problems faced by micro finance institutions and measures to solve it

A

GRAND PROJECT

ON

PROBLEMS FACED BY MICRO FINANCE INSTITUTIONS

AND MEASURES TO SOLVE IT

By

Brijesh G. Rupapara (Roll No. 46)

Jitendra V. Patoliya (Roll No. 36)

PGDM Program

Batch 2008-2010

Parul Institute of Management

Vadodara

January 2010


PREFACE

Our grand project is on “In-depth Study on Problems faced by Micro Finance

Institutions” has provided us a golden opportunity for exploring our knowledge of

classroom teaching to real life of corporate. It is rightly said that student without

practical knowledge is just like a bird without wings.

In this project, we have studied various aspects considered as pillars before starting

Micro Finance Institutions. There are number of factor considered by Micro

Finance Institutions for its development. We have studied on the services provided

by SHGs and NGOs. We have also covered various schemes of Grameen Bank.

At the end of the study we have mentioned about the findings of the study. This

primarily includes the credit access to the poor people of India. We have also

suggested about various improvements to be made in credit assessment of Micro

Finance Institutions and speedier access to the credit. This project has guided us in

aligning our career as a techno commercial person. Any admirable things, which

one can see, are due to the efforts made by our teachers in the academic and

corporate world. We take sole responsibility of any mistake, fault or

misconception, you may find in this project.


ACKNOWLEDGEMENT

We are very thankful to our PIM-PGDM and Director N.K.Kapoor who has given

us an opportunity to get practical knowledge in the field of finance and also for

helping us to undergo this grand project. The learning during this project has been

a great experience.

We are also indebted towards our project guide Prof. N.K.Kapoorfor their

invaluable guidance throughout this project.

We are also very much grateful towards other faculty members for his noble help

and motivation, which has enhanced our level of satisfaction for this project.

We are also indebted towards our institute for giving us an opportunity to get the

grass route realities of the financial world. Finally we are thankful to all those who

have directly or indirectly help in this project.

Thus, it was because of all these people, we were motivated to achieve successful

completion of our project.

________________ _________________

(JitendraPatoliya) (BrijeshRupapara)


EXECUTIVE SUMMARY

Microfinance emerged as a noble substitute for informal credit and an effective and

powerful instrument for poverty reduction among people who are economically

active but financially constrained and vulnerable in various countries.It covers a

broad range of financial services including loans, deposits and payment services,

and insurance to the poor and low-income households and their micro

enterprises.Persuaded with the potential role of micro financing in alleviating

poverty, the South Asian countries especially India & Bangladesh have been

actively pursuing the policy of setting up formal network of microfinance

institutions. These institutions include NGOs/NBFCs and government sponsored

programs.

Some leading MFIs, e.g. Grameen Bank in Bangladesh, have created financial

modes that serve increasing number of poor. They also lead to repayment rates

positively comparable with the performance of many commercial banks. Whenever

we think about microfinance services, the name of country comes in our mind is

“Bangladesh”. India is second most populated country in the world. If we see the

condition of India, more than 60% people lives below poverty line. It means out of

total population of 1.20 billion, 70 crore people are poor. This section of society

can’t borrow fund from commercial bank due to their inability of meeting

requirement of collateral security for taking loan from these banks. This shows

scope of development of MFIs in India.

If we have seen the scenario of MFIs in India then there are very few MFIs and

cover only fraction of its total potential. In India MFIs are facing some challenges


which we will discuss in this report. If we can overcome these challenges then

there is no doubt in making India as market leader in providing microfinance.


CONTENT TABLE

CH. TITLE Page

No.

1 INTRODUCTION 8

2 METHODOLOGY 10

2.1Objective of Report 10

2.2 Research Design 10

2.3 Research Methodology 10

2.4 Implication of this study 11

2.5 Limitation of the study 11

3 HISTORY OF MICRO FINANCE 12

4 WHAT IS MICRO FINANCE 14

4.1 Utilizaiton of Micro Finance credit 14

4.2 Approach to MFIs 15

4.3 Demand for Micro Finance Services 16

4.4 Supply of Micro Finance Services 18

4.5 Major Achievements of Micro Finance 20

4.6 Challenges 21

4.7 Lessons learned 24

5 DATA ANLAYSIS AND INTERPRETATION 27

6 BUSINESS MODEL FOR KALPTARU MFI 40

6.1 Sources of income for MFIs 41


6.2 Reward and recognition to borrower 42

6.3 Product & services offered by P&R MFI 44

7 SUGGESTIONS 47

8 CONCLUSION 48

9 BIBLIOGRAPHY 50

10 ANNEXURES 51

1. INTRODUCTION


The age old saying, “India is a rich country where poor people live”, still holds

well. In the present era there is a need for practical and workable solutions to

improve the socioeconomic conditions of the poor in India, thereby helping in

wiping out the deep-rooted problem of poverty. Globalization has brought

substantial benefits around the world, but in many developing countries it is

contributing to a growing disparity between the rich and the poor. In a country like

India, The structure of the economy is dualistic. We can see the Growing

Companies, booming stock market and soaring profits, making the rich, richer on

the one hand while faltering incomes and wages in the field of agriculture and

allied activities is making the poor, poorer on the other. This worsens the access of

the poor to the economic opportunities through which they could build up their

assets and enhance income in order to come out of poverty cycle.The potentials to

avail such economic opportunities mainly depends on the degree of access to

financial services. The commercial banking sector does not consider the poor

bankable owing mainly to their inability to meet the eligibility criteria, including

collateral. Thus the poor in most countries have had no access to formal financial

services.

The more rational way to help the poor could be the provision of sustainable

economic opportunities at grass-root level especially provision of required

financial services at competitive rates to support their investments and viable

business activities. So, micro finance is one of the most effective solutions of this

problem.

