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A

Project Report

On

“Role & Implications of Micro Finance”

Submitted in Partial fullfilment for the Award of degree of

Master of Business Administration

2009-2011

Submitted to :- Submitted by

Ankit Kumar Jain

(MBA IV SEM)

MANAGEMENT & COMMERCE INSTITUTE OF GLOBAL SYNERGY

(Approved by AICTE, Affiliated to Rajasthan Technical University of Kota)

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Certificate

This is to certify that Mr. Ankit Kumar Jain is a student of MANAGEMENT &

COMMERCE INSTITUTE OF GLOBAL SYNERGY which is affiliated to

Rajasthan Technical University, Kota.

The project undertaken by him is prepared as per my knowledge and the work

has been completed by him under my guidance.

Date

(Lecturer MIGS)

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ACKNOWLEDGEMENT

"Gratitude is not a thing of expressions, it is more matter of feeling."

My Disseration Report work includes the contribution of number of people who supported me throughout

my tenure. I take this opportunity to thank all of them from the core of my heart

There is always a sense of gratitude which one express towards others for their help and supervision in

achieving the goals. This formal piece of acknowledgement is an attempt to express the feeling of gratitude

towards people who helpful me in successfully completing of my training.

I would like to express my deep gratitude to… my supervisor for her constant co-operation. He/She was

always there with her competent guidance and valuable suggestion throughout the pursuance of this research

project.

Special thanks to Dr. N.S. Kothari our Principal who guided me to work honestly and to give valuable

suggestion for improving my work last but not least I would also like to place of appreciation to all the

respondents whose responses were of utmost importance for the project.

Above all no words can express my feelings to my parents, friends all those people who supported me during

my project. I am also thankful to all the respondents whose cooperation & support has helped me a lot in

collecting necessary information. I would also like to thank almighty God for his blessings showered on me

during the completion of project report.

At last, I am also thankful to Prof. Mr. Ishwar Tharaney (Director of MIGS), Family members of MIGS,

my Parents and my Friends, to all known and unknown individuals who have given me their constructive

advise, educative suggestion, encouragement, co-operation and motivation to prepare this report

(ANKIT KUMAR JAIN)

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CONTENTS PAGE NO.

1. MICROFINANCE FAQ‘S 5

2. MICROFINANCE OVERVIEW 11

3. MICROFINANCE IN INDIA 14

4. MICROFINANCE INSTITUTIONS 32

5. SHG BANK LINKAGE MODEL 40

6. URBAN MICROFINANCE 48

7. MICROFINANCE IN NGO‘S 54

8. FUTURE OF MICROFINANCE IN INDIA 66

9. INTRODUCTION OF NABARD & SIDBI 72

10. RESEARCH METHODOLOGY 81

11. FACTS & FINDING 90

12. DATA ANALYSIS AND INTERPRETATION 92

13. SWOT ANALYSIS 111

14. CONCLUSIONS 115

15. SUGGESTIONS 119

16. ANNEXURE 121

17. BIBLIOGRAPHY 125

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Microfinance

FAQS

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Microfinance FAQS

What is microfinance?

Microfinance began as a financial system to provide poor families with very small loans (microcredit) to help

members begin or sustain income-generating activities. Microcredit arose in the 1970s, through the efforts of

Mohammad Yunus, a microfinance pioneer and founder of the Grameen Bank of Bangladesh.

The definition of microfinance has since broadened, and includes savings, insurance, and money transfer

vehicles; the industry has realized that those who lack access to traditional formal financial institutions actually

require and desire a variety of financial products.

Microcredit has largely been directed by the non-profit sector, but recently we see (as in the case of SKS) the

emergence of ―for-profit‖ MFIs. In India, these ‗for-profit‘ MFIs are referred to as Non-Banking Financial

Companies (NBFCs).

What is a Microfinance Institution (MFI)?

A microfinance institution is an organization that offers financial services to low income populations. Almost

all give loans to their members, and many offer insurance, deposit and other services. Various types of institutions

offer microfinance: NBFCs, NGOs, cooperatives, private commercial banks and sectors of government banks.

Some NGOs offer microcredit as one slice amongst a host of non-financial development activities. SKS has

opted instead to focus solely on microfinance, to develop the most efficient and effective mechanisms to deliver

finance to the poor.

How does microfinance help the poor?

Microfinance plays an important role in fighting the multi-dimensional aspects of poverty. Microfinance

increases household income, which leads to attendant benefits: increased food security, the building of assets, and an

increased likelihood of educating one‘s children.

Microfinance is also a means for self-empowerment. It enables the poor, especially women, to become

economic agents of change - they increase income, become business-owners and reduce their vulnerability to external

shocks (illness, weather, etc)

When is microfinance not an appropriate tool?

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Microcredit is best-suited to those with entrepreneurial capability and opportunity. This translates to those

poor who work in growing economies, and who can undertake activities that generate weekly stable incomes.

Microfinance is inclusive of a much larger range of clients.

However, many poor do not fit within the current structure of microfinance. One reason for this is extremely

poor people (destitute and homeless) lack a stable income. Without a stable income, it is difficult to make the weekly

repayments that microcredit requires. Credit requires a 98% ―hit‖ rate to be successful, as high default rates

undermine the very principles of lending.

Programs have been developed to provide these ―very poor‖ with safety net programs that offer basic

subsistence. At SKS, our NGO-arm, SKS Assist aims to do so, and endeavors to graduate members to our

microfinance program.

Why do MFIs charge such high interest rates to poor people?

Providing financial services to poor people is expensive. This cost is one of the most important reasons why

banks don't make small loans. For example, a Rs.2,000 loan requires the same amount of resources as a

Rs.1,00,000 loan.

Microfinance is a high-touch business: At SKS, field staff managers must perform village surveys before

entering a village, conduct interviews with potential members, train members on credit discipline, travel to villages by

motorbike every week to collect interest and disburse loans, and follow-up to ensure the loans are being used for their

intended purpose. These personnel and administration costs easily amount to 11% of our total cost structure.

In addition, we must borrow from commercial sources to lend to our members. This cost of lending is

anywhere from 10-12%. The combination of this personnel/administration costs, the cost of lending, a 1-2% loan loss

provision (due to default or writing off a loan), and 1-2% profit used to expand operations, translates to an interest

that appears high. However, it is the lowest possible interest we can charge to cover our costs. As the microfinance

industry matures, and MFIs like SKS continue to scale and increase efficiency, our cost of lending may reduce. And,

if commercial banks reduce their own rates, we can and will deliver these savings to our borrowers.

How do you know microfinance is making an impact?

Microfinance has gained popularity for several reasons. One, it is a much better alternative than the informal

financial sector. In India for example, moneylenders charge rates of 36-72%. Secondly, members realize the value

of assured long-term access to credit. Many SKS clients have been with us since inception in 1998, and have

consistently taken loans each year.

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This access to finance allows women to increase income, which benefits the entire household. How do we

know this? Our return on investment (ROI) calculations demonstrate that most borrowers earn anywhere from 25%-

200% more than the interest rate charged, due to low infrastructure costs, no tax or legal costs, and the overall capital

cost that is just a small percentage of the total cost.

Why doesn‟t SKS allow members to save?

SKS is a Non-Banking Financial Company (NBFC), and is therefore regulated by the Reserve Bank of India

(RBI). RBI regulations do not allow NBFCs to hold savings deposits.

Why do you only lend to women?

Social development studies have demonstrated that women are much more likely to reinvest income into the

household, for the benefit of the entire family.

Can microfinance be profitable?

Yes it can, as SKS demonstrates.

Data from the Micro Banking Bulletin reports that 63 of the world's top MFIs had an average rate of return,

after adjusting for inflation and after taking out subsidies programs might have received, of about 2.5% of total assets.

This lends to the hope that microfinance can be sufficiently attractive for investors, as well as the mainstream into the

retail banking sector.

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Comparison of New and Old Microfinance

Base Old Microfinance New Microfinance

Rules of Model Intricate, explicit rules dictated and

directed by MFI

Simple rules made by groups

Institutional Thrust Single actor providing both organizing

and credit services

Multiple actors providing organizing,

savings, and credit services

Growth Strategy Reliance on paid animators (field

workers) to engage community members

to participate in scheme

Growth often resulting from ―ripple

effect‖: groups forming new groups; local

volunteers spreading information

Locus of

Sustainability

Self-sufficiency sought at institutional

level; institution to cover all costs

through internally generated income

Self-sufficiency sought at group level;

group able to cover costs through

members‘ labor and internally generated

cash

Transparency of

Options

MFIs tempted to withhold information

concerning competitive local resources

(e.g. lower interest loans)

NGOs have no reason to hold back

important information and options that

speak to the best interests of groups and

members

Service Providers MFIs provide group organizing

functions, credit, and in some cases,

savings and insurance (insurance often

provided by third parties)

SHPIs provide group-organizing

functions; groups and banks provide

credit; third parties provide insurance

Financial Service

Focus

Credit-led with savings services in some

cases; credit minimum high in order to

cover transaction costs of borrower

Savings-led, based on the concept of

thrift; credit minimum nil, as group bears

costs

Credit Profile Credit tailored to the needs of the

financial institution for cost purposes;

loan terms and repayment practices based

on institutional viability; therefore rigid

regarding regular payments of principal

Financial services flexible and based on

capacity of each group member; terms

often negotiated— even mid-term—to

adjust to repayment capacity of borrower

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Base Old Microfinance New Microfinance

Loan Purpose Initial loans typically designated for

income generating purposes

Initial loans typically used for any purpose

Interest Rate Calculated to cover costs of specialized

institution plus institutional and investor

need for return on investment; rates often

ranging from 36% to 87% (CRS MFIs)

Calculated by group to cover ―hard costs‖

and varying according to group need for

return on investment; group level rates

often range 24%–60%; Bank rates 12–

13%

Depth of Outreach High minimum loan amounts (at least Rs.

1000 per member) preventing reaching

the poorest; also, rigidity in repayment of

principal excludes seasonal cash flow

patterns of poorest

Low minimum loan amounts allow even

the most risk-averse poor to participate;

flexible repayment of principal (both at

group and bank level) consider the

variable cash flow of the poorest

Drop Outs CRS own data shows 11% lowest rate;

some programs with 30%

Less than 5% per year (undocumented

officially; data drawn from CRS-partner

reports)

Annual Investment

per Client

Investment and opportunity costs high; in

initial five years investment is as high as

Rs. 15000 per client, including operating

subsidy plus loan capital

Investment and opportunity costs low; in

initial five years, investment is as low as

nil (for self replicating groups) and as

high as Rs. 500 per year per client (for

CRS/partner supported groups)

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MICRO

FINANCE

AN

OVERVIEW

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1. MICROFINANCE - AN OVERVIEW

1.1Micro Finance Background

Micro-credit for the poor has emerged as an idea that appeals to several sections of people. In principle, even

the world's poorest people can acquire savings and investment if they have access to capital. The strategy is

redistributive (appeals to liberals), entrepreneurial (appeals to conservatives) and empowering (appeals to radicals).

