for offering microinsurance the partner-agent model, the provider-driven model, the
full-service model, and the community-based model. Each of these models has their own
advantages and disadvantages.

 Partner agent model: A partnership is formed between the micro insurance(partner as

MFI) scheme and an agent (insurance companies), and in some cases a third-party
healthcare provider. The microinsurance scheme is responsible for the delivery and
marketing of products to the clients, while the agent retains all responsibility for design
and development. In this model, microinsurance schemes benefit from limited risk, but
are also disadvantaged in their limited control. Micro Insurance Centre is an example of
an organization using this model.
Full service model: The microinsurance scheme is in charge of everything; both the
design and delivery of products to the clients, working with external healthcare providers
to provide the services. This model has the advantage of offering microinsurance schemes
full control, yet the disadvantage of higher risks.
Provider-driven model: The healthcare provider is the microinsurance scheme, and
similar to the full-service model, is responsible for all operations, delivery, design, and
service. There is an advantage once more in the amount of control retained, yet
disadvantage in the limitations on products and services.
Community-based/mutual model: The policyholders or clients are in charge, managing
and owning the operations, and working with external healthcare providers to offer
services. This model is advantageous for its ability to design and market products more
easily and effectively, yet is disadvantaged by its small size and scope of operations.

MICROINSURANCE SCHEME
A microinsurance scheme is a scheme that uses, among others, an insurance mechanism
whose beneficiaries are (at least in part) people excluded from formal social protection
schemes, particularly, informal economy workers and their families. The scheme differs
from others created to provide legal social protection to formal economy workers.
Membership is not compulsory (but can be automatic), and members pay, at least in part,
the necessary contributions in order to cover benefits.
The expression "microinsurance scheme" designates either the institution that provides
insurance (e.g., a health mutual benefit association) or the set of institutions (in the case
of linkages) that provide insurance or the insurance service itself provided by an
institution that also handles other activities (e.g., a micro-finance institution).
The use of the mechanism of insurance implies:

 Prepayment and resource-pooling: the regular prepayment of contributions

(before the insured risks occur) that are pooled together.
Risk-sharing: the pooled contributions are used to pay a financial compensation to
those who are affected by predetermined risks, and those who are not exposed to
these risks do not get their contributions back.
Guarantee of coverage: a financial compensation for a number of risks, in line
with a pre-defined benefits package.
Microinsurance schemes may cover various risks (health, life, etc.); the most frequent
microinsurance products are:

Life microinsurance (and retirement savings plans)

Health microinsurance (hospitalisation, primary health care, maternity, etc.)

Disability microinsurance

Property microinsurance assets, livestock, housing

Crop microinsurance

Dirk Reinhard provides a good list summarising reading pertinent to microinsurance.

Small means, massive impact.

MICROINSURANCE AND DEVELOPMENT

Microinsurance is recognized as a useful tool in economic development. As many low-income
people do not have access to adequate risk-management tools, they are vulnerable to fall back
into poverty in times of hardship, for example when the breadwinner of the family dies, or when
high hospital bills force families to take out loans with high interest rates. Furthermore,
microinsurance makes it possible for people to take more risks. When farmers are insured against
a bad harvest (resulting from drought), they are in a better position to grow crops which give
high yields in good years, and bad yields in year of drought. Without the insurance, however,
they will be inclined to do the opposite; since they have to safeguard a minimal level of income
for themselves and their families, crops will be grown which are more drought resistant, but
which have a much lower yield in good weather conditions.

MICRO FINANCE ON THE INDIAN SUBCONTINENT

Loans to poor people by banks have many limitations including lack of security and high
operating costs. As a result, microfinance was developed as an alternative to provide loans to
poor people with the goal of creating financial inclusion and equality.
Muhammad Yunus, a Nobel Prize winner, introduced the concept of Microfinance in Bangladesh
in the form of the "Grameen Bank". The National Bank for Agriculture and Rural
Development (NABARD) took this idea and started the concept of microfinance in India. Under
this mechanism, there exists a link between SHGs (Self-help groups), NGOs and banks. SHGs
are formed and nurtured by NGOs and only after accomplishing a certain level of maturity in
terms of their internal thrift and credit operations are they entitled to seek credit from the banks.
There is an involvement from the concerned NGO before and even after the SHG-Bank linkage.
The SHG-Bank linkage programme, which has been in place since 1992 in India, has provided
about 22.4 lakh for SHG finance by 2006. It involves commercial banks, regional rural banks
(RRBs) and cooperative banks in its operations.
Microfinance is defined as, financial services such as savings accounts, insurance funds and
credit provided to poor and low income clients so as to help them increase their income, thereby
improving their standard of living.