India is perhaps the largest emerging market for micro finance. Over the past

decade, the Micro finance sector has been growing in India at a fairly steady pace.

Though no micro finance institution (MFI) in India has yet reached anywhere near


the scale of the well-known Bangladeshi MFIs, the sector in India is characterized

by a wide diversity of methodologies and legal forms.

Micro finance phenomenon is one of the most remarkable socio-economic

developments of recent times. Because of their economic circumstances, poor for a

long time were considered non-bankable. However, the evolution of the

phenomenon of micro-credit has proved that the poor are creditworthy if organized

in small groups. Over the period micro-credit has had profound impact not only

from finance perspective but, more importantly, from the perspective of poverty

alleviation. In the recent years Micro-Finance has been recognized as an effective

development intervention and thereby a lot of Micro-Finance institutions and

programs targeted to the poor have emerged. In India there are a wide range of

Micro-Finance institutions active in this sector, each with its own way of going

about the task of making financial services accessible to the poor.

Till recent times most of the micro-finance institutions and programs have been

only focusing on providing saving and credit services to the non-bankable.

However a growing number of MFIs have recognized that providing credit is not

enough for the sustainable development of the people and are thus is now

providing a range of other financial services including insurance and other support

services along with savings and credit services. The poor are vulnerable to

different types of risks and adopt various strategies to reduce the impact of the

losses. Micro Finance services are very essential for the low income households to

cope with uncertainties and emergencies like illness or injury, Death, Natural

disasters, theft and life cycle needs.

2. METHODOLOGY


2.1 Objective of Report

1) Current MFIs activities of India

2) Limitation of MFIs

3) Scope of MFIs in India

4) To develop a business model for MFIs

2.2 Research Design

Inductive studies were done. This method is practically useful when the researcher

has a clear idea of the problems.

The research is aimed at collecting information from the various sources like

Internet and Business Magazine, which will assist us to analyze the micro finance

sector as our macro part and to develop a business model for MFIs at micro level.

Therefore, the most appropriate research design is an inductive one.

2.3 Research Methodology

Research methodology consists of the subject coverage, data collection, data

analysis and interpretation. Various methods are used to supplement the research:

1. Coverage: it includes location, population study, population size and units of

observations, which are very essential for this report.

Location: LIMDA, ISHWARPURA, PREMPARA and PIPALIYA

Population study: We have taken a sample study of the above

mentioned villages.

Units of observation: We have observed in total 500 people from the

above mentioned villages.

2. Data collection: The method of data collection is informal.


Sources: Following two sources were used:

a) Primary Sources: Primary data was collected by Informal talk with

the MD of Deepak Foundation, faculty members and the survey of

500 people from the different villages.

b) Secondary sources: Secondary data that was utilized in the project

was the data provided by the Internet, Magazines etc.

3. Data analysis and Interpretation: This includes the overall analysis of the data

collected and interpretation of the facts witnessed in the research.

2.4 Implication of this Study

The report helps to identify the measures to improve the micro finance servicesand

to develop as business model to provide the various services of micro finance,

exposure growth in the coming years, with the purpose of improving its

performance by strengthening the way to provide the services.

2.5 Limitation of the Study:

As some of information is not revealed, whatever suggestions

generated by us is based on certain assumptions.

Due to time constraints we analyzed only the sample of 500 people,

so sample error is possible.

3. HISTORY OF MICRO FINANCE


The history of micro financing can be traced back as long to the middle of the

1800s when the theorist Lysander Spooner was writing over the benefits from

small credits to entrepreneurs and farmers as a way getting the people out of

poverty. But it was at the end of World War II with the Marshall plan the concept

had a big impact.

Micro finance institutions (MFIs) have expanded rapidly in recent years:

According to the Microcredit Summit Campaign, micro finance institutions had

154,825,825 clients, more than 100 million of them women, as of December 2007.

In 2006, Mohammad Yunus and the Grameen Bank were awarded the Nobel Prize

for Peace, for their contribution to the reduction in World Poverty.

[[[[

Today, the term which we use as MF has its root in 1970. At that time a small

institution named as Grameen Bank of Bangladesh came up with concept of MF

and the person who has developed the MF was Mohammad Yunus. He has started

and shaped the emerging concept of micro financing. Another pioneer in this sector

is Akhtar Hameed Khan. At that time a new wave of micro finance initiatives

introduced, many new innovations into the sector. Many pioneering enterprises

began experimenting with loaning to the underserved people. The main reason why

micro finance is dated to the 1970s is that the programs could show that people can

be relied on to repay their loans. It is possible to provide financial services to poor

people through market based enterprises without subsidy. Shore bank was the first

micro finance and community development bank founded 1974 in Chicago .


http://www.nationalmortgage.com/

Another organization, the caisse populaire movement grounded by Alphone and

Dorimene Desjardins in Quebec, was also concerned about the poverty. Between

1900 to 1906 when they founded the first caisse, they passed a law governing them

in the Quebec assembly; they risked their private assets and must have been very

sure about the idea about microcredit.

Today the World Bank estimates that more than 16 million people are served by

some 7000 micro finance institutions all over the world. CGAP (CATFISH

GRANT ASSISTANCE PROGRAM) experts say that about 500 million families

benefits from these small loans making new business possible. In a gathering at a

Microcredit Summit in Washington DC the goal was reaching 100 million of the

world´s poorest people by credits from the world leaders and major financial

institutions.

The year 2005 was proclaimed as the International year of Microcredit by The

Economic and Social Council of the United Nations in a call for the financial and

building sector to “fuel” the strong entrepreneurial spirit of the poor people around

the world.

.


4. WHAT IS MICRO FINANCE?

Micro finance is the provision of a broad range of financial services such as

deposits, loans, payment services, money transfers, and insurance to poor and low-

income households and, their microenterprises. Micro finance services are

provided by three types of sources:

• Formal institutions, such as rural banks and cooperatives;

• Semiformal institutions, such as nongovernment organizations; and

• Informal sources such as money lenders and shopkeepers.

