Issue 4 of Samridhi Financial Services a MFI based in Lucknow.

1. VOLUME 1, ISSUE 1V 1 APRIL , 2009
Trust MicroFin enters into
Strategic partnership with
Samridhi
Samridhi has entered into a strategic partnership with Trust MicroFin Network (TMN). TMN is a not-
for-profit Trust that provides financial and other support services to its partners in the field of Microfi-
nance and livelihood services. TMN currently has 22 network partners in the in UP, Bihar, Jharkhand,
Uttarakhand and Rajasthan. As a strategic partner, TMN will provide Samridhi with bulk credit
through debts over the next few months.
The Power of Ideas
Samridhi’s Managing Partner, Lokesh Kumar Singh has been shortlisted in the
first list of “The Power of Ideas”, an initiative by The Economic Times for bud-
ding entrepreneurs. In the first phase, individuals from across the country,
who had a business idea, submitted it in an appropriate Business Summary
format. The shortlisted candidates will now be called for Group Mentoring
sessions and will be prepared for an Elevator Pitch interview. The candidates
will be mentored by successful entrepreneurs, investors and patrons of The
Power of Ideas at select cities.
The select few “Ideas” will be polished and nurtured with personalized guidance from senior mentors before
being submitted to the largest group of investors for funding.
Samridhi crosses the Rs. 4 million disbursement mark
The close of financial year 2009 saw Samridhi reach the Rs. 4
Million in disbursement. By adding 120 new members to its fold
in March has taken Samridhi’s membership count to over 500.
The JLG model of Micro financing is proving to be a compelling
value proposition for the clientele which is otherwise not af-
fected by the economic slowdown. With several key innovations
in its field processes and a well thought out growth plan the
company is going from strength to strength.

2. PAGE 2
Corporate governance in Indian Microfinance
Corporate governance has never been India Inc’s forte. The recent Satyam fiasco is the
latest testimony to the plight of Indian businesses. The causes for such fiascos can be
summarised in the points mentioned below.
 Ownership structure
 Role of independent directors
 Unclear pricing policies
 Audit reports
 Salary Structure
The Microfinance sector is also not unscathed by the above mentioned problems even
though it’s still a sunrise sector. The sector so far has been somewhat different from its
quot;The path to our peers world over in terms of rate of growth. India’s demography has helped the sector to
a large extent. Though, Indian Microfinance was only replicating what was already very
destination is not always a
much prevalent in Bangladesh, but in terms of rate of growth it has left its mentor far
straight one. We go down behind. The situation had come to a stage where 20 – 25% CAGR which can be very re-
spectable and elusive rate of growth in other industry was meted out with ridicule in In-
the wrong road, we get
dian Microfinance industry which had clocked rate of growth anywhere close to 70-100%
lost, we turn back. Maybe CAGR depending on which figure you takes for your consideration.
We can trace the reason for the present status of corporate governance partly in the this
it doesn't matter which
fast pace at which the industry has been growing and at which every player is expected
road we embark on. to grow in order to stay in the race.
Maybe what matters is
that we embark . quot; –
Origin of Indian Microfinance Industry:
Barbara Hall
Microfinance as being practiced today was not always intended to be in this way when it
started. Initially microfinance was not the exclusive activity that the organisations were
performing. It all started with failure of government run poverty alleviation programs
which motivated social entrepreneurs to look outside India when they came across the
powerful Grameen Bank model and which was not dependent on government infrastruc-
ture.
Typically these organisations were led by somebody who had a strong visible social com-
mitment and they mostly wanted to work around the areas which they either have
known through their upbringing or through their professional experiences. That’s how the
entire microfinance sector started to grow.
Suddenly private banks woke up to the potential of this sector and started lending to
these institutions. With the credits easily available the organisations started expanding
their microfinance initiatives and realised that their other activities had become quite
negligible in comparison to their microfinance initiatives. In the process financial institu-
tions realised that these organisations were very highly leveraged and they started be-
coming anxious about the risk associated with such lending. At the same time regulatory
authorities realized that the NGOs which otherwise are supposed to be philanthropic in
nature were making huge profits and regulatory authorities found it increasingly difficult
to reconcile to these two contradictory features of microfinance organisations.