The emergence of micro-credit as an alternative to the existing methods of addressing rural poverty through the

provision of credit has questioned the fundamentals of the development paradigm in developing countries. Though it

was not the first micro lending institution, the famed Grameen Bank (http://www.grameen-info.org/) of Bangladesh

has become the most celebrated and widely imitated. Grameen, which began as an experiment initiated in 1976 by

economist Muhammed Yunus, became a full-fledged bank in 1983. In a Muslim country with strong patriarchal

traditions, empowering women, as Grameen did, had social-change implications far beyond immediate

entrepreneurship. It also made sound business sense, since repayment rates remained high, generally above 95%. .

The Grameen model has inspired more than 10,000 micro lending organizations providing loans to more than

25 million poor people throughout the world, most of them women. The number of these organizations grew

dramatically during the 1990s, spurred by the notion of 'self-help' and a faith in the creditworthiness and

entrepreneurial potential of the poor. The movement took off with strong support both from the free-enterprise zealots

of the right and the anti-poverty warriors of the left.

But three decades into the vast social experiment of lending to the poor, many questions remain. Does micro-

credit really help the world's poorest citizens? Does it genuinely empower women? How well has the Grameen model

worked in other countries? And can we expect it to be sustainable without subsidy?

Micro-Credit in India: The Early Years

Micro-credit is not a new idea in India. Research conducted in India by t he National Bank for Agriculture

and Rural Development (NABARD) (http://www.nabard.org/) during the early-'80s showed that despite a wide

network of rural bank branches which implemented specific poverty alleviation programmes that sought creation of

self- employment opportunities through bank credit for almost two decades, a very large number of the poor

continued to remain outside the fold of the formal banking system.

NABARD had been set up in 1982 under an Act of Parliament as a development bank to provide and regulate

credit and other facilities for the promotion and development of agriculture, cottage and village industries, handicrafts

and other allied economic activities in rural areas with a view to "promoting integrated rural development and

securing prosperity of rural a Rural development, special schemes and rural banking could not tackle the widespread

poverty in rural areas. Research indicated that existing banking policies and procedures were perhaps not suited to the

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immediate needs of the very poor. What they really needed was better access to these services and products, rather

than cheap, subsidized credit. The priority of the rural poor appeared to be consumption credit, savings, production

credit and insurance. Consumption needs included credit for short periods for emergent needs, which were usually

met by informal sources at exploitative interest rates, as poor borrowers were unable to offer banks any security for

small consumption loans

Against this background, a need was felt for alternative policies, systems and procedures, savings and loan

products, complementary services, and new delivery mechanisms which would fulfill the requirements of the poorest,

especially of the women members of such households. The Grameen Bank in neighbouring Bangladesh had already

proved a successful model of micro lending in South Asia. The self-help group model, pioneered by the Grameen

Bank, emerged as a viable strategy to tackle these issues ' both for borrowers as well as banks.

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MICRO

FINANCE

IN

INDIA

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1.2 Micro Finance in India

Microfinance Institutions in India

More than subsidies poor need access to credit. Absence of formal employment make them non `bankable'.

This forces them to borrow from local moneylenders at exorbitant interest rates. Many innovative

institutional mechanisms have been developed across the world to enhance credit to poor even in the

absence of formal mortgage. The present paper discusses conceptual framework of a microfinance

institution in India. The successes and failures of various microfinance institutions around the world have

been evaluated and lessons learnt have been incorporated in a model microfinance institutional mechanism

for India.

Micro-finance and Poverty Alleviation

Most poor people manage to mobilize resources to develop their enterprises and their dwellings slowly over

time. Financial services could enable the poor to leverage their initiative, accelerating the process of building

incomes, assets and economic security. However, conventional finance institutions seldom lend down-market to serve

the needs of low-income families and women-headed households. They are very often denied access to credit for any

purpose, making the discussion of the level of interest rate and other terms of finance irrelevant. Therefore the

fundamental problem is not so much of unaffordable terms of loan as the lack of access to credit itself (Kim 1995). .

Over the last ten years, however, successful experiences in providing finance to small entrepreneur and

producers demonstrate that poor people, when given access to responsive and timely financial services at market

rates, repay their loans and use the proceeds to increase their income and assets. This is not surprising since the only

realistic alternative for them is to borrow from informal market at an interest much higher than market rates.

Community banks, NGOs and grassroot savings and credit groups around the world have shown that these micro

enterprise loans can be profitable for borrowers and for the lenders, making microfinance one of the most effective

poverty reducing strategies.

To be successful, financial intermediaries that provide services and generate domestic resources must have

the capacity to meet high performance standards. They must achieve excellent repayments and provide access to

clients. And they must build toward operating and financial self-sufficiency and expanding client reach.

Strategic Issues

Is there a prevailing paradigm for micro-finance?

Are there clearly visible pattern across the country?

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Is there a clearly defined foundation building blocks such as organizing principles, gender

preferences and operational imperetives?

What are methodological issues?

Institutional Issues

Is there a need for a new institution?

Should it operate all India or in a state?

Where should it be located?

Who can lead an institution of this sort?

What will its contextual interconnections be?

Who will be its beneficiaries?

Connectivity Issues

How should the Corporate Financial Sector be involved?

What is the role of donor agencies?

How should communities be involved?

Are there political issues that should be explicitly considered?

Are there government policy issues?

The Formal Sector Institutions

Traditionally, the formal sector Banking Institutions in India have been serving only the needs of the

commercial sector and providing loans for middle and upper income groups. Similarly, for housing the HFIs

have generally not evolved a lending product to serve the needs of the Very LIG primarily because of the perceived

risks of lending to this sector. Following risks are generally perceived by the formal sector financial institutions:

Credit Risk

High transaction and service cost

Absence of land tenure for financing housing

Irregular flow of income due to seasonality

Lack of tangible proof for assessment of income

Unacceptable collaterals such as crops, utensils and jewellery

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As far as the formal financial institutions are concerned, there are Commercial Banks, Housing Finance

Institutions (HFIs), NABARD, Rural Development Banks (RDBs), Land Development Banks Land Development

Banks and Co-operative Banks (CBs). .

The Government has taken several initiatives to strengthen the institutional rural credit system. The rural

branch network of commercial banks have been expanded and certain policy prescriptions imposed in order to ensure

greater flow of credit to agriculture and other preferred sectors.

The Existing Informal financial sources

The informal financial sources generally include funds available from family sources or local money lenders.

The local money lenders charge exorbitant rates, generally ranging from 36% to 60% interest due to their

monopoly in the absence of any other source of credit for non-conventional needs. Chit Funds and Bishis are other

forms of credit system operated by groups of people for their mutual benefit which however have their own

limitations.

Lately, few of the NGOs engaged in activities related to community mobilization for their socio-economic

development have initiated savings and credit programmes for their target groups. These Community based financial

systems (CBFS) can broadly be categorized into two models: Group Based Financial Intermediary and the NGO

Linked Financial Intermediary.

Most of the NGOs like SHARAN in Delhi, FEDERATION OF THRIFT AND CREDIT ASSOCIATION

(FTCA) in Hyderabad or SPARC in Bombay have adopted the first model where they initiate the groups and provide

the necessary management support. Others like SEWA in Ahmadabad or BARODA CITIZEN's COUNCIL in Baroda

pertain to the second model.

The experience of these informal intermediaries shows that although the savings of group members, small in

nature do not attract high returns, it is still practiced due to security reasons and for getting loans at lower rates

compared to that available from money lenders. These are short term loans meant for crisis, consumption and income

generation needs of the members. The interest rates on such credit are not subsidized and generally range between 12

to 36%. Most of the loans are unsecured. In few cases personal or group guarantees or other collaterals like jewellery

is offered as security.

The Wholesalers will include agencies like NABARD, Rashtriya Mahila Kosh-New Delhi and the Friends of

Women's World Banking in Ahmadabad. Few of the NGOs supporting SHG Federations include MYRADA in

Bangalore, SEWA in Ahmadabad, PRADAN in Tamilnadu and Bihar, ADITHI in Patna, SPARC in Mumbai, and

ASSEFA in Madras etc. While few of the NGOs directly retailing credit to Borrowers are SHARE in Hyderabad,

ASA in Trichy, RDO Loyalam Bank in Manipur.

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Strengths of Informal Sector

A synthesis that can be evolved out of the success of NGOs/CBOs engaged in microfinance is based on

certain preconditions, institutional and facilitating factors.

Preconditions to Success:

Those NGOs/ CBOs have been successful that have istilled financial value/ discipline through savings and

have demonstrated a matching value themselves before lending. A recovery system based on social intermediation

and various options including non-financial mechanisms has proved to be effective. Another important feature has

been the community governance. The communities in which households are direct stake holders have successfully

demonstrated the success of programs. A precondition for success is to involve community directly in the program.

Experience indicates that savings and credit are both critical for success and savings should precede credit. Chances

of success more with women: Programs designed with women are more successful.

Operating Indicators

The operating indicators show that programs which are designed taking into account the localized and

geographical differences have been successful. Effective and responsive accounting and monitoring mechanisms have

been an important and critical ingredient for the success of programs. The operational success has been more when

interest rates are at or near market rates: The experience of NGOs/CBOs indicates that low income households are

willing to pay market rates. The crucial problem is not the interest rates but access to finance. Eventually in absence

of such programs households end up paying much higher rates when borrowing from informal markets. Some NGOs

have experimented where members of community decide on interest rates. This is slightly different from Thailand

experience where community decides on repayment terms and loan amount. A combination of the three i.e. interest

rates, amount and repayment period if decided by community, the program is most likely to succeed. A program

which is able to leverage maximum funds from formal market has been successful. Experience indicates that it is

possible to leverage higher funds against deposits.

Facilitating Factor

Another factor that has contributed to the success is the broad environment. A facilitative environment and

enabling regulatory regime contributes to the success. The NGOs/CBOs which have been able to leverage funds from

formal programs have been successful. An essential factor for success is that all development programs should

converge across sectors.

Weaknesses of Existing Microfinance Models

One of the most successful models discussed around the world is the Grameen type. The bank has

successfully served the rural poor in Bangladesh with no physical collateral relying on group responsibility to replace

the collateral requirements. This model, however, has some weaknessed. It involves too much of external subsidy

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which is not replicable Grameen bank has not oriented itself towards mobilizing peoples' resources. The repayment

system of 50 weekly equal installments is not practical because poor do not have a stable job and have to migrate to

other places for jobs. If the communities are agrarian during lean seasons it becomes impossible for them to repay the

loan. Pressure for high repayment drives members to money lenders. Credit alone cannot alleviate poverty and the

Grameen model is based only on credit. Micro-finance is time taking process. Haste can lead to wrong selection of

activities and beneficiaries.