Institutional micro finance is defined to include micro finance services provided by

both formal and semiformal institutions. Micro finance institutions are defined as

institutions whose major business is the provision of micro finance services.

4.1 Utilizationof Micro Finance Credit

There are basically two ways for utilization of micro finance credit they are as

follows:

1. Productive utilization:

Productive utilization means use of micro finance credit for the purpose of

purchasing profit generating asset (i.e. loan for purchasing of a sewing

machine).


2. Non-productive utilization:

Non-productive utilization means use of micro finance credit for satisfying a

personal financial requirement of a lower income section of a society (i.e.

loan to be given for the education for children).

As MFIs we are required to encourage our borrower to use a credit for

productive purpose rather than non-productive purpose because it can help

to generate employment and provide opportunity to them to take

independent decision as they are owner of their business.

4.2 Approaches to MFIs

In general there are two approaches which are followed by MFIs

1. Minimalist:

It is also known as “credit only approach” where only credit is provided with

the assumption that a poor people will use it for economic activity.

2. Maximalist:

It is also known as “credit plus approach” where MFIs helps in capacity

building through a various programs such as business related training, access

to a market along with a provision of credit.


So from the above two approaches of MFIs we can say that minimalist

approach focus only on providing credit rather than how to utilize the money

or invest money or give them financial guidelines where they need to invest

so they get the maximum return out of it here, the minimalist approach failed

and the maximalist approach came up with the overcome of where

minimalist approach was failing. So we can say that maximalist approach is

more beneficial than minimalist approach.

4.3 Demands for MicroFinance Services

The poor and low-income households and their microenterprises inthe Region are a

diverse group. Their demand for micro finance servicesalso reflects this diversity.

The collective demand of thesegroups for financial services is large and the types

of services theydemand vary across households and microenterprises and over

time.This large demand and the heterogeneity of services needed acrosshouseholds

and microenterprises and over time have created scope for commercial financial

intermediation.

Poor and low-income households and their microenterprises inthe Region have a

large demand for safe and convenient depositservices. This demand reflects the

importance of savings for thesehouseholds and microenterprises for a variety of

reasons. The poorneed to save for emergencies, investment, consumption,

socialobligations, education of their children and many other purposes. Theyhave

the capacity and willingness to save. Savings are important formicroenterprises and

provide them with a major source of investmentfunds. The large demand for

deposit services among the poor isconfirmed by empirical evidence. For example,

the number of savings accounts in unit desas of BRI (Bank Rakyat Indonesia)

increased, from 5.0 million in 1988 to16.1 million in 1996. Most of these accounts

belong to poor households.


The cooperative rural banks in Sri Lanka had 4.7 million depositaccounts at the

end of 1998; while the Association for SocialAdvancement, micro finance NGO in

Bangladesh, had over 1.4 millionactive savings accounts of poor households at the

end of 1999.Extensive use of informal savings arrangements by poor householdsis

another indicator of their demand for savings facilities. In somecountries, the poor

pay high prices to those providing deposit services.The demand for deposit

services is particularly strong among poorwomen in the Region.

The demand for microcredit that originates both from householdsand

microenterprises is also large. Poor households in the Regionrequire microcredit to

finance livelihood activities, for consumptionsmoothening, and to finance some

lumpy nonfood expenses forpurposes such as education (e.g., school fees and

books), housingimprovements, and migration. Many Asian countries have

numeroussmall farms and their operators also require micro finance services.

Theother source of demand is nonfarm microenterprises, which cover awide array

of activities such as food preparation and processing,weaving, pottery, mat and

basket making, furniture making, and pettytrading.

The demand for other financial services among poor and lowincomehouseholds

and their microenterprises could also be significant.A good share of rural

households borrow, many more save, but allseek to insure against the vagaries of

life and therefore the demand forinsurance services among the poor is vast.


A private insurancecompany in Bangladesh that started to provide micro-insurance

servicesto low-income households on a commercial basis, for example, foundthat

its client base was expanding rapidly. At the end of 1999, thiscompany had over

800,000 clients, about 50,000 of which areconsidered poor. This experience shows

that the supply of such servicescreates its own demand because the real demand for

such servicesremains hidden when suitable products are not available in the

market.

4.4 Supply of MicroFinance Services

The market structure in microfinance varies significantly acrosscountries in the

Region depending on their stage of financial development, level of economic

development, policy environment, and other factors. However, aspects of the

supply, particularly about different types of suppliers, may be usefully discussed.

The micro finance services are supplied mainly by informal sources. Their

collective outreach, both breadth and depth, is vast in most countries. They supply

mainly short-term credit and charge higher interest rates than semiformal and

formal sources. Because of the relatively greater bargaining power enjoyed by the

informal suppliers in general, the terms and conditions under which services are

provided do not enable the clients to fully harness economic opportunities. The

informal sources operate in highly localized areas. Therefore, their contribution to

financial intermediation and improvement of resource allocation is also limited.

For example, informal sources do not allow savings to be collected from more than

a small group of individualswell known to one another, and they do not move

funds over largedistances. Most informal insurance mechanisms are typically

weak,particularly against repeated shocks, and often provide only

inadequateprotection to poor households.


The involvement of formal sources in micro finance has increasedduring the last

two decades. This greater involvement has stemmedfrom (i) the expansion of the

scope of formal institutions intomicro finance through downscaling and

establishment of linkageprograms with semiformal sources of different types; (ii)

the emergenceof new formal institutions focused on micro finance, such as

theGrameen Bank of Bangladesh; (iii) reforms of state-owned financialinstitutions

such as unit desas of BRI; and (iv) the introduction of newmicro finance programs

by the governments through nonfinancialinstitutions. However, the formal

operations concentrate mostly onproviding credit facilities, and savings

mobilization has yet to receiveadequate attention, with few exceptions.