In this context the main features of microfinance are:

Loan given without security

Loans to those people who live below the poverty line

Members of SHGs may benefit from micro finance

Maximum limit of loan under micro finance 25,000/-

Terms and conditions offered to poor people are decided by NGOs

Microfinance is different from Microcredit- under the later, small loans are given to the
borrower but under microfinance alongside many other financial services including
savings accounts and insurance. Therefore microfinance has a wider concept than
microcredit.

In June 2014, CRISIL released its latest report on the Indian Microfinance Sector titled "India's
25 Leading MFI's". This list is the most comprehensive and up to date overview of the
microfinance sector in India and the different microfinance institutions operating in the subcontinent.

CHAPTER 4
CASE STUDY
THE MICROFINANCE CRISIS IN ANDHRA PRADESH ANALYSIS OF THE
AP ACT

The Andhra Pradesh Microfinance Institutions (Regulation of Money Lending) Act, 2010.

In October 2010, with no warning or consultation with stakeholders, the Government of Andhra
Pradesh issued the Andhra Pradesh Microfinance Institutions (Regulation of Money Lending)
Act, 2010 effectively shutting down all private sector microfinance operations in the state. The
AP Act does not however apply to APs government-backed microfinance business which
directly competes with private sector MFIs. This was a major blow to the entire microfinance
industry as Andhra Pradesh, widely regarded as the birthplace of private sector microfinance,
accounts for over 40% of all loans by MFIs acrossIndia according to some estimates.

To justify its extraordinary action against private sector microfinance, the AP government
claimed to be protecting the poor from what they claimed to be rapacious lending practices by
the MFIs. But, as discussed below, the facts prove otherwise. Moreover, by its own terms, the AP

Act aims to protect the governments own microfinance programs which had been losing market
share to the more efficient and better run MFIs:
Whereas these SHGs are being exploited by private Micro Finance Institutions (MFIs) through
usurious interest rates and coercive means of recovery resulting in their impoverishment & in
some cases leading to suicides, it is expedient to make provisions for protecting the interests of
the SHGs, by regulating the money lending transactions by the money lending MFIs and to
achieve greater transparency in such transactions in the State of Andhra Pradesh

No-one would object to protecting the poor from exploitation by institutions charging usurious
rates, practicing coercive recovery techniques, or driving clients to suicide. However, was there
ever any real substance behind these alarming claims? Indeed, when one looks for evidence to
substantiate these allegations, it quickly becomes apparent that the services being provided by
private sector MFIs are valued by their clients, and are neither usurious nor violent. On the
contrary, given the size of the MFI sector, tales of exploitation are remarkably rare.
.
Lets consider each of these three allegations in turn, again using SHARE and Asmitha as our
case study:

1. Interest rates charged by micro finance institutions.

SHARE and Asmitha, two of Indias largest MFIs, charge average interest rates of between 23.628.1% depending on the maturity of the market in a particular state. These rates are lower than
the average interest rate of 30% forconsumer credit cards in India.They are also among the

lowest rates for microfinance in India and the world. These rates are offered despite the high cost
of providing door-step services (i.e., sending loan officers to meet the borrowers in their
villages), which allow clients to remain close to their homes, children, fields, livestock and
livelihoods. This is in contrast to the AP governments SHG program which requires borrowers
to pay at the local or regional office behind closed doors.

Conclusion: MFI interest rates are commercial, reasonable and competitive.

2. MFIs need to employ coercive collection practices.

By design, MFI processes have a number of in-built mechanisms to ensure repayment. From
identification to repayment, a larger group of borrowers is engaged in appraising MFI members
and in ensuring on-time repayments. The group pledges to cover for members and ensures credit
discipline. In addition, the small, frequent payment structure eases this process. In a few
instances where repayments have posed a hardship for clients, MFIs have restructured loans to
support clients. Thus, there is little need for MFIs to employ coercive measures. Finally, clients
rely on ongoing access to finance in the same manner as any borrower in the formal banking
sector; and the failure to repay results in the clients inability to take future loans which can be
important for business and other needs. A good credit history is as valuable to the poor as it is to
the wealthy.