Another model is Kerala model (Shreyas). The rules make it difficult to give adequate credit {only 40-50

percent of amount available for lending). In Nari Nidhi/Pradan system perhaps not reaching the very poor.

Most of the existing microfinance institutions are facing problems regarding skilled labour which is not

available for local level accounting. Drop out of trained staff is very high. One alternative is automation which is not

looked at as yet. Most of the models do not lend for agriculture. Agriculture lending has not been experimented.

Risk Management : yield risk and price risk

Insurance & Commodity Future Exchange could be explored

All the models lack in appropriate legal and financial structure. There is a need to have a sub-group to

brainstorm on statutory structure/ ownership control/ management/ taxation aspects/ financial sector prudential

norms. A forum/ network of micro-financier (self regulating organization) is desired.

1.2.1 A New Paradigm

A new paradigm that emerges is that it is very critical to link poor to formal financial system, whatever the

mechanism may be, if the goal of poverty alleviation has to be achieved. NGOs and CBOs have been involved in

community development for long and the experience shows that they have been able to improve the quality of life of

poor, if this is an indicator of development. The strengths and weaknesses of existing NGOs/CBOs and microfinance

institutions in India indicate that despite their best of efforts they have not been able to link themselves with formal

systems. It is desired that an intermediary institution is required between formal financial markets and grassroot. The

intermediary should encompass the strengths of both formal financial systems and NGOs and CBOs and should be

flexible to the needs of end users. There are, however, certain unresolved dilemmas regarding the nature of the

intermediary institutions. There are arguments both for and against each structure. These dilemmas are very

contextual and only strengthen the argument that no unique model is applicable for all situations. They have to be

context specific.

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Dilemmas

Community Based Investor Owned

Community Managed

Community (self) financed

Integrated (social & finance)

Non profit / mutual benefit

Only for poor

'Self regulated'

Professionally managed

Accepting outside funds for on-lending

Minimalist (finance only)

For profit

For all under served clients

Externally regulated

The four pillars of microfinance credit system (Fig. 1) are supply, demand for finance, intermediation and

regulation. Whatever may the model of the intermediary institution, the end situation is accessibility of finance to poor.

The following tables indicate the existing and desired situation for each component.

DEMAND

Existing Situation Desired Situation

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fragmented

Undifferentiated

Addicted, corrupted by capital & subsidies

Communities not aware of rights and responsibilities

Organized

Differentiated (for consumption,

housing)

Deaddicted from capital & subsidies

Aware of rights and responsibilities

SUPPLY

Existing Situation Desired Situation

Grant based (Foreign/GOI)

Directed Credit - unwilling and corrupt

Not linked with mainstream

Mainly focussed for credit

Dominated

Regular fund sources

(borrowings/deposits)

Demand responsive

Part of mainstream (banks/FIs)

Add savings and insurance

Reduce dominance of informal,

unregulated suppliers

INTERMEDIATION

Existing Situation Desired Situation

Non specialized

Not oriented to financial analysis

Non profit capital

Not linked to mainstream FIs

Not organized

Specialized in financial services

Thorough in financial analysis

For profit

Link up to FIs

Self regulating

REGULATION

Existing Situation Desired Situation

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Focussed on formal service providers (informal not

regulated)

regulating the wrong things e.g. interest rates

Multiple and conflicting (FCRA, RBI, IT, ROC,

MOF/FIPB, ROS/Commerce)

Negatively oriented

include/informal recognise e.g. SHGs

Regulate rules of game

Coherence and coordination across

regulators

Enabling environment

1.2.2 The Profile of Microfinance in India

The profile of micro finance in India at present can be traced out in terms of poverty, it is estimated that 350

million people live Below Poverty Line and this translates to approximately 75 million households with annual credit

demand by the poor in the country is estimated to be about Rs. 60,000 crores.

The following are some of important components of microfinance:

Cumulative disbursements under all microfinance programmes is only about Rs. 5000 crores.(Mar.

04)

Total outstanding of all microfinance initiatives in India estimated to be Rs. 1600 crores. (March 04)

Only about 5 % of rural poor have access to microfinance.

Though a cumulative of about 20 million families have accessed microfinance to the extent of Rs.

5000 crores, the total outstanding is estimated to be only about Rs. 1600 crores. The active

borrowers are estimated to have a per capita outstanding of only Rs. 2500.

While 10 % lending to weaker sections is required for commercial banks, they neither have the

network for lending and supervision on a large scale nor the confidence to offer term loans to big

MFIs.

• The non poor comprise of 29 % of the outreach.

Non-Institutional or Informal Sources of Micro-Credit in India

In nutshell, one can say that RFIs do not fulfill the credit needs of the farmers, rural producers and the rural

poor in general, resulting in non-institutional sources of credit. The indirect reason responsible for the growth of non-

institutional sources of credit was also the economic weakness of the Jajmani System*. The non-institutional sources

of credit would include big farmers, big farmer-cum-money-lenders, commission agents, friends/ relatives,

moneylenders, traders, village shopkeepers and others. The All India Rural Credit Survey Committee, appointed by

the RBI in 1951 under the Chairmanship of Gorwala, undertook a comprehensive survey of rural credit and submitted

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its report in August 1954. The survey revealed that shares of institutional and non-institutional sources of rural credit

were 7.3 per cent and 92.7 per cent respectively.

In brief analysis micro finance chronology can be evaluated by the following steps:

Microfinance has been in practice for ages (though informally).

Legal framework for establishing the co-operative movement set up in 1904.

Reserve Bank of India Act, 1934 provided for the establishment of the Agricultural Credit

Department.

Nationalisation of banks in 1969

Regional Rural Banks created in 1975.

NABARD established as an apex agency for rural finance in 1982.

• Passing of Mutually Aided Co-op. Act in AP in 1995.

The Status of Microfinance

• Considerable gap between demand and supply for all financial services

Majority of poor are excluded from financial services. This is due to, inter-alia, the following

reasons

Bankers feel that it is fraught with risks and uncertainties.

High transaction costs

Unfavourable policies like caps on interest rates which effectively limits the viability of serving the

poor.

While MFIs have shown that serving the poor is not an unviable proposition there are issues that

have constrained MFIs while scaling up.

About 56 % of the poor still borrow from informal sources.

70 % of the rural poor do not have a deposit account

87 % have no access to credit from formal sources.

Less than 15 % of the households have any kind of insurance.

Negligible numbers have access to health insurance (0.4 %) and crop insurance (0.2 %).

• NABARD‘s bank linkage program has cumulatively reached a total of 9.4 lakh SHGs with about 1.4 crore

households.

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Opportunities for Micro-Finance Sector in India

Keeping in view of above mentioned issues relating to how and why the rural informal credit system is

strengthened, NGOs are need to sensitize the state institutions and NGOs it self has to take initiatives for the rural

banking in micro rural credit system. Moreover, rural population is a major population segment in India.

According to the 2001 Census of India 2001, 72.22 percent of the total population is rural and dependent on

agriculture and allied activities for their livelihood. Due to the failure of agricultural reforms and not adopting a

farmer-oriented agricultural policy, growth rate of employment in agriculture sector has declined from 2.32 per cent

in 1972-73 to 1.2 per cent in 1983 to 0.65 per cent in 1985. Agriculture contributed only 31.7 percent to GDP in

1993-94 down from 56.5 per cent in 1951. But this is not the complete picture of the rural economy. The rural

economy has a strong base for employment generation.

Rural economy still accounts nearly 40 per cent of India‘s GDP including 10 per cent of RNFS. Share of

exports in GDP has increased from 6.2 per cent in 1991-92 to 9.2 per cent in 1994-95. Major contribution to exports

comes from the agricultural and allied sectors such as handloom, power loom, gem and jewellery, handicrafts,

carpets, leather and mineral products, all of which have at least one primary rural production base. .

Rural non-agricultural activities have thus been growing much more rapidly than the overall employment,

agricultural employment and also urban employment. In fact, the non-agricultural rural employment has grown at an

average rate of about 5 per cent during the ten-year period 1977-78 to 1987-88. Consequently, there has been a shift

from agriculture in which employment has grown at a rate of only 0.74 per cent, to the non-agricultural activities.

It is because of decrease in self-employment and regular wages/ salaried employment in agriculture and

increase in employment in non-agricultural sector. Micro-enterprises established in RNFS contribute about 40 per

cent of the gross industrial turnover and 34 per cent of total exports. RNFS is the potential sector for employment

generation through establishment of micro-enterprises.

There is a need to match the decline in agriculture sector with the gain in non-farm activities, to absorb the

surplus labour from agriculture. Eighth Five-Year Plan document (Government of India 1992: 122) states that: "In the

long run, however, it must be recognized that agriculture and other land-based activities, ever with a reasonably high

rate and possible diversification of growth, will not be able to provide employment to all the rural workers at

adequate levels of incomes.

Indian microfinance continued growing rapidly towards the main objective of financial inclusion, extending

outreach to a growing share of poor households, and to the approximately 80 percent of the population which has yet

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to be reached directly by the banks. The larger of the two main models, the Self-Help Group (SHG) Bank Linkage

Programme (SBLP) covered about 143 million poor households in March 2006 and provided indirect access to the

banking system to another 14 million, including the "borderline poor".

1.2.3 Models of Micro Finance

There are different models followed by the different microfinance institutions in India. The following are the

some of established microfinance and their activities in microfinance can be seen here.

Grameen bank

Spandana

Grameen koota

Swayam krishi sangam

Danda credit society

Grameen Bank

Grameen Bank (GB) has reversed conventional banking practice by removing the need for collateral and

created a banking system based on mutual trust, accountability, participation and creativity. GB provides credit to

the poorest of the poor in rural Bangladesh, without any collateral. Professor Muhammad Yunus, the founder of

"Grameen Bank"

As of July, 2004, it has 3.7 million borrowers, 96 percent of whom are women. With 1267 branches, GB

provides services in 46,000 villages, covering more than 68 percent of the total villages in Bangladesh.

General features of Grameen credit are :

a. It promotes credit as a human right

b. Its mission is to help the poor families to help themselves to overcome poverty. It is targeted to the poor,

particularly poor women.

c. Most distinctive feature of Grameen credit is that it is not based on any collateral, or legally enforceable

contracts. It is based on "trust", not on legal procedures and system.

d. It is offered for creating self-employment for income-generating activities and housing for the poor, as

opposed to consumption

e. It was initiated as a challenge to the conventional banking which rejected the poor by classifying them to be

"not creditworthy". As a result it rejected the basic methodology of the conventional banking and created its

own methodology.