Formal micro finance has changed to some extent with increasinginvolvement of

private sector institutions. The Bank Dagang Bali inIndonesia has expanded its

micro finance operations and increased itsclients. Badan kredit-desas, owned by

Indonesian villagers, nowreach 1.7 million clients, and the Grameen Bank in

Bangladesh, ownedlargely by its borrower members, operates in over 38,000

villages with1,140 branches and reaches about 2.4 million clients.

Cooperatives are also playing a significant role as financial intermediaries in the

Region, particularly in India, Sri Lanka, Thailand, and Viet Nam. The thrift and

credit cooperative societies in Sri Lankareach about 800,000 households while

primary agricultural cooperativesocieties in India have about 89 million members.

These cooperatives,among other things, provide micro finance services. In many

countries,the cooperatives have begun to explore possibilities for deeperpenetration

into the micro finance market and show a greater concernabout their financial

viability than they did in the 1980s.


A major feature of semiformal micro finance sources in the Regionis the extensive

involvement of NGOs. NGOs have become important providers of micro

financeservices. Their involvement is important because their clientsin general are

poorer than those reached by many formal institutions,their services are targeted in

most countries to serve poor women, andtheir credit services are provided largely

on the basis of social collateral.The small average loan sizes of NGOs, which

usually range from about$30 to $150 per active loan account, suggest that their

clients includethe poorest. NGOs in some countries are trying to organize

themselvesinto national coalitions to improve the industry standards and self-

regulation.A few NGOs in the Region have plans to transformthemselves into

formal financial institutions.

4.5 Majorachievements inMicro Finance

The MFIs and other financial institutions (OFIs) providing micro financeservices

have expanded their outreach from a few thousand clients inthe 1970s to over 10

million in the late 1990s. The developments inmicro finance in the Region have set

in motion a process of changefrom an activity that was entirely subsidy dependent

to one that canbe a viable business.

(i) MFIs and OFIs mobilizing voluntary savings have shattered themyth that poor

households cannot and do not save, and provedthat savings can be successfully

mobilized from poor households.This is perhaps a more important achievement of

micro finance inthe Region than the expanded outreach in access to credit.


(ii) MFIs, OFIs, and their clients have shown that the poor arecreditworthy (poor

women, in particular) and financial servicescan be provided to and accessed by the

poor on a profitable basisat low transaction costs without relying on physical

collateral, if itis done with appropriate financial technology and a commitment

To achieve efficiency.

(iii) Micro finance services have triggered a process toward broadeningand

deepening of rural financial markets.

(iv)Micro finance services have strengthened the social and humancapital of the

poor, particularly women, at the household,enterprise, and community level.

(v) Sustainable delivery of micro finance services on a large scale insome countries

has generated positive developments inmicro finance policies and practices among

all stakeholders:governments, central banks, micro finance service providers, and

external funding agencies.

4.6 Challenges

The achievement in micro finance in the Region has been impressiverelative to the

status in the 1970s. However, a number of major problemsremain.

1. Policy environment

Despite general improvement in the policy environment for financialsector

programs, the policy environment for micro finance in manycountries including

India remains unfavorable for sustainable growth in micro financeoperations.


In India process of registration is very burocratic and takes so much time.

Moreover there is no stable policy environment for micro finance institutions it is

always depend on ruling party (i.e. B.J.P, congress). The policy will also change if

there is change in ruling party.

2. Limited retail level institutional capacity

As new and emerging MFIs following are the problems to be faced by us as far as

retail level capacity is concern

(i) Lack capacity to leveragefunds, including public deposits, in commercial

markets;

(ii) Are unableto provide a range of products and services compatible with

thepotential clients’ characteristics;

(iii) Do not have an adequate networkand delivery mechanisms to cost-effectively

reach the poorest of thepoor, particularly those concentrated in resource-poor

areas and areaswith low population densities

(iv) Do not show a vision and acommitment to ensure their financial soundness and

sustainabilitywithin a reasonable period, and become subsidy independent

(v) Do not have the capacity to manage growth prudently.


Most of the state-sector institutions or programs that providemicro finance services

have been created within and nurtured by adistorted policy environment. They do

not have a business culture.

3. Inadequate investments in agriculture and rural development

Agricultural growth, which requires for the growth in the ruralnonfarm subsector,

significantly influences rural financial marketdevelopment. India is not making

adequateinvestments for agricultural growth and rural development. This is amajor

constraint on the development of sustainable micro financeservices. The

insufficient investments in physical infrastructure(especially irrigation; roads;

electricity; and support services formarketing, business development, and

extension) continue to increasethe risk and cost of micro finance and particularly

discourage privateinvestments in the provision of micro finance services on a

significantscale. Also, in the absence of economic opportunities created bygrowth-

inducing processes, micro finance cannot be expected to playa significant role in

poverty reduction.

4. Sustainability

The main challenge for MFIs is the problem of its sustainability which indicates

lapse in their financial procedure, organizational design and governance. Here we

can say that most of the MFIs in INDIA depending on donation or subsidies it are

like getting success through other. If they stop helping them, then they will fail


5. Loan without security

MFIs target the group of lower income people and providing loan to them. Such

people are not able to give the security for loan. That will lead to bad debt for

MFIs in case of failure of repayment of loan.

4.7 Lessons learned

(i) Adoption of the financial system development approach is the keyto

achieving sustainable results and to maximizing developmentimpact.

This approach emphasizes an enabling policy environment,financial

infrastructure, and the development of financialintermediaries that are

committed to achieving financial viability andsustainability within a

reasonable period and that can provide avariety of financial services, not

just credit, to the poor.

(ii) Micro finance clients are more concerned about access to servicesthat are

compatible with their requirements than about the cost ofthe services.