Established MFIs such as SHARE and Asmitha have strict policies against physical coercion
being used to force repayment, and the consequences for doing this can be severe and result in

immediate termination. In addition, both the Sa-dhan and MFIN code of conduct have clauses on
fair recovery practices which all major MFIs in India have signed and are committed to.

Conclusion: loan repayments are professionally managed and humanely carried out.

3. MFI pushed to commit suicide.

Suicide for any reason is a profound tragedy. In a report published in Microfinance Focus in
October 2010, the gender unit of SERP asserted that 54 microfinance borrowers residing in AP
had tragically committed suicide as a consequence of MFI lending practicesviii. Although 54
deaths may seem a substantial number to be allegedly caused by MFI lending practices, it is not
until one contrasts this number with the suicide statistics for the state of Andrah Pradesh as a
whole that one can begin to put these numbers into perspective. There were over 14,500 people
who committed suicide in Andhra Pradesh in 2009 alone, most being attributed to agricultural
failure or grief over political development.Based on an estimated population of 75 million in
Andhra Pradesh, for every 6 million AP residents, 1,160 of them might be expected to commit
suicide in any given year based on statistical norms. Given the estimated 6 million microfinance
borrowers in AP, SERPs assertion that there were 54 deaths allegedly caused by MFI lending
practices therefore appears not to be unusual, based on what national statistics demonstrate.

Additionally, based on the numbers from SERP (formally a non-governmental organization, but
it receives its funding from the AP government and the states Chief Minister chairs its governing
board), it appears that the suicide rates amongst MFI borrowers are dramatically lower than the

statistical average in the entire state of Andhra Pradesh. In other words, borrowers from private
sector MFIs appear less likely to commit suicide than their fellowresidents in Andhra Pradesh.
This should, of course, not be very surprising, given the manner in which MFI clients benefit
from the services provided.

Conclusion: there is no proven correlation or causal link between MFIs and suicides.

It can be seen from the foregoing that the factual basis for the AP Act is, in fact, deeply flawed.
This does not mean to say that the prevailing system, with thousands of staff and millions of
clients, is perfect. All MFIs need to work hard to build a common culture and mitigate the risk
posed by overzealous loan officers. Yet shutting down an entire industry because of anecdotal
evidence of occasional problems would be like closing all schools because a few teachers
provide poor ormisguided teaching to their students.

Additionally, this raises the question: what was the real reason that such draconian measures
were taken to stifle private sector MFI activity in Andhra Pradesh? It will be seen in the next
section that, rather than doing a bad job, private sector MFIs have been doing their job too well
too well for their competition within the state of AP. Regardless of the motivation behind the AP
Act, serious damage has already been done to the microfinance sector, as well as to the climate
for business and investment in AP and India.

THE SOURCE OF THE AP ACT AND THE MICROFINANCE CRISIS

There allegations of suicides and violence come from.

If the extremely serious assertions of MFI wrongdoing are in fact not true, then this demands an
answer to the question Where did these allegations come from? Who could possibly gain from
shutting down the private sector MFI industry in Andhra Pradesh, and from denying the rural
poor access to their services? The answer is not difficult to find. The number one competitor of
private sector microfinance in AP is the state-run microfinance business, SERP.

Behind the scenes, the AP Act was written and championed by SERP, the agency responsible for
running the AP government-backed microfinance SHG program. Evidence shows that SERP has
been losing the struggle to compete with private sector mfis.

The effect of the AP Act is not to protect the poor, but to protect the uncompetitive
government-backed SHG program run by SERP.

The AP government-backed SHG program competes directly with the private sector mfis. The
SHG program however is failing to keep up and has lost significant market share to the mfis.
Why? According to the October 2010 Intellecap White Paper, the government programs have
neither the discipline needed for long-term sustainability, nor a business model that can be scaled
up effectively. Additionally, there is a widespread belief that the World Bank is on the point of
providing an additional $1 billionxi in funding support to SERP or a successor program. The case
for this extension is believed to be strengthened if the commercial MFI industry is weakened.