SPANDANA

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Institution's Mission

Spandana envisions itself as a financially self sustainable Micro Finance Institution with a diversified

ownership. It is committed to strengthening significantly the socio-economic status of poor women in Rural and

Urban areas by providing technical and financial services on a continued basis for establishing their identity and

self-image

Products

Loans

Voluntary Savings

Insurance

Main Funding Sources

Grants

Loans

Savings

Largest funder for Micro Finance

The following institutions are the important funders:

ICICI Bank, SIDBI, Indian Overseas Bank, HDFC Bank, IDBI Bank, ABN AMRO Bank, ING Vysya Bank,

HDFC, UTI Bank.

SHARE Micro Finance Limited

Introduction

SML started operations in 1989 as a not-for-profit society. It was the first MFI in India to obtain a

NBFC (non-deposit accepting) license and also the first Indian MFI to carry out a microfinance

securitization transaction.

SML has employed a for-profit approach to create social returns by channeling funds from

development institutions and commercial banks as collateral-free loans to Joint Liability Groups (JLGs).

JLGs are the central element of the Grameen lending methodology adopted by SML.

Vision

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To improve the quality of life of the poor by providing access to financial and support services add

to be a viable financial institution developing sustainable communities.

Our Mission

• To mobilize resources to provide financial and support services to the poor, particularly women, for viable

productive income generation enterprises enabling them to reduce their poverty

Objectives

To provide financial services predominantly to poor women.

To create opportunities for self- employment for the underprivileged.

To train rural poor in simple skills and enable them to utilize the available resources and contribute

to employment and income generation in rural areas.

Loan Proposals and their Processing

In the first step, every member who intends to access credit from the company has to complete the

compulsory group training programme and Group Recognition Test organized by the company. This

programme is conducted by the Field Credit Assistant (FCA) or a designated staff member, authorized by

SML.

Primary data is collected in a prescribed format from borrower/member to comply with the KYC

(Know your Customer) norms.

FCA should verify the loan application and completely fill the following information:

Date of application

Borrower identification particulars

Loan product details

Loan Amount

Need for Loan

Applicable interest rates

Term of the Loan

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Repayment particulars

• Acceptance by the borrower‘s family member / the relevant SHG members

The expected date of loan disbursement should be mentioned on the loan application form and to be

intimated to the borrower / member.

Loan appraisal and Terms & conditions

FCA or designated staff of the Company should convey to the borrower/member the amount of loan

sanctioned along with the terms and conditions including the annualized rate of interest and method of

repayment of the loan.

Disbursement procedure of loans

Authorized staff of SML should verify the Loan application along with all securities, sureties and

approvals, which is applicable as per the applicable policy of the company.

Demand promissory Note

Surety or guarantee

SHG members/Group acceptance

Family members‘ acceptance

Acceptance of the terms and conditions by the borrower/member for rate of interest, processing

charges if any and repayment terms.

Documentation for Hypothecation or charge creation or any security or surety/guarantee

The acceptance letter

• Letter of confirmation of deposit of security documents

The Company keeps all the documents in the safe custody in the respective premises by the

authorized persons. Loan passbook has to be given to every borrower/member for each loan. The loan

passbook contains the repayment schedule, effective interest rate and other processing charges etc. The

company gives prior notice of any change in the interest rate and other charges to the borrower / member.

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Microfinance and Enterprises

15%05%80%1,105Non Farm

21%07%72%282Animal husbandry

22%23%55%168Agriculture

17%08%76%1,555Total

No changeDecreaseIncrease No.Enterprises

Income change across sector for clients from

enterprises with credit support

The company takes a decision whether to recall / accelerate the payment or performance under the

loan agreement / Promissory Note as agreed with the borrower/member under intimation.

Conclusion

Some valuable lessons can be drawn from the experience of successful Microfinance operation. First of all,

the poor repay their loans and are willing to pay for higher interest rates than commercial banks provided that access

to credit is provided. The solidarity group pressure and sequential lending provide strong repayment motivation and

produce extremely low default rates. Secondly, the poor save and hence microfinance should provide both savings

and loan facilities. These two findings imply that banking on the poor can be a profitable business. However,

attaining financial viability and sustainability is the major institutional challenge. Deposit mobilization is the major

means for microfinance institutions to expand outreach by leveraging equity (Sacay et al 1996). In order to be

sustainable, microfinance lending should be grounded on market principles because large scale lending cannot be

accomplished through subsidies.

A main conclusion of this paper is that microfinance can contribute to solving the problem of inadequate

housing and urban services as an integral part of poverty alleviation programmes. The challenge 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 imposing unbearably high cost of monitoring its end-use upon the lenders. A promising

solution is to provide multi-purpose loans or composite credit for income generation, housing improvement and

consumption support. Consumption loan is found to be especially important during the gestation period between

commencing a new economic activity and deriving positive income. Careful research on demand for financing and

savings behaviour of the potential borrowers and their participation in determining the mix of multi-purpose loans are

essential in making the concept work (tall 1996).

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Eventually it would be ideal to enhance the creditworthiness of the poor and to make them more "bankable"

to financial institutions and enable them to qualify for long-term credit from the formal sector. Microfinance

institutions have a lot to contribute to this by building financial discipline and educating borrowers about repayment

requirements.

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MICRO

FINANCE

INSTITUTIONS

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1.3 Micro Finance Institutions

Fighting poverty is one of the core objectives of the Millennium Development Goals (MDG).Micro Finance

is the best way to eradicate poverty and to empower people. Micro finance is the newly emerging financial industry.

It has the target market of more than 1.8 billion people in the whole world. The emphasis of this study is to analyze

the prospects of micro finance industry in India. Our research stresses the need of the diverse micro financial services

in order to make the micro finance banks sustainable and profitable while serving the diverse needs of the poor.

MFI‘s should be distinguished from the NGOs as they are not just charity organizations. The diverse products will

mitigate the risk and at the same time gives a variety of services and choices to the clients. Today the reason of the

loss of the most of the micro finance institutions is that they offer very few products dominantly micro credit, a

successful MFI in India and has developed its recommendations on the basis of this analysis that can be implemented

on the other MFI‘s. There is a demand for diverse micro financial services in India and just by meeting a very small

group, So, if there are more innovations in the product development, this sector can become sustainable. Future of

micro finance is bright in India.

Definition of Microfinance:

Micro Finance is defined as formal scheme designed to improve the well being of poor through better access

to saving and services loans (Schreiner, 2000).

Micro finance is the tool that can bring the positive change in the life of the poor people of India. Micro

finance is more than simply credit.

According to the ‗‘India Microfinance Network‘‘, an institution involved in the research and development of

microfinance in India, microfinance is a composition of not only micro credit but includes a whole range of financial

services such as deposits, remittances, insurance and micro leasing.

According to Robinson, Marguerite (2001), ―microfinance refers to small-scale financial services primarily

credit and savings provided to people who farm or fish or herd; who operate small enterprises or micro enterprises

where goods are produced, recycled, repaired, or sold; who provide services; who work for wages or commissions;

who gain income from renting out small amounts of land, vehicles, draft animals, or machinery and tools; and to

other individuals and groups at the local levels of developing countries, both rural and urban. Many such households

have multiple sources of income‖.

Microfinance Institution (MFI)

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According to the definition on ‗‘Microfinance Gateway‘‘ an MFI is the organization that offers financial

services to the low-income people (Microfinance gateway, 2008).

There is a wide range of micro financial institutions. Mostly when we talk about these, financial NGO`s come

into the mind. These financial NGO‘s provide micro credit and micro finance services too and in most cases these

financial NGO‘s are not allowed to capture saving deposits from general public. Many NGO‘s provide other financial

services along with the micro finance and similarly some commercial bank are also providing micro finance along

with their routine financial activities so because of these micro finance services which are quite bit part of the whole

of the activities of these commercial banks we can call these as a micro finance institutions (Rehman, 2007). There

are some other MFI´s that can be considered in the business of micro finance. These institutions are the community

based financial intermediaries such as credit union; cooperative housing societies and some other are owned and

managed by the local entrepreneur and municipalities. This type of institution is varying from country to country

(Rehman, 2007).

Significance of Microfinance Institutions:

The microfinance institutions have a pivotal role to play in a society marked by economic classes. By

providing small loans to poor people, these institutions attempt to provide remedies to the woes of the deprived class.

Apart from this, it is through these institutions that poor people are able to avail small loan facilities on reasonable

terms and interest rates. In the absence of these institutions the poor people are more likely to fall prey to the

exploitation of money lenders, who are more likely to exploit the poor masses by providing loans on enormously high

rates. As a result the problems of the poor class are likely to be multiplied instead of being nullified. According to

Robinson, Marguerite (2001), poor people are exploited by informal money lenders who provide loans at high costs

which can range from ten to more than a hundred percent.

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1.3.1 Leading Views on Microfinance:

According to Marguerite (2001), there are two leading approaches to microfinance:

1. Poverty lending approach.

2. Financial systems approach.

Both these approaches tend to provide the availability of financial services for the poor, despite having

consonance in their goals, each approach tends to adopt a different modus operandi for the achievement of their

desired aim. We look at how these two approaches tend to operate:

1. Poverty Lending Approach

According to Robinson & Marguerite (2001), the basis focus of the poverty lending approach is the

reduction of poverty through institutions which receive funds from donors or governmental authorities. The

basic aim of the poverty lending approach is to reach the poorest of the poor. In poverty lending approach to

microfinance saving is only limited to a trivial status i.e. only as a compulsion for receiving credit. Institutions

adopting the poverty lending approach are not sustainable, the reason being that the interest rate on their loans is too

low for the recovery of even their costs. These institutions also do not cater to the demand for micro saving services

among the poor. The focus of poverty lending approach is upon micro-credit not microfinance.

2. Financial Systems Approach

According to Robinson, Marguerite (2001), the financial systems approach focuses on financial

intermediation between the poor borrowers and savers on commercial basis. This approach lays its emphasis on the

institutional self-sufficiency. The world has witnessed the emergence of many commercial microfinance

intermediaries in the past decades. These commercial microfinance intermediaries provide credit and saving services

to the economically active poor. The loans of these institutions are financed by savings, commercial debts and

through profitable investments. The financial systems approach represents a more globally acceptable model of

microfinance.

Difference Between Conventional Banking And Microfinance Banking

The main difference between a conventional banking institute and microfinance institute is of their approach

towards their customers. The main difference is of their target market. A microfinance institute is opened with the

main aim of targeting the poor and providing its services to that part of the community which is vulnerable to

poverty. Now days it also include small and medium enterprises. Where as, a conventional banking institute has a

bigger target market. It covers all the clusters of the community. Its main aim is profitability and other things are set

aside. Increasingly, formal financial institutions are recognizing the benefits of serving poorer clients but these

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institutions are only going there because they are recognizing that they can also get profits from the poor. Another

difference between the commercial and microfinance banking is of group lending with only social collateral.