(iii) Given the diversity of demand for financial services, a broad rangeof

institutional types is required to expand the outreach.

(iv) Strong retail institutions committed to outreach and sustainabilityare

essential for extending the permanent reach of financialservices and to

have a significant impact on poverty reduction.Thus, building the

capacity of institutions with a commitment toreach the poor is vital.


(v) Financial institutions committed to provide micro finance services inmost

developing countries require considerable technical assistance for

capacitybuilding. This is particularly true for institutions that target

potentialclients in resource-poor areas and the poorest of the poor.

(vi) The demand for savings services by poor households andmicroenterprises

is as strong as or stronger than the demand forcredit. Expansion of the

outreach of savings services can have apotentially significant impact on

both institutional sustainability andpoverty reduction.

(vii) Because micro finance is primarily targeted to the poor who

aredisadvantaged, social mobilization is necessary to introduce themto a

formal or semiformal, market-oriented institutional environment.This is

particularly true for poor women and the poorest of the poor. It

isimportant, however, to distinguish between financial intermediation

andsocial intermediation in designing support programs.


DATA ANALYSIS

AND

INTERPRETATION

5. DATA ANALYSIS AND INTERPRETATION


1. Your Age?

AGE GROUP

16-20

21-25

26-30

31-35

36-40

41-45

46-50

51-55

56-60

61-65

66-70

71-75

0

20

40

60

80

100

120

44

99

70 7364 65

31

2010 8

313

No. of RespondentPercentageColumn3

AGE

NO

. O

F RE

SPO

NDE

NTS

INTERPRETATION

From the above graph we can clearly see that more than 90% of the population is

between the ages of 16-50 years. It means they are considering as a productive

work force. We can give loan to them for starting their own business which

improves their living slandered.As they are physically efficient to do work.

2. Education Qualification


Illiterate Primary S.S.C H.S.C Graduate0

20

40

60

80

100

120

140

160

180165 167

75

35

58

33 33.4

157 11.6

No. of RespondentsPercentage

QUALIFICATION

NO

. O

F RE

SPO

NDE

NTS

INTERPRETATION

Here we can see that nearly 33% of the population is illiterate and 34% of

the population had gone through primary education only. These illiterate

people also include child labor which is 25% of total illiterate people.

Money is major constrain for the parents of child laborwhich is again a

scope for us where we can develop as a MFI.

Here we can observe from above chart that 33.6% people get education

either at S.S.C level or more.

3. Marital Status


Married Unmarried0

50

100

150

200

250

300

350

400

450398

10279.6

20.4


MARITAL STATUS

NO

. O

F RE

SPO

NDE

NTS

INTERPRETATION

As the most of the people in the village are uneducated and thus this create a huge

gap of understanding and thus at the very young age they get married. So here it

talks about the mentality of the people that how the illiteracy effect even the living

standards of the people also. After get married most of women remain unemployed

and sitting at their home idle. So it clearly indicates the potentiality for

development MFI by framing SHGs of women.

4. Number of years you are in this village?


STAYING IN THE SAME VILLAGE

More than 3 years Less than 3 years0

100

200

300

400

500

600

496

4

99.2

0.8

No.of RespondentsPercentage

NO OF YEARS

NO

. O

F RE

SPO

NDE

NTS

INTERPRETATION

Basically we found out that almost 99% of the populations of the villages

were residing in the village since more than 3 years and major of them owed

their own houses only. So it was one of the plus points because we can at

least trust them that they are being part of the village since long period.

When we are going to give them loan it require for us to verify that

particular person has living in the same village since last 3 year. As it is one

of the criteria for giving them loan.

5. Occupation


Agriculture Labour Other Unemployed0

50

100

150

200

250

115

205

80

100

2341

16 20


OCCUPATION

NO

. OF

RESP

ON

DEN

TS

INTERPRETATION

Here almost 41% of the people are doing labor work because of they are not

having enough money power so that they can do their own business, so

though if they possess any specific skills they have to hide that skill because

of insufficiency of money. Hence they go for the labor work and one more

thing that nearly 20% of population is unemployed, so one of the major

concern where we can define our scope to develop MFI.

6. Income per day


Rs.0 Less than Rs.50

Rs.50 to Rs.100

Rs.100 to Rs.150

More than Rs.150

0

20

40

60

80

100

120

140

160

115 111

149

101

2423 22.229.8

20.2

4.8

No.of RespondentPercentage

INCOME (in Rs.)

NO

. OF

RESP

ON

DEN

T

INTERPRETATION

From the observation we can see that 75% of the total population earns less

than Rs. 100 per day. It means they have potentiality to repayment of loan.

Most of them are engaged in either in labor work or agriculture. It is again

scope for us to provide them financial services at micro level.

7. Are you having a bank account?


Yes No0

50

100

150

200

250

300

350

203

297

40.659.6


HAVING BANK A/C.

NO

. OF

RESP

ON

DEN

T

INTERPRETATION

One of the major things is that 60% of the people were not even having a

bank account also. So if they want to deposit any amount they were not able

to do it. And one of the major reason as being illiterate if they go to bank

then there will be no one to guide them how to proceed for opening a bank

account and if they open a bank account then they would be not be able to

keep the minimum required balance in the account. So these are some of the

major reasons that why the villagers were not having a bank account. This is

an opportunity for us to develop our MFI. As it indicates that they cannot

access financial services provided by commercial bank.

8. Is there any financial institution providing loan to you at cheaper rate?


Yes No0

100

200

300

400

500

600

0

500

0

100


FI'S PROVIDING LOAN AT CHEAPER RATE

NO

. OF

RESP

ON

DEN

TS

INTERPRETAION

It was really interesting there are no financial institutions which provide the loan at

cheaper rate. The people are in need of loan in order to meet their livelihood so

even they pay high rate of interest also and they are in need of any such institution

which provides loan to them at the cheaper rate.