An AP Act that eliminates law-abiding private sector participants in the market and directly
benefits the government-backed provider is unfair at best and illegal at worst. Given that it will
negatively impact millions of borrowers amongst Indias rural poor, it is also unconscionable. As
Vijay Mahajan, Chairman of BASIX, has stated, the AP government is an unfair referee as itis
both player and referee. The AP Act does not try to hide its anti-competitive aims. The text of
the Act states that its goal is to protect the interests of the shgsi. If the World Bank provides the
much discussed $1 billion in funding to the SHGProgram in AP, it will be complicit in snuffing
out the private sector from Indian microfinance. According to David Roodman of the Center for
Global Development in his blog on the crisis in AP, World Bank money hasbeefed up a
political economyhostile to private sector solutions

THE SUPERIOR PERFORMANCE OF PRIVATE SECTOR MICROFINANCE

Private sector microfinance has grown dramatically because it offers the best products and
services to meet the massive demand for credit amongst Indias rural poor.

Between 2008 and 2010 the number of clients of MFIs grew by an average of 61% each year,
with loan portfolios growing 85% per year. The AP government-backed microfinance SHG
program, on the other hand, only grew its client base by 13.6% during the same period and its
loan portfolio by 28%xiv. As an October 2010 White Paper by Intellecap stated the MFIs
combination of door-step service, easy credit, frequent small-value repayments and the group
guarantee is attracting borrowers who are no longer so nave that they cannot weigh the
attractions of these factors against the lower rates of government programs.

Additionally, a World Bank report found that government loan administrators sometimes demand
bribes of up to 20%xvi of the loan amount before loan requests are granted. If true, this would
help explain why borrowers prefer accessing loans through MFIs which are provided in a
transparent manner, over the potentially coercive manner some SHG loan officers provide loans.

Moreover, if a borrower must pay interest of 3% per annum (typical SHG interest rate) and a
bribe of 20% of the loan amount, then the borrowers actual cost of capital is similar to (if not
greater than) interest rates charged by MFIs. When one takes the better service offered by MFIs
into account, it becomes easy to understand why MFIs are taking marketshare from SHGs.

CONSEQUENCES OF THE AP ACT

Unless repealed or overruled immediately, the AP Act will continue to cause irreparable damage
to the wellbeing of the rural poor by destroying a large part of the private sector microfinance
industry, cause large write-offs for public and private sector banks in India and put the policy
goal of financial inclusion in jeopardy.

The AP Act made it illegal for MFIs to collect outstanding loans in the field in the manner in
which they and their client base had become accustomed to. It provided that all MFIs must now
register at the district level and require prior approval from the respective District Authorities to
disburse any loan. At the same time, repayments must now only be collected at government
notarized locations, a big departure from the village center meetings designed to maximize
efficiency and benefit for the client. Previously, MFIs were able to conduct weekly meetings in
small groups of 40 women, which formed a critical aspect for building and maintaining a strong
credit culture and financial discipline. With MFIs now only able to collect loansmonthly as
opposed to weekly, this strong repayment culture has eroded significantly. As a result, there has
been a complete standstill of disbursements and repayments in the state of AP, with adjoining

states now also witnessing a spillover effect. While this puts MFIs and banks in jeopardy, the
ones who lose the most, of course, are those with no voice: the millions of poor families across
India with no access to finance in the planting season.

It is possible to get a sense of the extent of the consequences that would flow from the collapse
of the private sector MFIs by looking at the position of SHARE and Asmitha alone:

Five million poor women in 18 states across India will lose access to finance. Without
private sector MFIs,these clients will need to rely on the limited resources, inefficiencies,
and frequently unethical practices of other sources of rural finance. Most states outside
AP do not have government-backed competing microfinance institutions, leaving these
borrowers with no alternative other than the village moneylender. Five million of Indias
poorest citizens would be impacted by the collapse of SHARE and Asmitha alone - a
broader collapse of private sector MFIs across India would cause this number to multiply,
putting many millions more at risk.