3. VOLUME 1, ISSUE 1V PAGE 3
These two factors started pushing the Indian microfinance organisations towards getting formalized and that’s
when the trend of getting converted into NBFC started.
Corporate Governance and Transparency:
Corporate governance is part of larger framework of transparency. Transparency with whom? Obvious answer
is all the stakeholders. Most poignant part of the whole debate is while discussing corporate governance the
“ultimate stakeholders”, the clients are never discussed. The whole issue of transparency towards the clients is
swept under the carpet so much so that nobody discusses it other than paying lip service.
As on August 2008, CRISIL had graded about 100 MFIs, which included most of the large and prominent players.
Only about 46% of MFIs qualify for a grade of 'mfR4' or higher, and no MFI meets the top grade of 'mfR1'.The
median grade of 'mfR4' reflects a satisfactory level of management quality, financial performance, and funding sta-
bility. Distribution is not biased by the age of an institution. Several relatively young MFIs are in the upper
Specific issues concerning the corporate governance and transparency can be summarised as follows.
1. Ownership Structure- Most of the NBFC’s are transformed from NGOs to their present structure which
has led to ownership structure and control not having correlation. The original promoter enjoys almost
unchecked power over the daily functioning of the organisation till the organisation reaches a certain
size disproportionate to their holdings.
2. Role of Independent Directors: Recent cases of corporate misgovernance have given rise to the doubts
that the independent directors do not have any incentive to speak against happenings in the organisa-
tion’s functioning. Similar scenario plays out in MFIs especially in case of non-profit companies as the
independent directors know very little about the business of microfinance and they feel obliged to keep
quiet on issues which are of little concern to them.
3. Pricing of products: Indian microfinance though has not been very innovative in the field of products but
when it comes to camouflaging the high pricing of loans there would be fewer better innovators then
Indian Microfinance Industry. There has been all different kind of hidden charges to make the high
priced loans palatable to clients.
4. Inconclusive Audits: Another Issue which plagues the entire sector is that audit reports are not stan-
dardised and creative accounting seems to be at play here. Major concern here is that it goes almost un-
noticed by the auditors who have no domain knowledge of this field.

4. 5. Grants & Donations: Most of the transformed NGOs keep their grant driven structure alive even after hav-
ing transformed because they find it very difficult to let go off such vehicle which can get them no strings at-
tached grants/donations which can be used to cross-subsidise the operating expenses of their NBFC opera-
tions making the profitability of NBFCs artificially high. The graph below gives the picture more clearly.
The most interesting part is that almost 80% of the entire credit flow for the Microfinance through JLG models go
through NBFCs but still bulk of the organisational spread is in the not for profit companies and societies. This
makes the point very clear that almost all the transformed NGOs keep this structure so as to route the grants to
the NBFCs.
6. Salary Structure: One of the most common features of Indian Microfinance is poorly paid field staff, often
lower than even the statutory norms through innovative use of designations and terminology. On the other
hand top management often which is headed by the promoters who would also be getting astronomical com-
pensations if all the perks are taken into account.
One silver lining which emerges out of the entire discussion is that there has been lot of interest shown by Private
Equity in the sector. Investors are particularly concerned about the quality of management and standards of cor-
porate governance, given that most approach microfinance projects with a long-term perspective.
It can be safely said that greater the exposure that Indian MFIs have had to mainstream financial markets--both
domestic and international--the greater their awareness of the importance of improved corporate governance.
However, it's evident from CRISIL's assessments that the majority of MFIs in India are still below the median, if
measured against the yardstick of acceptable corporate governance standards--whether it pertains to manage-
ment structures and control, management information systems, disclosure standards, or board composition.
This article was contributed by Lokesh Kumar Singh to the upcoming issue of the monthly magazine published by
Gurgaon based organisation Plural India.
VOLUME 1, ISSUE 1V 1 APRIL, 2009 SAMRIDHIINDIA.COM

5. VOLUME 1, ISSUE 1V 1 APRIL, 2009 SAMRIDHIINDIA.COM