9. Is there any SHG working in your village?


Yes No0

100

200

300

400

500

600

0

500

0

100


ANY SHG's WORKING

NO

. OF

RESP

ON

DEN

T

INTERPRETATION

Even there are no SHGs also working in these villages, so there is a huge

scope for the SHGs to come up in these villages and start their business. As

it is new emerging concept of linkage between SHG and bank to provide

empowerment to the downtrodden people of rural area. So as MFI we can

become pioneer in providing financial services by linking SHGs with our

micro finance enterprise.

10.Do you have any Photo Identity Proof?


Yes No0

100

200

300

400

500

600

487

13

97.4

2.6


ANY PHOTO IDENTITY PROOF

NO

. OF

RESP

ON

DEN

TS

INTERPRETATION

One good thing which was seemed out in these villages was that at least they

were having photo identity proof almost 97% of the people were having it.

So at least they were being recognized to be the Indian civilization.it means

most of them are fulfilling one of the criteria for giving them loan facility.

11.How many earning members are there in your family?


0 1 2 3 More than 30

50

100

150

200

250

3

151

197

100

49

0.6

30.239.4

209.8


NO. OF EARNING MEMBERS IN FAMILY

NO

. OF

RESP

ON

DEN

TS

INTERPRETATION

Nearly 70% of population was like that were only one or two members were the

earning members in the family and the rest other were dependent on them and this

lead to a huge pressure on the member who is earning and provide livelihood for

the rest of the members of the family. So family in which there are more than three

earning members can start their own business if provide them loan facility and

Families which have less than one earning member can get employment in the

same business. By this way we can provide them empowerment.

12. Do you think that is there any requirement of MFIs for providing you

loan?


Yes No0

100

200

300

400

500

600

500

0

100

0


REQUIREMENT OF MFI's

NO

. OF

RESP

ON

DEN

TS

INTERPRETATION

There was not a single individual who refused to us that they are not in

requirement of MFIs. Basically these villages need such types of institutes who

help them and provide loan to them at cheaper rates. Also provide them other

financial facility (i.e. micro insurance, acceptance of micro deposits etc.) which

they require most.

13. Do you possess any inherent skill in you?


Yes No0

50

100

150

200

250

300

350

400

450

500

63

437

12.6

87.4


INHERENT SKILL

NO

. OF

RESP

ON

DEN

TS

INTERPRETATION

There are nearly 13% of the population who possess specific skills like tailoring,

handicraft, etc. which can be effectively utilized and by this way they can groom

up and come up with new ideas and new concepts. We can also develop some new

skills by providing them training and utilize the same skill for getting business.

6. BUSINESS MODEL FOR“KALPTARUMICRO FINANCE

INSTITUTION”


MFIs satisfy the financial requirement of poor section of the society. We will plan

to give a loan (maximum up to Rs.5,000) to lower income group who are not

focused by commercial banks. For the purpose of getting success at MFIs at initial

stage we are required to give loan for productive asset only (i.e. loan for

purchasing equipment for handicraft item). If we give loan for a productive use

only then they will generate profit out of it.

Now problem of reimbursement of loan may take place. This problem can be

solving if we grant loan for productive use not for non-productive use. Now we are

required to collect this loan in an installment of small amount. Before they start to

earn profit from this productive asset we are required to collect principle amount

only. Once they are starting to earn profit we can get some of the portion of their

profit which is consider as interest income for us.

If we follow this model then we can generate profit from operation of MFIs by

doing business through this model for 2 to 3 years. Then we can have accumulated

profit that we can plough back and expand our business. Once after generating a

profit by this way and creating enough capital for us, now we can also give loan for

non-productive use and charge interest on it at nominal rate which will become

additional income for MFIs. And we can also increase the limit of loan providing

for productive purpose (more than Rs. 5,000). So if lower income people invests

more in productive asset and generate more and more profit, then it ultimately a

profit for MFIs only as they are sharing their profit for getting interest income.

6.1 Sources of income for MFIs


One of the major reasons for less development of MFIs is its dependability on

external sources for fund (i.e. donation, subsidies, etc.). If we want to get success

in MFIs then we have to rely less on external sources for fund. We can also

generate the fund for us through following sources:

1. Contribution from promoters

If we want to start MFI then it is required to invest some portion of money

from our side. If we invest money at initial level then we can start our

business and circulate this money by providing money. Once we start to

provide a loan then we will get income in form of interest and we can able to

expand our business in this case we would like to say that “MONEY CAN

ATTRACT MORE MONEY”.

2. Deposits from Public

One of the major sources of income for us after starting operation of our

business is to accept a small amount of deposit from lower income section of

the society. If a labor work into agriculture wants to invest and/or deposit

Rs. 50 then he cannot approach to a bank for such a small amount i.e. is a

big opportunity for us to collect fund through deposit to run our business.

Here we would like to say that “SMALL SMALL DROPS OF WATER

FILL THE LAKE”

3. Advertisement


A product which are producing with the help of asset purchase through our

borrowing we can put the name of any business organization on those

product as advertisement for those business organization. For e.g. if our

borrower produces sweater from woolen then we can put a sticker of Bank

of Baroda in that sweater or we can also give the same product in a

polythene printed on the name of Bank of Baroda. In return we can get

income from this bank as we are doing their advertisement.

As it is our business policy to motivate our borrower who can generate more

profit out of their productive asset so there by arranging a social function

and other event where number of people will come and so they can come to

know about our business and that is an indirect cost less advertisement for

our business. If we put hoarding of any business organization on those

functions so we can get revenue from them also. In this way an

advertisement becomes a major source of income for us.

4. Insurance Premium

As micro insurance is one of the product MFIs. We know that still many

insurance companies have not started up with micro insurance, so we can

approach to all that insurance companies and can tell them to have a tie up

with us or they can sell their micro insurance product to the employees of

our organization and hence through this was the insurance companies as well

as our business can be benefited from this.

