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; focussing 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 understand the micro insurance with reference to “BASIX”.

To know the different types of Micro-insurance.

To study the micro finance with reference to “AP 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 TWO

PROFILE

PROFILE OF BASIX GROUP

BASIX is 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 companieswhich 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 micro-

finance 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 Services is 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 women’s

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 company’s 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, BSFL’s 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 BSFL’S aggressive growth plans ,

CRISIL expects the company’s capital adequacy to remain under pressure over the

medium term,unless more capital is infused during 2009-10.

BSFL’s 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 THREE

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 IRDA’s 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 AkhtarHameed Khan.

Microfinance in India can trace its origins back to the early 1970s when the Self

Employed Women’s 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 India’s 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 BakaryTraoré 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 policy’s 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 member’s beneficiaries

with a multiple of the member’s deposit balance in the event of the member’s 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

product’s 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 insurer’s 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 won’t extend loans to those with

little to no assets, and generally don’t 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 sub-

continent.

CHAPTER FOUR

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 AP’s 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 government’s 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.

.

Let’s consider each of these three allegations in turn, again using SHARE and Asmitha as our

case study:

1.Do private sector MFIs charge usurious interest rates?

SHARE and Asmitha, two of India’s largest MFIs, charge average interest rates of between 23.6-

28.1% 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 government’s 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.Do 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 client’s 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.Are MFI clients being 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, SERP’s 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 state’s 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

Where did the 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 India’s 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 shgs”i. 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 has…beefed

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 India’s 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 MFI’s

combination of door-step service, easy credit, frequent small-value repayments and the group

guarantee is attracting borrowers who are no longer so naïve 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 borrower’s 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 India’s

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

government’s 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 sector’s involvement in microfinance and called for continued

priority sector lending support to mfis. However, the Malegam Committee’s 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.

CONCLUSION OF AP ACT

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 India’s “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.

CHAPTER FIVE

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 micro-

insurance 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 MFI’S 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.

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.

BIBLOGRAPHY

www.wikipedia.com

www.basixindia.com

www.scribd.com