Indian private Sector MFIs will ultimately fail. Due solely to the AP Act, SHARE and
Asmitha are prevented from collecting the amounts owed to them, and are therefore
unable to repay these amounts to their 40 lenders. As per recent news reports, the
Corporate Debt Restructuring (CDR) Cell of the RBI admitted loans in excess of Rs
6,000 crore ($1.35BN) for restructuring in March 2011, involving five MFIs. However,
such is the depth of the prevailing crisis in AP that even the most forgiving of CDR

packages is only likely to provide a temporary fix. It seems clear that the effects of the
AP Act on MFIs have been extremely severe. Unlike other companies that typically end
up in the CDR process, the current plight of the private sector MFIs was attributable to
external factors, i.e. the passing of the AP Act, rather than any credit weakness or
operational negligence committed by the MFIs themselves. It seems incredible and tragic
that an ill-advised law passed by a state government in India can cause the demise of
several otherwise healthy and productive companies, and potentially imperil an entire
sector.

The financial inclusion agenda will suffer. To fulfill the vision of financial inclusion,
billions of dollars must be lent and collected across India. There is room for all providers
of microfinance given that the needs are so great. The AP Act has the underlying potential
to kill leading private sector providers of microfinance, cause massive write-offs for the
banking sector and reduce the supply of both debt and equity capital to this priority
sector, turning the clock back 20 years when finance for the poor was primarily
provided by moneylenders, poorly managed government agencies of questionable
governance and charitable organizations with limited capital. Not having been able to
conduct its normal business since October 2010, and with planting season approaching,
SHARE and Asmitha are now seeing large numbers of women coming to its branches
demanding loans but who, due to the AP Act, must leave empty-handed.

Indian private and public sector banks will suffer substantial losses. SHARE and Asmitha
alone have over Rs 2,100 crore ($475MM) in loans made to borrowers in AP. The AP Act

has made it impossible for SHARE and Asmitha to collect the amounts due for
repayment. The repayment rate in AP for all MFIs is down to an average of 15%, from
98% before the Act was passed. While the terms of the CDR packages remain to be seen,
the potential for future default by SHARE and Asmitha remains material and any such
default would lead to significant writedowns at 40+ lenders of the two MFIs. Defaults by
other MFIs are also a real possibility. With SKS Microfinance the only likely large
survivor of the crisis (ironically, given how much equity was raised in its IPO, SKS can
afford to write-down its entire AP portfolio without wiping out all of its equity), it is
highly doubtful that lenders will ever again extend credit to the microfinance sector.
Thousands of people employed in the microfinance sector will lose their jobs. SHARE
and Asmitha together employ approximately 10,000 people across India. Remarkably,
private sector microfinance provides employment to more people in AP than the
Information Technology industry. It is noteworthy that the IT industry as a whole was not
forced to close down when the $1 billion Satyam scandal came to light; no more so
should the microfinance industry be forced to close down, especially when, unlike
Satyam, MFIs have not committed any malfeasance.

THE MALEGAM COMMITTEE RECOMMENDATIONS:

Even if the AP Act fails to quickly destroy private sector microfinance, the Malegam Committee
recommendations, if adopted without change, will likely achieve the same result, albeit more
slowly.

The RBI is responsible for regulating non-banking financial companies (NBFCS), not the state
governments. As a first step toward resolving the jurisdictional breach caused by the AP
governments purported regulation of nbfcs, the RBI set up the Malegam Committee to study the
issue and make recommendations. In its draft report, the Malegam Committee thankfully
legitimized mfis and the private sectors involvement in microfinance and called for continued
priority sector lending support to mfis. However, the Malegam Committees recommendations
also gave rise to a number of concerns, as discussed below.

Loan limits.
A limit on loans of Rs 25,000 to borrowers with household income of less than Rs
50,000. This could result in a disincentive for these clients to state their true income, or
even to increase their household income for fear of losing access to finance from mfis.

And the millions of borrowers who now cannot avail themselves of microcredit will have
limited alternatives, most likely needing to return to the village moneylender.

A cap on interest rates and margins.

It is well known that price controls create benefits for the few and shortages for the many
in this case, the result will be a shortage of available finance. To make broad-based
financial inclusion a reality in India, the sector will need to attract billions of dollars from
global capital markets. If the RBI chooses to set pricing and margins, instead of letting
competition and the market set prices, this will dramatically reduce the amount of
investment capital flowing to these mfis, especially the equity capital they will need to
maintain minimum capital adequacy going forward while still growing.