5. Collection from Business Organization and NGOs


It is also a major source of income for us. Business organization believes in

doing CSR (corporate social responsibility) activities, if we convince them

to give this money to us. Now we can utilize the same to give micro loan

and providing other micro finance facility. Here in this case we will require

giving loan on the name of such an organization that provides money to us

not on the name of our organization. In this way both provider and users

(MFIs) are in benefit. MFIs get income in form of interest, while for

provider of loan it is CSR cum PUBLICITY.

6.2 Reward and recognition to borrower

Once we provide a loan for a productive purpose now we are required to create a

competitive environment among ours borrower that can motivate them to earn

more and more profit. In short, we are required to arrange some programs and

giving a reward in form of award or monetary benefit, to a person who generate

more profit from asset purchase with the help of our borrowing it gives recognition

and self-motivation to them for earning more and more profit.

As it is our business policy to have some portion of profit generated by them if

they earn more profit it will increase profitability of our business.


6.3 Products and services offered by Kaptur Micro Finance

Institution

1. Microloans

Microloans (also known as microcredit) are loans that have a small value; most

loans are less than US$100 in size. These loans are generally issued to small

scale entrepreneurs who run micro-enterprises in developing countries. Examples

of micro-enterprises include basket-making, sewing, street vending and raising

poultry. The average global interest rate charged on micro-loans is about 35%.

Although this may sound high, it is much lower than other available alternatives

(such as informal local money lenders). Moreover, MFIs must charge interest rates

that cover the higher costs associated with processing the labor-intensive micro-

loan transactions.

Kaptur Micro Finance Institution loan model

A group is comprised of six to 10 women/men, and 25-45 groups form a “center”.

Women/men are jointly responsible for the loan of their group, and of the

center. The first loan is Rs. 5,000.

It takes 50 weeks to reimburse principal and interest rate; the interest rate is 12%.

They are required to pay interest only after they start to earn profit out of the

asset purchased through loan provided by us. If they all reimburse they are

eligible for second loans of Rs.5,000-7,000; loans amounts increase up to Rs.

15,000 (if they are regular in paying loan consecutive for 3 years).


Unlike other micro finance organizations, Kalptaru Micro Finance Institution does

not require its clients to borrow to start a business: the organization recognizes

that money is fungible, and clients are left entirely free to choose the best use of

the money, as long as they repay their loan.

Eligibility criteria for loan

(a) female/male, (b) aged 18 to 59, (c) residing in the same area for at least

one year, (d) has valid identification and residential proof (ration card, voter

card, or electricity bill), (e) at least 80% of women/men in a group must own

their home. Groups are formed by women themselves, not by Kalptaru

Micro Finance Institution. Kalptaru Micro Finance Institution does not

determine loan eligibility by the expected productivity of the investment

(although selection into groups may screen out women/men who cannot

convince fellow group-members that they are likely to repay)

2. Micro savings

Micro savings accounts allow individuals to store small amounts of money for

future use without minimum balance requirements. Like

traditional savingsaccounts in developed nations, micro-savings accounts are

tapped by the saver for life needs such as weddings, funerals and old-age

supplementary income.

3. Micro-Insurance

Individuals living in developing nations have more risks and uncertainties in their

lives. For example, there is more direct exposure to natural disasters, such as

mudslides, and more health-related risks, such as communicable diseases.


Micro-insurance, like its non-micro counterpart, pools risks and helps provide risk

management. But unlike its traditional counterpart, micro-insurance allows for

insurance policies that have very small premiums and policy amounts. Examples of

micro-insurance policies include crop insurance and policies that cover outstanding

balances of micro-loans in the event a borrower dies. Due to the high

administrative expense ratios, micro-insurance is most efficient for MFIs when

premiums are collected together with microloan repayments.


7. SUGGESTIONS

1. MFIs should closely monitor the utilization of credit by their clients and

encourage them to use more for productive purpose.

2. They should take positive action to stimulate entrepreneurial spirit of an

economically weaker section of the society.

3. Agency related input for capacity building in terms of various other non-

financial services such as development of forward linkage (motivating

workshops, training activities, assisting in purchase of machinery and tools,

locating suppliers, etc.) and backward linkage (such as marketing assistance,

identification of dealer or sales person, development of common brand, etc.)

are also required for the development of micro finance enterprises.

4. The utilization of loan has a strong bearing on the economy, so MFIs should

follow up strongly for utilization and should take periodical feedback.

5. Proportion of economically weaker section of women is significantly less in

entrepreneurship category. To motivate women empowerment, they should

provide privilege loan to women.


8. CONCLUSION

Some valuable lessons can be drawn from the following experience of successful

micro finance operations. India is going to stand among the countries developed

and we must accept fact that poverty alleviation and reduction of income

inequalities, has to be the top most priority. In this backdrop impressive gain made

by SHG-Bank Linkage Programmed in coverage of rural population with financial

services offers a ray of hope. The paper argues for mainstreaming of impact

assessment and incorporation of local factors in service delivery to maximize

impact of SHG Bank Linkage Programmed on achievement of Millennium

Development Goals (MDGs) andnot letting go the opportunities.

The conclusion of this study is that micro finance can contribute to solve the

problem of inadequate housing and urban services as an integral part of poverty

alleviation programs. The challenges lies in finding the level of flexibility in the

credit instrument that could make it match the multiple credit requirements of the

low income borrowers without improving unbearably high cost of monitoring to

end use lenders. A promoting solution is to provide multipurpose loans or

composite credit for income generation, and consumption support.

