Micro financing has become an attractive proposition for private banks as it helps them inch closer to the stipulated priority sector lending target and fetches high returns ranging between 8 per cent and 12 per cent.

"What is attracting banks to micro financing is that it enables them, to an extent, to achieve the priority sector lending target and offers attractive returns," says G V Nageshwar Rao, managing director, IDBI Bank.

IDBI Bank has been tapping this market since May 2003 and has tied up with various micro finance institutions. Currently, the bank is extending loans to MFIs in 7 states.

About 3,500 farmers have become its clients via the MFIs. As on March 2004 the bank disbursed about Rs 8 to 10 crore (Rs 80-Rs 100 million) crop loans.

The bank has a memorandum of understanding with Mahindra Shublabh, a subsidiary of Mahindra & Mahindra, Tata Kisan Kendra a division of Tata Chemical and Godrej Agroweights, which provides agri extension services to farmers.

The bank has also tied up with self-help groups like Share Microfin, Asmitha Microfinance, Basix, Asha and Spandhan, which are active in southern India.

"This is a new area of lending and banks would have to look at setting up effective sales and services organisation to explore the market effectively," said IDBI Bank, head credit administration, Rajiv Handa.

UTI Bank in alliance with MFIs such as Friends of Womens World Banking in Ahmedabad, Share Micro and Basix in Hyderabad and Activists for Social Alternatives in Tamil Nadu to tap these semi-rural and rural markets.

UTI Bank, president-credit, Asok Kumar said the bank is also in talks with a self-help group Cashpor in north.

ICICI Bank is tapping microfinance institutions in a big way -- buying out existing portfolio of MFIs and offering loans through a partnership model.

The bank has securitised two assets pools of small loans worth Rs 20 crore (Rs 200 million) in Andhra Pradesh. So far, the bank has tied up with 10 microfinance institutions and several more are on the cards.

Thus, the bank is building rural assets without compromising on its quality. Even at 8 per cent, the bank is able to make money because full repayment is assured.