Commercial banks have developed products that are targeting the poor but they also demand physical collateral

whereas the microfinance institutions rely on social collateral.

Difference Between Micro Credit and Microfinance

Microfinance is the provision of a wider range of financial services to the very poor and Micro credit is

one of the services offered by microfinance Institutes. As mentioned in the definition of Microfinance. Micro

credit is very small loan given to the poor which are considered unbankable. These people are usually unemployed or

poor entrepreneurs. They lack collateral, steady employment and a verifiable credit history and therefore cannot meet

even the most minimal qualifications to gain access to traditional credit. Micro credit is a part of microfinance, which

is the provision of a wider range of financial services to the very poor.

Impact of Microfinance on Poverty

Microfinance has helped poor in increasing their income levels and improvements in other social indicators.

In case of Lusaka, an impact study by Copestake et al. (2001) report there was increase in their business and house

income of borrowers who were able to repay the first loan. Aghion and Morduch (2005) show how a loan of $150

changed the life of poor woman and after ten loans she built a toilet and was looking forward to do much.

Microfinance has changed lives of thousands of poor just as this woman which is yet to be captured by studies. There

are so many examples in this regards. According to Goldberg, apart from these income increases there were social

gains of the microfinance programs like the increase in education of children, nutrition of babies and empowerment

of women (Goldberg, 2005).

In the early1970‟s, Microfinance started as a revolution in countries of Latin America and South Asia

with independent initiatives. Now there are more than one thousand micro finance institutions over 100

countries, 73% are NGO‟s, 13.6% are credit unions 7.8% are banks and rest are saving unions. And about 65

million people are served by the micro finance institutions these days. (Morduch, 2005)

Microfinance Clients

Microfinance clients are poor and vulnerable non-poor who have a relatively stable source of

income (microfinance gateway, 2008). The clients of microfinance can be divided in to 2 main

categories, „‟Rural‟‟ and „‟Urban‟‟ clients. But the common character between them is that they are low

income persons who do not have access to the formal financial institutions and they are typically self-

employed. Usually, they have household-based enterprises (microfinance gateway, 2008) (Rehman, 2007).

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According to a report printed in „‟The Times‟‟ magazine the clients have experienced positive increase in

their income and the increase was more significant for women than for men. Clients experienced improved

relationships with suppliers of inputs for their business, increased household consumptions, improved quality of their

children education, increased income and improved employment generations.

Micro Finance for the Economically Active Poor

Poor people need shelter, clothes and food. The services of the micro finance institutions are aimed at the

economically active poor. The people who are already involved in some ventures and they need some leverage and

that are the micro finance which seems to be a catalyst to boost their activities. The economically active poor have

some financial literacy. They know how to diversify their portfolios, how to save and where to invest. To such people

micro finance is useful which increases their income and improves their lives. (Robinson, 2005).

1.3.2 Objectives of the Micro Finance Institutions.

The goal of the MFIs which serves as the development organizations is to fulfil the needs of

unserved and underserved people. (Ledgerwood, 1998) describes these objectives as,

To reduce poverty

To empower women or other disadvantaged population groups

To create employment

To help existing businesses grow or diversify their activities

To encourage the development of new businesses

Two main objectives of the MFIs serving in any country are

Outreach

It is to serve those people who have been deprived previously or are underserved (Women, poor and

indigenous and rural poor).

Sustainability

It is to generate enough revenues to cover the expenses for providing the financial services. The

main theme of the financial system approach is the sustainability. (Ledgerwood, 1998)

Diversified Product Lines

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Leading microfinance institutions in the world the kinds of product lines that could be offered and which can

improve the current scenario of micro financial institutions in India, according to our suggestion are:-

Micro insurance

―Micro-insurance 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‘‘

(Churchill 2006). 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.

Micro Savings

Saving products benefit low income people and entrepreneurs. It helps them to build assets and

provide security at the time of the financial distress. It also constitutes an additional source of income. MFIs

must formulate themselves to become regulated entities to accept saving deposits. Products like Term

finance certificates, ranging from 3 months to 1 year is a good example of saving products. The World

Bank‘s world wide inventory of micro finance institutions found that many sustainable institutions rely

heavily on the saving mobilization.

Compulsory Savings

Compulsory savings are the funds which are contributed by the borrowers as a preliminary condition to

receive the loans. Compulsory savings are of no use to the clients rather they are use to the banks. Normally they are

taken in the group lending.

Voluntary Savings

They are not obligatory as part of assessing the credit services. They are provided to the borrowers and the

non borrowers. Who can deposit according to their cash flows and the needs. (Ledgerwood, 1997) Poor with irregular

cash flows have some irregular excess cash. If the MFIs provide the saving services, these people can deposit their

money and the interest on the principle will motivate them to save more.

Micro Leasing

―Financial leasing is a contractual arrangement between two parties, which allows one party (the lessee) to

use an asset owned by the other (the lessor) in exchange for specified periodic payments. The lessee uses the asset

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and pays rental to the lessor, who legally owns it‖ (Gallardo, 1997). Grameen bank Bangladesh started micro leasing

in 1992. In 1994, the leasing facilities were delivered from all the zones.

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SELF HELP

GROUP BANK

LINKAGE

MODEL

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1.4 Self Help Group Bank Linkage Model

Introduction

The SHG - Bank Linkage Programme is a major plank of the strategy for delivering financial services to the

poor in a sustainable manner. The search for such alternatives started with internal introspection regarding the

innovations which the poor had been traditionally making, to meet their financial services needs. It was observed that

the poor tended to come together in a variety of informal ways for pooling their savings and dispensing small and

unsecured loans at varying costs to group members on the basis of need. The SHG – Bank Linkage Programme was

started as an Action Research Project in 1989 which was the offshoot of a NABARD initiative during 1987 through

sanctioning Rs. 10 lakh to MYRADA as seed money assistance for experimenting Credit Management Groups. In the

same year the Ministry of Rural Development provided PRADAN with support to establish self-help groups in

Rajasthan. The experiences of these early efforts led to the approval of a pilot project by NABARD in 1992. The pilot

project was designed as a partnership model between three agencies, viz., the SHGs, banks and NGOs.

No. of SHGs Financed During the Year (In Lakh)

Cumulative no. of SHGs financed (in lakh)

2001-02 1.98 4.61

2002-03 2.56 7.17

2003-04 3.62 10.79

2004-05 5.39 16.18

2005-06 6.20 22.38

2006-07 6.87 29.25

2007-08 7.12 24.31

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Positive Features of the SHG - Bank Linkage Programs

7.07 The financial inclusion attained through SHGs is sustainable and scalable on account of its various

positive features. The program confronts many challenges and for further scaling up, these challenges need to be

addressed.

The Financial Scheme

The financial scheme under the Linkage Programme could be based on the following broad principles:

Savings first, no credit without saving.

Saving as partial collateral

Bank loans to the group, for onlending to members

Credit decisions for onlending to members by the group

Interest rates and other terms and conditions for loans to members to be decided by the group

Joint liability as a substitute for physical collateral

Ratio between savings and credit contingent upon credit worthiness of the group; increasing with

good repayment record.

Small loans to begin with. Financial Inclusion of Poor Women

7.08 The Committee noted that more than 90% of the members of SHGs are women and most of them are

poor and assetless. The SHG movement has been instrumental in mainstreaming women by-passed by the banking

system.

Loan Repayments

7.09 One of the distinctive features of the SHG - Bank Linkage Programme has been very high on-time

recovery. As on June 2005, the on-time recovery under SHG - Bank Linkage Programme was 90% in commercial

banks, 87% in RRBs and 86% in cooperative banks.

Program Impact

7.10 The major findings and recommendations of three studies on the impact of the SHG - Bank Linkage

Programme are summarised in Annexure III. 7.11 The main findings reveal that the programme has:

Reduced the incidence of poverty through increase in income, and also enabled the poor to build

assets and thereby reduce their vulnerability.

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Enabled households that have access to it to spend more on education than nonclient households.

Families participating in the programme have reported better school attendance and lower drop out

rates.

Empowered women by enhancing their contribution to household income, increasing the value of

their assets and generally by giving them better control over decisions that affect their lives.

Reduced child mortality, improved maternal health and the ability of the poor to combat disease

through better nutrition, housing and health - especially among women and children.

Contributed to a reduced dependency on informal money lenders and other noninstitutional sources.

Facilitated significant research into the provision of financial services for the poor and helped in

building ―capacity‖ at the SHG level.

• Finally, it has offered space for different stakeholders to innovate, learn and replicate. As a result, some

NGOs have added micro-insurance products to their portfolios, a couple of SHG federations have

experimented with undertaking livelihood activities and grain banks have been successfully built into the

SHG model in the Eastern Region. SHGs in some areas have employed local accountants for keeping their

books, and IT applications are now being explored by almost all for better management information sytems

(MIS), accounting and internal controls.

Challenges

Group Loans to SHGs and SHG Loans to Members

7.12 The average loan provided to SHGs by the banks for the last three years is presented in the following

table : 7.13 During the year 2005-06, the average loan provided to new SHGs was Rs. 37,581. On an average, per

member loans work out to less than Rs. 4,000. Many believe that such loan amounts are grossly inadequate for

pursuing any meaningful livelihood activity. Per capita loans in mature SHGs are increasing very gradually. It has

also to be kept in view that members take very short term loans of 3 to 6 months on many occasions and there can be

more than one cycle of borrowing/ repayment in one year. Committee is of the view that the existing dispensation of

subsidy in the form of a revolving fund initially and as capital subsidy for income generating activities in the second

stage may not be sustainable with the exponential growth recently observed in the formation of groups under the

programme. 7.18 At present, banks do not incur incremental costs for lending to SHGs, as it is done through the

existing branch network. SHG lending to members has been reportedly at interest rates ranging between 15% and

24%. While this has been considered high, it is also reported that members borrow for short periods and do not feel

the annualized burden of interest rates. Further, the interest income of SHGs is ploughed back into the corpus for

lending and is beneficial to all members.

1.4.1 MFI and SHG Bank Linkage Credit Supply

Models of Linkage between Banks and Self-Help Groups

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BANK = Commercial Bank

NABARD = National Bank for Agriculture and Rural Development

SHG = Self Help Group (or community groups, people's organizations)

SHPI = Self Help Promotion Institution (or NGOs)

Three distinct model can be observed in linkage programmes between banks and low-income groups.