Micro finance can indeed be sustained in the long run in a profitable manner; going

by the increasing number of commercial banks that have evinced interest in this

area, the future is seems to be bright. The changing face of micro finance in India,

appear to be positive in terms of the ability of micro finance to attract more funds

and therefore increase outreach. This will lead in measuring how this positions

micro finance in terms of poverty alleviation and social impact a going forward.


Micro finance remains a powerful tool for development. It may not be a panacea,

but it has brought a sea of change in the lives of many. Only spreading the outreach

of micro finance will bring down the cost of capital, the operating cost to

strengthen the bonding between micro finance and the formal financial system.

However, for sustainable development of the poor.

Rural economy, focus must be on development of rural infrastructure and rural

economy, to ensure that there exist activities which require financial assistance.


9. BIBLIOGRAPHY

Web URL

(1) http://www.investopedia.com/terms/m/micro finance.asp

(2) micro finance\Grameen Bank - Wikipedia, the free encyclopedia.htm

(3) Opportunity International - Wikipedia, the free encyclopedia.htm

(4) Www. Themix.org

(5) micro finance\GTZ Financial Sector Development Programme.htm

(6) http://www.cgap.org/p/site/c/template.rc/1.9.34818/

(7) http://www.rmmfi.org/?page_id=27

Magazines

Micro Finance in India a State of the Sector Report, 2007

ICFAI Banker Article on micro finance September 2009

Micro Finance as insight into the world of micro finance July-September 2009


http://www.rmmfi.org/?page_id=27

http://www.cgap.org/p/site/c/template.rc/1.9.34818/

http://www.investopedia.com/terms/m/microfinance.asp

ANNEXURES


10. ANNEXURES

Annexure – 1

Questionnaire

Dear Sir/Madam,

We are the students of Parul Institute of Management, Vadodara and

presently doing a Grand Project on “PROBLMES FACED BY MFIs AND

MEASURES TO SOLVE IT, Vadodara”. We request you to kindly fill the

questionnaire below and we assure you that the data generated shall be kept

confidential.

Name: ………………………………………………………………………..

Address: ……………………………………………………………………..

Contact No :®………………( O)……………… (M)………………………

City: ………...............Pin: ………………….Village: …………………….

1. Your Age: ____________________

2. Education Qualification.

(a) Illiterate (b) Primary

(c) S.S.C (d) H.S.C

(e) Graduate

3. Marital Status.

(a) Married (b) Single

No. of Children: __________


4. Number of years you are in this Village.

(a) Less than three year’s (b) More than three year’s

5. Occupation.

(a) Worker (b) Farmer

(c) Other

6. Your income per day.

(a) <than Rs.50 (b) Between Rs.50 to Rs.100

(c) Between Rs.100 to Rs. 150 (d) >than Rs. 150

7.Are you having a bank account?

(a) Yes (b) No


(a) Yes (b) No


(a) Yes (b) No

10. Do you have any photo identity proof?

(a) Yes (b) No

If yes, please specify which_______________________

11. How many earning members are there in your family?

(a) 1 (b) 2

(c) 3 (d) More than 3

12. Do you think that is there any requirement MFIs for providing you loan?

(a) Yes (b) No



(a) Yes (b) No

If yes then which_______________________

Date:

Signature by

Interviewer Interviewee

_____________ ____________

Thank You


Annexure – 2

1. Your Age?

Sr. No. Category No. of

Respondents

Percentage

1 16-20 Years 44 8.8

2 21-25 Years 99 19.8

3 26-30 Years 70 14

4 31-35 Years 73 14.6

5 36-40 Years 64 12.8

6 41-45 Years 65 13

7 46-50 Years 31 6.2

8 51-55 Years 20 4

9 56-60 Years 10 2

10 61-65 Years 8 1.6

11 66-70 Years 3 0.6

12 71-75 Years 13 2.6

Total 500 100

Annexure – 3


2. Education Qualification


Respondents

Percentage

1 Illiterate 165 33

2 Primary 167 33.4

3 S.S.C 75 15

4 H.S.C 35 7

5 Graduate 58 11.6

Total 500 100

Annexure – 4

3. Marital Status



Respondents

Percentage

1 Married 398 79.6

2 Unmarried 102 20.4

Total 500 100

Annexure – 5

4. Number of years you are in this village?


Respondents

Percentage

1 More than 3

years

496 99.2

2 Less than 3 years 4 0.8

Total 500 100

Annexure – 6

5. Occupation



Respondents

Percentage

1 Agriculture 115 23

2 Labor 205 41

3 Other 80 16

4 Unemployed 100 20

Total 500 100

Annexure – 7

6. Income per day



Respondents

Percentage

1 Rs.0 115 23

2 Less than Rs.50 111 22.2

3 Rs.50 to Rs.100 149 29.8

4 Rs.100 to Rs.150 101 20.2

5 More than Rs.150 24 4.8

Total 500 100

Annexure – 8

7. Are you having a bank account?


Respondents

Percentage

1 Yes 203 40.6

2 No 297 59.4

Total 500 100

Annexure – 9




Respondents

Percentage

1 Yes 0 0

2 No 500 100

Total 500 100

Annexure – 10



Respondents

Percentage

1 Yes 0 0

2 No 500 100

Total 500 100

Annexure – 11

10.Do you have any Photo Identity Proof?

Sr. No. Category No. of Percentage


Respondents

1 Yes 487 97.4

2 No 13 2.6

Total 500 100

Annexure – 12

11.How many earning members are there in your family?

Earnings Members No. of Respondents Percentage

0 3 0.6

1 151 30.2

2 197 39.4

3 100 20

More than 3 49 9.8

Total 500 100

Annexure – 13

12.Do you think that is there any requirement MFIs for providing you loan?


Respondents

Percentage


1 Yes 500 100

2 No 0 0

Total 500 100

Annexure – 14



Respondents

Percentage

1 Yes 63 12.6

2 No 437 87.4

Total 500 100


problems faced by micro finance institutions and measures to solve it

Documents