Provisioning norms.
The report recommends much higher provisioning norms than are currently in place. If
these are implemented, because of the current situation in AP, many of the large mfis will
have to provide for and writeoff their portfolios in AP which would ultimately lead to
bankruptcy.

Increased capital requirement.

An increase in the minimum capital requirement from Rs 2 crore ($450,000) to Rs 15
crore ($3.4MM), represents a 7.5 fold increase for an industry with historical repayment
rates of 98% and higher. Such a draconian and arbitrary requirement will make it nearly

impossible for new companies to start or survive, therefore reducing competition and
ultimately denying potential borrowers access to financial inclusion.

The social and economic consequences of the AP Act are stark and disquieting. Millions of poor
people across India are presently denied their fundamental right to make their own financing
choices and are without access to basic financial services, thousands of people employed in the
microfinance sector have lost their jobs, countless MFIs are on the brink of financial ruin and the
long-term fate of some of the largest MFIs in India is hanging in the balance. Private sector MFIs
have an essential role to play if the goal of financial inclusion is to become a reality for the
millions of Indias unbanked, and the RBI and central government must take immediate action
to supersede, suspend or repeal the AP Act and introduce sensible legislation on a federal level
which allows the private sector to grow and flourish.

The Malegam Committee has proposed a number of welcome recommendations and indeed
affirms the value that MFIs bring to the microfinance sector in rural India. These
recommendations have now been broadly accepted by the RBI, subject to certain adjustments.
However, the constraints proposed around loan limits and interest rates, as adjusted by the RBI,
together with those around provisioning norms and capital requirements must be revisited to
avoid unintended and deleterious consequences that could permanently impact private sector
MFIs. The one thing that the RBI and central government would benefit from at this stage is
being afforded the time to further develop, modify and refine the MalegamCommittee
recommendations in collaboration with stakeholders to ensure that the new regulatory framework
introduced allows the sector to continue in its quest to meet the burgeoning social and economic
needs of a rapidly growing India.

SOME OF THE RECOMMENDATIONS COULD BE:

1. Simplification of products and bundling where requires making them easy to understand,
easy to use, sill and service.
2. Simplifying and making premium payment plans flexible to suit the needs.
3. Focus on volumes by targeting large groups.
4. Innovations are required at all stages for products, in pricing policy and in delivery
channels
5. Success of marketing micro insurance depends on understanding the social and cultural
needs of the target population
6. Integrating micro finance activities with micro insurance for a most beneficial outcome.
7. Claim settlement to be timely, simple and transparent.
8. Maximizing the benefit of connectivity revolution in rural India to reach the un-served
markets.
9. Using additional innovative distribution channels to achieve cost-efficiency in
agricultural markets.

CHAPTER 5
CONCLUSION
CONCLUSION

Micro Insurance is designed keeping in mind to poor people. Like everybody else, the poor
people face a variety of risks such as risk of death, illness, disability, accident, income &
property & so on. Like all other, they also need to be protected from these risks.
Policy-induced and institutional innovations are promoting insurance among the low-income
people who form a sizable sector of the population and who are mostly without any social
security cover. Although the current reach of micro-insurance is limited, the early trend in this
respect suggests that the insurance companies, both public and private, operating with
commercial considerations, can insure a significant percentage of the poor. Serving low-income
people who can pay the premium certainly makes a sound commercial sense to insurance
providers. To that extent imposing social and rural obligations by insurance regulator (IRDA) is
helping all insurance companies appreciate the vast untapped potential in serving the lower end
of the market.

At present microfinance business in the country is unregulated. Regulation of mfisis needed not
only to promote micro-finance activity in the country but also to promote the linking of microinsurance with micro-finance. It is becoming increasingly clear that micro-insurance needs a
further push and guidance from the regulator as well as the government.
CRISIL believes that the key factors that can drive success for MFIS are robust system,and
Processes and efficiency and productivity levels , maintaining asset quality,prevention of credit
Losses and capitalerosion, and remaining adequacy capitalized to fund growth plans.

BIBLOGRAPHY
Micro-Insurance in India: Trends and strategies for further extension
Author: Rajeev Ahuja.

www.wikipedia.com
www.basixindia.com
www.scribd.com
www.ruralfinance.org