MODEL I: Bank-SHG with active support of SHPI

The most common linkage model in India is where the banks deal directly with individual SHGs. In

case of most of these SHGs, the SHPI had provided the intial training, guidance to rural poor in organizing

themselves into thrift and credit groups. In many cases, the SHPI had also provided some initial support to

these SHGs to sugment their resources. (In case of of an NGO, MYRADA, it became possible for it to

provide such financial assistance to SHGs from an initial support of Rs. 1 million by NABARD before the

Pilot Project was started). The SHPI also keeps a watch and ensures satisfactory functioning of the SHGs

even after the linkage. While linkage of the banks is direct with the SHGs, the SHPI has an important role

in pre- as well as post-linkage stages.

MODEL II: BANK-SHG

A slight variant to Model 1 is where Banks have provided financial support to SHGs which had

grown almost spontaneously without any intervention of any SHPI. The SHGs were initially on the basis of

acommon activity, problem and took up thrift and credit activities. The cases of such linkages are of course

not very common.

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MODEL III: BANK-SHPI-SHG

In this model, the SHPI have taken the role of a financial intermediary between the banks and a

number of SHGs. Again, the SHPIs take up such responsibilities only in respect of the groups

promoted/nurtured by them and nopt for other groups. The SHPI accepts the contractural responsibility for

repayment of the loan to the bank. In this respect it is indirect linkage support to the SHGs. This model is

quite common.

Another model that has emerged ... is a combination of SHG linkage concept and credit programmes

where loan assistance is given to the individual members of the group and not to the group. It is also not

directly connected to the savings of the group. The loans in these cases were given only for income

generating investment credit activities. The SHG and SHPI help the bank in identification, preperation of

loan application, monitoring, supervision and recovery of loans.

45 | P a g e

1.4.2 Microfinance and Poverty Alleviation

In the year 2000, the United Nations drew up a list of Millennium Goals which aim to spur globalization and

development and eradicate extreme poverty. Extreme poverty is defined as those living on less that $1 a day

(Simanowitz and Walter 2002:15). The UN Resolution adapted by the General Assembly states, ―We will spare no

effort to free our fellow men, women, and children from the abject and dehumanizing conditions of extreme poverty,

to which more than a billion of them are currently subjected‖ (4). The seven Millennium Goals are as follows: 1)

eradicate extreme poverty and hunger, 2) achieve universal primary education, 3) promote gender equality and

empower women, 4) reduce child mortality, 5) improve maternal health, 6) combat HIV/AIDS, malaria, and other

diseases, and 7) ensure environmental sustainability. These goals, which are to be achieved by the year 2015, are a

monumental step in the direction of poverty alleviation (UN Homepage).

Increase in Income

Better Nutrition

Higher School Attendance

Women‘s Empowerment

Lifts Poor Out of Poverty

Integrated Programs

Conclusion

Microfinance is an effective method of poverty alleviation. MFIs have developed many unique and

innovative practices to account for the difficulties of providing credit to the poor. The use of village banks has

enabled microfinance programs to reach areas with restricted mobility and lack of infrastructure. Trust and group

lending practices encourage the poor to collaborate in mutual trust and friendship and to offer support for

communityloans and small businesses. Focus on female entrepreneurs allows marginalized women to gain access to

the economic opportunities that they need to empower themselves.

Qualified leadership assures that microfinance will continue its success and innovation in the critical years to

come. Research has shown that MFIs can and will reach the poorest of the poor by implementing integrated programs

that address the diversified needs of destitute families.

Increasing numbers of microfinance institutions are achieving financial sustainability and widening their

outreach while still focusing on the neediest in society. Microfinance allows women to gain autonomy and control

over their lives and to enter the public sphere with skill and confidence. The benefits of microfinance are not only felt

by those who directly participate, but by their families and entire communities as well. Some of these benefits are

increase in household income, consumption smoothing, capacity to sustain gains over time, better nutrition and

46 | P a g e

health, higher education and school attendance, female empowerment, and the ability to completely break free from

the bonds of extreme poverty.

Microfinance has achieved its success and popularity through its recognition of the poor as agents of change.

MFIs do not dole out aid packages, they present the poor with the opportunities to advance themselves. A true

poverty alleviation program fights poverty by addressing the social, political, and economic constraints that keep the

poor in an oppressed condition and by implementing tactics specified to overcome those constraints. In most parts of

the world, the poor are not given a voice in any sphere whether political, social or economic. They are deterred from

holding political office, segregated to pariah status in society, and restricted from access to economic opportunity.

Any poverty purging strategy that aims for marked reform needs to recognize that the poor know how to help

themselves far better than aid agencies and social organizations. Microfinance gives the power to the people. Clients

are given opportunities for economic advancement that will eventually lead to empowerment in social and political

spheres. Living conditions are markedly improved along with self-esteem and sense of control. Impoverished people

with credit are not dependent on aid, the responsibility rests with each individual family to work hard and to enjoy the

overwhelming pride that comes with well-deserved success.

Microfinance is not a miracle solution. It is not for everyone and is not solely responsible for poverty

alleviation. Microfinance must also be coupled with other social programs that are flexible to meet the diverse needs

of destitute families. An MFI should also be sure to incorporate the customs and practices of the people into its

programs. But through a holistic approach to fighting poverty and a recognition of the importance of the poor as

agents of change, the battle against extreme poverty can be fought and won. Globalization will not be allowed to

expand the gap between the rich and the poor. Affluent countries cannot continue to dump aid on needy nations;

developing countries must not be permitted to ignore the needs of their impoverished population. Let the oppressed

people speak. Let them change their own lives. Listen to them.

47 | P a g e

URBAN

MICRO

FINANCE

48 | P a g e

1.5 Urban Microfinance

Why urban microfinance

According to 2001 census, urban poor comprise of 35 to 40% of total population

Current urban market of 280 million is expected to grow by 600 million by 2030

Urban market contributes to 62% of GDP

Only 0.01% of them have banking relationships

Who are the clients?

Spandana Study Preliminary Results

The average family size is of 5, with monthly expenditure of Rs 5,000

Poor, but not ultra poor: only 6% of these households live under a dollar a day per member, but 47%

live under 2 dollars a day

67% of the household live in a house they own, and 29% in a house they rent. The median house has

two room, kutcha for 2/3 of the time

Who are the clients?

Businesses are very prevalent

31% of the households run at least one small business

Out of these, 9% of households run more than one

• For comparison, in the OECD, only 12% of the households run a business Who are the clients?

But these businesses have limited

• Specialized skills:

– 11% tailors

– 8% fruits and vegetablesellers

– 17% general store or Kirana store

– 6.6% telephone boot – 4.31% auto owners

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– 6.3% milk business

• Employees:

– Only 2% of business have a partner

– Only 10% have any employee, none has more than 3

– Including household members, 58% of business have only one person working in them, and 95%

have less than 3

Who are the clients?

Debt

• A large fraction of household have debt:

– 69% of the households have at least one outstanding loan

– 46% of the households have more than one outstanding loan

• The average loan, when it was taken out, was for Rs 20,000 (median Rs 10,000)

• The average interest rate is 3.85% per month. •Loans are taken from moneylenders (49%),

family members (13%), friends or neighbors (28%). Rarely commercial banks, almost no MFI loan (before

penetration)

Who are the clients?

• Among those households who do not have a loan, 56% say they want one but could not obtain one.

– Main purposes for taking out a loan: Health (17%), temporary difficulty (10%), Marriage (13%),

Home construction (10%), regular consumption (10%).

– Business acquisition only 7% and business expansion only 1.33%.

People are largely unaware of: how much of the loan is still outstanding, how much longer they will need to

pay the installment for, etc…

Who are the clients?

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Savings, Insurance and shocks

34% of the households have a savings account. •26% have a life insurance policy.

But almost none have any health insurance cover.

Yet 40% of the household had to spend Rs500 or more on health in the last year.

• 60% of the households who had a sick memberhad to borrow: so 24% of the household borrowed for health

in the past year.

Who are the clients?

Number of new clients opening savings accounts with SEWA (annual data)

Each bin represents number of new clients (as measured by when they opened their first savings

account) in the calendar year

Roughly 12000-13000 new clients a year with greater increase in client base in 2003 and 2005Who

are the clients?

Number of clients taking out a first unsecured loan with SEWA (annual data)

What are the challenges?

Highly competitive environment

Difficult to find strong social networks and information on SHG members

Lack of requisite documentation, irregular incomes and migration Some of the successful suppliers

1.5.1 Key Lessons in Urban Microfinance

Services Resources/Logistics Management

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Successful product

diversification

Adapting distribution

models

Hiring local staff, particularly

female credit officers

Solving distributional

difficulties, such as space

limitations

Sufficiently motivating staff with

incentives and training

Effectively monitoring

management information

system.

Anticipating client needs

through focus group

discussions and market

research

Expanding through existing

operations and deepening

penetration in urban areas

CMF did six case studies of some of the successful MFIs across India

1. Ujjivan - Bangalore

2. SEWA - Ahmadabad

3. VWS - Calcutta

4. SWAWS - Hyderabad

5. WWF - Chennai

6. Indian Bank‘s - Chennai

What are the innovative strategies?

Tracking loan usage/meeting the life-cycle needs of salaried women

Overcoming space constraints

Focusing on field staff

Implementing training programs and credit- plus activities

Effectively managing information systems

Coping with rural-urban migration and risk Tracking loan usage/meeting the life-cycle needs of

salaried women

Ujjivan‘s separate product exclusively for family helped to avoid borrowings to meet household

expense. This also helped MFI in tracking the credit needs and usage by their clients

• SEWA‘s Sanjivani loan for closed textile mill workers and accounts for marriage, education and gifts helps

salaried women to prepare for life cycle events and reduces her burden

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Overcoming space constraints

As urban MFIs continue to grow, having space for a typical JLG meetings is difficult

Urban working women tend to have less free time for meetings and travel

Ujjivan and WWF found a solution to this by organizing interactive meetings at public places like

schools, health centers, community centers, temples, mosques or churches.

Focusing on field staff

It was evident through case studies that people working in microfinance have genuine desire to help

poor access finance and are sensitive to their needs

Many MFIs have hired female fieldworkers to create supportive environment for women

VWS introduced incentive system of providing motorbikes for employees who exceeded expected

performance

Both, financially and professionally rewarding careers must be considered for field staff to retain

them

Implementing training programs and credit-plus activities

SEWA Bank‘s financial literacy training •SWAWS need based training for vocational skills and

management of small enterprises

Indian bank – training clients in operating two wheelers, exhibition of products made by SHG

members

• VWS established a home for elderly, helpline for women and runs primary school

Effectively managing information systems

Urban lending is complex and requires putting together detailed individual level information into

single database

• SEWA and WWF have met the challenge of establishing MIS which helps them to develop credit rating

system which helps in loan sanctioning process and leads to lower risks plus lower transaction costs

Coping with rural-urban migration and risk

Migration posses risks to MFIs operating in cities

Ujjivan has added a residency requirement stating that clients must have lived in a particular area for

a certain period of time before joining the group

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SWAWS requires clients to produce proof of residency to confirm that they are residents of target

locality Key lessons from Case Studies

What further needs to be done?

