The objective of the project is to scale up access to sustainable microfinance services, particularly to clients in underserved areas of the country, including through introducing innovative financial products and fostering transparency and responsible finance.

    The project will achieve its objective through: (i) supporting expansion of financial services, particularly in underserved states or underserved areas within states; (ii) facilitating responsible and sustainable growth through the provision of more patient capital sources of funding, including longer term debt, and equity and quasi-equity instruments with funding inter-linked to responsible microfinance actions (for example, actions on transparency, good governance and adhering to codes of conduct).

    The project will be implemented by Small Industries Development Bank of India (SIDBI) over a period of 5 years with the estimated project cost of USD 330 million. USD 300 million is proposed to be funded through the World Bank line of credit.

    This Component of the project would provide funding for MFIs to scale up their operations. Funding from SIDBI to MFIs is proposed to be structured as quasi-equity or debt, to support their operations and growth, enhance their financial strength and enable them to leverage and crowd-in private commercial funds to on-lend larger amounts to the underserved. Limited equity support may also be considered from SIDBI to MFIs/microfinance investment vehicles. The total funding thus mobilized will enhance MFIs’ ability to reach out to larger numbers of underserved segments of the population through microfinance services. In particular, the quasi-equity/equity funding will also help address the equity gap in Indian MFIs, while providing SIDBI with the leverage to promote the responsible finance agenda amongst the MFIs funded.

     This Component would promote transparency and responsible microfinance through the development of a common information platform for the collection and dissemination of this data (similar, but broader and deeper than the information available on the MixMarket). As part of this responsible finance initiative, SIDBI will seek to bring together and consult with a Lenders’ Forum – a grouping/platform of commercial lenders engaged in microfinance, which would aim to leverage and link their support to MFIs with criteria on transparency and governance; and move the sector towards better governance through formalized monitoring of the microfinance code of conduct by independent organization/s. This Component will be cross linked with the Microfinance Fund, such that MFIs accessing Component 1 will need to commit to data sharing to the common information platform and other responsible finance initiatives that will be defined as performance criteria in the Operations Manual (OM).

    Implementation support which would include support to SIDBI for: (i) implementing the project including the monitoring work ; (ii) commissioning an impact evaluation exercise (to be carried out through an external research agency); and (iii) SIDBI’s capacity building.

    The project loan will be intermediated by SIDBI to several Microfinance Institutions (MFIs). The recipients of loans from MFIs include micro-enterprise activities and cottage industries. Significant part of such activities are environmentally benign – these typically include embroidery, mat making, tailoring, wool knitting, handloom weaving, rope making, carpentry work, handicrafts, general stores, vegetable vending, etc. The activities require very small size of investments (on average less than US$200) and do not require environmental regulatory clearances. However, there is also – albeit very limited – demand for microfinance for household-based activities such as packaging inflammable materials, household dying, etc. Such activities, if necessary care is not taken, may pose Environment, Health, and Safety (EHS) issues. However, institutionalizing the impact assessment and environmental management measures would not be practical due to the vast spread and very small size of investments.

    Though very limited, these issues are therefore will be addressed through an Exclusion List of Activities (ELA) ineligible for SIDBI’s on-lending to MFIs under the Project. The key steps and due diligence to identify ELA included the following:
a) Detailed review of range of activities currently under the microfinance portfolio of SIDBI, identifying activities that have potential to cause EHS impacts;
b) Activities that are prohibited for World Bank Group (WBG) lending, including IFC’s exclusion list.
c) Focus group discussions with some of the MFIs supported by SIDBI and visits to the microfinance activities supported by the MFIs.
Based on the above approach, an ELA comprising 23 microfinance activities has been identified. The ELA is presented in Table 1

    World Bank Operations Policy on Environmental Assessment (OP 4.01) requires that the Financial Intermediary (FI) screens proposed on-lending activities and ensure that sub-borrowers follow environmental safeguards measures. In line with this requirement, ELA and the process of its application for the Project has been endorsed by SIDBI. The ELA will be applied as part of SIDBI’s credit appraisal of MFIs for the Project through a two stage environmental screening process.
(a) SIDBI’s Credit Appraisal: The first level of screening will be part of SIDBI’s credit appraisal, wherein the MFI’s micro-finance portfolio will be reviewed by credit officers to determine the nature of activities, and further stipulate an on-lending legal covenant for application of ELA by the MFI.
(b) MFI’s Appraisal of Microfinance Activities: The second level of screening and application of ELA shall be followed by the MFIs as part of their appraisal for micro-financing activities under the Project. Such arrangements will be formalized as part of SIBI’s on-lending covenants.
The application of ELAs and compliance of with the ELA shall be certified by MFIs on a semi-annual basis and SIDBI will conduct an annual audit on ELA compliance by MFIs and report compliance to the World Bank.
The process of application of ELA for the Project and the compliance reporting requirements have been integrated in to the Project Operations Manual

    Implementation support which would include support to SIDBI for: (i) implementing the project including the monitoring work ; (ii) commissioning an impact evaluation exercise (to be carried out through an external research agency); and (iii) SIDBI’s capacity building.