Credit Bureau to reduce risk and help clients keep track of their credit histories

• Developing variety of consulting and training programs for MFIs to expand and establish their operations in

urban India.

MICRO

FINANCE

AND

54 | P a g e

NGOS

55 | P a g e

1.7 Micro Finance and NGOs

“Self realization and self initiative are the two most powerful weapons to wash poverty out from the world”

– Chanakya

World‟s Greatest Ancient Economic and Political Scholar

Non-Governmental Organizations and voluntary action have been part of the historical legacy1. In the context

of contemporary social empowerment, self realization and self initiative is the base for the formation of self help

groups. This is the logic motivated NGOs to form SHGs in rural areas to empower them through developing their

inherent skills. Thus, SHG movement among the rural poor in different parts of the country is emerging as a very

reliable and efficient mode for technology transfer2. Chanakya‘s philosophical statement has transformed into the

SHGs with the help of NGOs and their efforts. Microfinance is the tool to empower the rural poor and also tool

against human deprivation. Microfinance is motivating sustainable development through the supportive NGOs.

Microfinance institutions are highly encouraging. Microfinance through SHG has become a ladder for the

poor to bring them up not only economically but also socially, mentally and attitudinally3. Initially, SHGs and

microfinance, as an instrument for social and economic empowerment, are established by the non governmental

organizations. In the era of 21st century, NGOs are transforming from non-profit to profit making business model

NGOs. Especially, the success formula of microfinance non profit model is learned from the PRODEM - Bolivia and

Grameen Bank – Bangladesh. It is proved that committed for the social development NGOs can develop the society

through providing finance accessibility to the poor based on self help model. Many NGOs (non-government

organizations) in India came forward to promote micro-finance. At present more than 1000 NGOs are implementing

micro-finance projects in India.

Some of them are leading MFIs (micro-finance institutions) playing the role of social intermediation and

building better society in rural areas. These MFIs have adopted different strategies of people‘s livelihood through

micro-finance delivery.

Microfinance Institutions:

The following are the some of leading microfinance institutions in India working in the sector.

This is quoted by Rimjhim Mousami Das’s “Micro-finance through SHGs: A Boon for the Rural Poor” from S.B. Verma and Yaswant Tukaram Pawar, (Ed) Rural Empowerment through Self Help Groups, Non Governmental Organizations and Panchayati Raj Institutions, New Delhi: Deep and Deep Publication, 2005. p.16. 1 . S.B. Verma and Y.T. Pawar, 2005. p.99. 2 . Verma, S.B. and Pawar. Y.T. 2005, p. x. 3 . Ibid, p. 16.

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Association for Sarva Seva Farms (ASSEFA)

Mitrabharati - The Indian microfinance Information Hub Mysore Resettlement and Development

Agency (MYRADA)

SADHAN - The Association of Community Development Finance Institutions

SEWA: Self-help Women's Association

SKS India - Swayam Krishi Sangam

Streedhan - Banking with Rural Women

Working Women's Forum, Madras, India

The goals are

Eradicate Extreme Poverty & Hunger.

Achieve Universal Education.

Promote Gender Equality & Women‘s Empowerment.

Reduce Child Mortality

Combat Diseases

Concept of Micro-Finance

Before we understand the concept of micro-finance, it would be worthwhile to understand the term micro-

credit as the two terms are closely related to each other. Poor people need micro credit for various and different

purposes. It may be to meet the major household expenses; emergency needs or even basic livelihood support. There

are two main systems of micro credit4. One is formal financial institutions, banks and co-operatives, which provide

micro-credit to the poor people under different schemes for livelihood support or helping them to start micro-

enterprises. The other is informal system comprising traditional moneylenders, pawnbrokers and trade specific

lenders. Both the systems have their own positive and negative aspects.

Examples of Recent Innovations in World‟s Financial Services for the Poor:

1. CCACN (Central de Cooperativas de Ahorroy Crédito Financieras de Nicaragua) is marketing its

"Agriculture Salary" savings product to farmers. The goal of the product is to smooth the flow of income

from the proceeds of an annual or semi-annual harvest. Each credit union works with its farmers to identify

their individual expenses and determine a monthly "salary" (portion of harvest proceeds on deposit

combined with an above-market interest rate) to be withdrawn from the credit union. In its infancy stage,

4 . Chauhan, Brij Raj (1990). Rural – Urban Articulations, Etawah: A. C. Brothers. Chippa, M.L. (1987). Commercial Banking

Development in India: A Study in Regional Disparity. Jaipur: Printwell Publishers. p. 50-51.

57 | P a g e

the credit unions have noted an interest from agriculture-based clients in such a savings management

program.

2. Caja los Andes in Bolivia offers four loan repayment options that fit the cash flow of various

agricultural activities, including an end-of-term payment for both principal and interest that fits single crop

activities, and unequal payments at irregular intervals for farmers that have planted several crops with

different harvesting periods. Flexibility is also provided in loan disbursements, and farmers can receive the

sanctioned loan amount in as many as three installments.

3. PRODEM in Bolivia has introduced a combination of biometric fingerprint and Smart Cards to deliver

financial services to its clients. Biometric technology measures an individual's unique physical or

behavioral characteristics, such as fingerprints, facial characteristics, voice pattern, and gait, to recognize

and confirm identity. Although the technology is still new, growing awareness of the importance of data

security is increasing adoption steadily. Prodem's fingerprint verification has reduced fraud, error, and

repudiation of transactions. Staff had not had to deal with forgotten PIN numbers or unauthorized use of

cards and accounts so they have more time to provide personal service and advice to clients.

4. Unibanka (Latvia): Prior to introducing credit scoring, Unibanka, a commercial bank, viewed

microfinance loans as too costly to deliver. With the assistance of Bannock Consulting, Unibanka instituted

a credit-scoring system based on qualitative client data because sufficient quantitative data was not

available to develop a statistical model5.

5. ICICI Bank (India): Two state banks in India (Corporation and Canara) partnered with an NGO to

provide salaried low-income workers with access to savings. The project uses the already established

automatic teller machines (ATMs) in the factories to offer a recurring savings product, along with education

on personal finance6.

1.7.1 SHG Bank Linkage Programme

Of the two major models of microfinance in India, the SHG Bank Linkage Programme (SBLP) is by far the

dominant model in terms of number of borrowers and loans outstanding7. The cumulative number of SHGs linked has

grown almost tenfold in the last five years, to achieve an outreach of about 31 million families through women's

membership in about 2.2 million SHGs by March 2006. Not all SHGs are currently "linked" in the sense of having

loans outstanding to the banks or federations, and only an estimated half of their members are poor. However, this

5 . CGAP it innovation series: Credit Scoring.

6 . CGAP it innovation series

7 . Ibid. p. 27.

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still means about 14 million poor households have been reached so far. Moreover the entire membership is saving

regularly, and has access to a ready source of small emergency and consumption loans in the form of loans extended

out of the group's own funds8.

NGOs Involvement in Micro-Finance and Strategies of People‟s Livelihood

The NGO‘s strength lies in target group approach, flexibility, experimentation, innovation, grassroots

presence and motivation. By learning from the example of Grameen Bank, Bangladesh, many NGOs in India, came

forward to provide financial services to the rural poor and RNFS enterprises. For NGOs, it is also a shift in approach

from development to empowerment wherein they can plan their withdrawal strategy from service delivery projects

and think of their own sustainability by providing financial services. At present there are almost 600 NGOs involved

in micro-finance delivery systems in India. These NGOs have adopted different strategies of promoting people‘s

livelihood through micro-finance. These strategies are based on their clientele, approach, focus area, interest rate,

savings linkages, collateral, coverage and organisational/ legal structure. These strategies can be classified into four

broad categories, namely, SHG promotion, MFI, micro-enterprise development and social development.

In all this NGO gets some financial support in terms of grant from Apex Financial Institutions (AFIs) like

NABARD and RMK (Rashtriya Mahila Kosh). The examples of such NGOs who are following SHG promotion

approach are: MYRADA in Karnataka, SHARE in Andhra Pradesh, RDO (Rural Development Organisation) in

Manipur, PREM (People‘s Right and Environment Movement) in Orissa & Andhra Pradesh, YCO (Youth Charitable

Organisation) in Andhra Pradesh, Anarde (Acil Navsarjan Rural Development Foundation) in Gujarat, PRADAN

(Professional Assistance for Development Action) & RUDSOVAT (Rural Development Society for Vocational

Training) in Rajasthan and ADITHI in Bihar.

Micro-Finance Institution Strategy

The approach of promoting MFIs is based on the premise that AFIs like SIDBI (Small Industries

Development Bank of India), RMK and other donor agencies provide bulk lending, soft loan and some grant to such

NGOs which can act as MFIs by on-lending the money to the poor people/ SHGs/ Federations/ smaller NGOs. These

MFIs stimulate the credit demand of the poor people. They also provide technical support for the beneficiaries to

ensure proper utilization of loans and repayment. At the same time they meet their cost of funds, cost of credit

management and cost of default through the spread of interest and generate surplus for the viable operation of micro-

finance.

The examples of such MFIs are Sewa Bank & FWWB in Gujarat, BASIX in Andhra Pradesh and RGVN

(Rashtriya Grameen Vikas Nidhi) in north-eastern states, Orissa and Bihar. 8.3 Micro-Enterprise Development

8 . Ibid,

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Strategy Entrepreneurship is one of the most important inputs in the economic development of a country and of the

regions within the country. Economic growth and industrialization are the by-products of entrepreneurship.

It is a breeding ground for the development of small-scale enterprises. The term EDP (Entrepreneurship

Development Programme) means a programme of entrepreneurship development designed to help a person in

strengthening his/ her entrepreneurial motive and in acquiring skills and capabilities necessary for playing his/her

entrepreneurial role effectively. It inculcates entrepreneurial traits into a person and develops his/her personnel,

financial, technical, managerial and marketing skills. There are number of programmes which are aimed at providing

informational or managerial inputs required by a new entrepreneur. However, a programme not touching upon

entrepreneurial motivation and behaviour cannot be called an EDP9.

Growth trends in the SHGs Bank Linkage Programme

Source: NABARD annual reports and data sheet for 2005-06published in Prabhu Ghate, Microfinance in India: A

state of the sector Report 2006, New Delhi, Microfinance India, p.28.

9 . Desai, Vasant. Entrepreneurial Development (Vol. I): Principles, Programmes and Polices. Bombay: Himalaya

Publishing House. 1991.

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Social Development Strategy

The social development approach of micro-finance is based on the premise that people should earn money by

investing in viable micro-enterprises. They should earn profit from their enterprises. Major share of the profit should

be reinvested in enterprises for their growth. The other share of the profit should be spent on social development that

is, health, education, housing, sanitation etc.

By earning profit from the viable micro-enterprises, people will increase their paying ability for services

delivered to them under different social development projects run by NGO and States/ Central Government. For the

NGOs and Government it can be a process of gradual withdrawal and for people, decrease dependency on the NGOs

and Government. Such projects have micro-finance as a major component coupled with social service delivery.

These projects have demonstrably positive effects. The examples of such projects are Indo- Canada

Agriculture Extension Project in Uttar Pradesh, IFFDC (Indian Farm & Forestry Development Corporation) project of

farm and forestry development in Uttar Pradesh and Rajasthan, ICDS (Integrated Child Development Services)

project of RASS (Rayalseema Sewa Samiti) in Andhra Pradesh and Conversion of ICDS project into Indira Mahila

Yojana.

Role of Financial Institutions in Micro-Finance

Especially during 1991-92, NABARD launched projects to provide micro credits to SHGs by bank linkages.

In the same way, NGOs also have done excellent work in the areas of microfinance. tSince the emergence of micro-

finance sector in India, role of AFIs has become significant. NABARD initiated the process of micro-finance in India

through linkage programme of SHGs under Automatic Refinance Scheme. SIDBI is second important player in

microfinance, providing bulk lending to MFIs. RMK is the third player providing loans to NGOs for on lending to the

women SHGs. These are the three major AFIs in India. Each has a different approach in micro-finance sector.

While NABARD‘s emphasis is entirely on SHGs linkage programme by mobilizing their own savings also,

SIDBI is focusing on building and creating larger MFIs and RMK is lending money to smaller NGOs as well. Taking

into consideration the growth and potential of micro-finance sector in India, other organizations and international

agencies have also made their entry in the micro-finance sector by providing loans and grants to NGOs for different

income generating projects as well as for incorporating micro-finance component in the service delivery projects of

social development.

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Exposure to Commercial Banks as on March 2006

Exposure to Commercial Banks as on March

2006

1991 **Total

109Some Public Sector banks

63Rishikulya Grameen Bank, Ganjam

158HSBC

5012Standard Chartered Bank

6119ING Vysya Bank

8719ABN AMRO Bank

10340UTI Bank

250HDFC Bank

2350 *100ICICI Bank

Loan O/s.

Rs. Crores

No. of MFIsBank

1.7.2 Microfinance Support Institutions in the Formal Sector

The following are the major support institutions in India.

National Bank for Agriculture and Rural Development

Rashtriya Mahila Kosh

SIDBI - Small Industries Development Bank of India

Tamil Nadu Women's' Development Corporation

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Commercial banks exposure to Microfinance

of selected banks, March 2006

The Role of NGOs

Non-Government Organizations (NGOs) have emerged as an integral part of the institutional structure for

addressing poverty as well as rural development, gender equality, environmental conservation, disaster management,

human rights and other social issues.

The NGOs, in order to support social and economic empowerment of the poor, have vastly widened their

activities to include group formation, micro credit, formal and non-formal education, training, health and nutrition,

family planning and welfare, agriculture and related activities, water supply and sanitation, human rights and

advocacy, legal aid and other areas.

These organizations mostly follow the target-group strategy under which the poor with similar

socioeconomic interests are organized into groups to achieve their objectives.

Co-ordinating the role of NGOs

In order to meet the need for a one-stop service to the NGOs, the Government created the NGO Affairs

Bureau in 1990. Located in the Prime Minister‘s Secretariat, the Bureau enables the NGOs to obtain their registration

clearance, approval and permission through a single agency of the Government within a specified time frame. The

aim of the Bureau is to ensure quality performance of the NGO sector and its accountability to the state.

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With a view to providing a regular forum of dialogue between the Government and the NGOs for increased

mutual understanding and cooperation, the Government-NGO Consultative Council (GNCC) has been formed with

representatives from the Government, NGOs and the civil society. The GNCC works as an advisory council toward

resolving issues arising out of Government-NGO interaction and collaboration.

Empowerment of Women through DWCRA / SHG Approach

Self-help Groups:

SHG is a group of rural poor who have volunteered to organise themselves into a group for

eradication of poverty of the members

The members of SHG save regularly and convert their savings into a common fund known as

Group Corpus

The group agrees to use this common fund and such other funds that they may receive as a

group through a common management

―A small, economically homogeneous and affinity group of rural/urban poor, voluntarily formed to

save and contribute to a common fund to be lent to its members as per the groups decision and for

working together for social and economic uplift of Their families and community

Self-help group (SHG) or a ‗sangha‘ is a voluntary association of people, which functions

democratically and accountably, to achieve the collective goals of the group.

Organizing disabled persons into ‗sanghas‘ unites and makes them visible in the larger community.

• Members can support one another by sharing information on the availability of services and resources, help

to make decisions on individual matters, help one another and so on.

Concept of SHG:

Self – Help Group (SHG) is a small voluntary association of poor people, preferably from the same

socioeconomic background. They come together for the purpose of solving their common problems through self-

help and mutual help. The SHG promotes small savings among its members. The savings are kept with a bank. This

common fund is in the name of the SHG. Usually, the number of members in one SHG does not exceed twenty.

The concept of SHG is based on the following principles:

Self-help supplemented with mutual help can be a powerful vehicle for the poor in their

socioeconomic development.

Participative financial services management is more responsive and efficient.

Poor need not only credit support, but also savings and other services.

Poor can save and are bankable and SHGs as clients, result in wider out reach. lower transaction cost

and much lower risk costs for the banks.

64 | P a g e

• Creation of a common fund by contributing small savings on a regular basis.

Essential Features of SHGs:

The following are the major essential features to be kept in mind for successful functioning of SHG‘s.

Group members come together voluntarily.

Basis of coming together is mutual help.

Homogenous group.

Regular interaction among group members

Group independently takes decision and manages its activities.

• Basis of people coming together is affinity.

SHG's – ROLE OF NGOs

NGOs play the crucial role of facilitators in group formation and development

Quality of group can be influenced by the capacity of facilitator i.e., NGO

NGOs also help in training and capacity building of facilitators being used by DRDAs

• DRDAs may support NGOs or Network of Community Coordinators who are engaged in the task of

initiating and sustaining the group development process

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THE FUTURE

OF MICRO

FINANCE IN

INDIA

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1.8 The Future of Microfinance in India:

The Microfinance India Conference and a Look at an Expanding Market

By Sukhwinder Singh Arora, Financial Sector Team, Policy Division, DFID*

I recently participated in the Microfinance India conference (New Delhi, April 12-14, 2005), organised by

CARE India, PlaNet Finance India, the United Nations Development Programme, the Small Industries Development

Bank of India, SADHAN, CGAP, ICICI Bank, Ford Foundation and Friends for Women's World Banking to mark

the International Year of Microcredit. The key themes of this conference were "Inclusion, Impact, and Innovation in

the Microfinance Industry".

This was the second annual event of what is now becoming a large annual gathering to celebrate successes,

discuss perspectives and research, and build networks around the microfinance sector in India. Reconnecting after a

few years, I was pleased to see all buzz about microfinance and the number and diversity of stakeholders who

collaborated on the conference. The number and diversity of delegates, the level of participation from senior policy

makers and bankers and the quality of debates and media attention confirms that microfinance is no longer at the

periphery of the financial sector in India. This short note is a personal reflection on what has changed, what may take

a long time to change and what India and the rest of the World may learn from each other.

1.8.1 What is Exciting about Indian Microfinance?

A Task Force on Microfinance recognised in 1999 that microfinance is much more than microcredit, stating:

"Provision of thrift, credit and other financial services and products of very small amounts to the poor in rural, semi-

urban and or urban areas for enabling them to raise their income levels and improve living standards". The Self Help

Group promoters emphasise that mobilising savings is the first building block of financial services.

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For many years, the national budget and other policy documents have almost equated microfinance with

promoting SHG links to the banks. The central bank notification that lending to MFIs would count towards meeting

the priority sector lending targets for Banks offered the first signs of policy flexibility towards MFIs. One could argue

that MFIs are small and insignificant, so why bother. The larger point is about policy space for innovation and

diversity of approaches to meet large unmet demand. The insurance sector was partially opened to private and foreign

investments during 2000. Over 20 insurance companies are already active and experimenting with new products,

delivery methodologies and strategic partnerships.

Microfinance programmes have rapidly expanded in recent years. Some examples are:

Membership of Sa-Dhan (a leading association) has expanded from 43 to 96 Community Development

Finance Institutions during 2001-04. During the same period, loans outstanding of these member MFIs have gone up

from US$15 million to US$101 million.

The CARE CASHE Programme took on the challenge of working with small NGO-MFIs and community

owned-managed microfinance organisations. Outreach has expanded from 39,000 to around 300,000 women

members over 2001-05, Many of the 26 CASHE partners and another 136 community organisations these NGO-MFIs

work with, represent the next level of emerging MFIs and some of these are already dealing with ICICI Bank and

ABN Amro.

Since banks face substantial priority sector targets and microfinance is beginning to be recognised as a

profitable opportunity (high risk adjusted returns), a variety of partnership models between banks and MFIs have

been tested. All varieties of banks - domestic and international, national and regional - have become involved, and

ICICI Bank has been at the forefront of some of the following innovations:

Lending wholesale loan funds.

Assessing and buying out microfinance debt (securitisation).

Testing and rolling out specific retail products such as the Kissan (Farmer) Credit Card.

Engaging microfinance institutions as agents, which are paid for loan origination and recovery, with

loans being held on the books of banks.

Equity investments into newly emerging MFIs.

Banks and NGOs jointly promoting MFIs.

The 2005 national budget has further strengthened this policy perspective and the Finance Minister Mr P.

Chidambram announced "Government intends to promote MFIs in a big way. The way forward, I believe, is to

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identify MFIs, classify and rate such institutions, and empower them to intermediate between the lending banks and

the beneficiaries."

What is beginning to happen in microfinance can be seen from the perspective of what has happened to

phones in India. With the right enabling environment, and intense competition amongst private sector players, mobile

phones in India expanded by 160% during just one year 2003-04 (from 13 to 33 million). Mobile tariffs fell by 74%

during the same period. While this is heady progress, there is a less heralded but even more powerful nationwide

success on access. In the late eighties, the phone infrastructure was the monopoly of public sector institutions. Phones

were difficult to get and even more difficult to use for those lacking ownership. Realisation that users need not own a

phone to access one led to privatisation of the last mile - where a phone user could interface with a private sector

provider using the public sector telecom infrastructure. Even with this policy change, today there are 2.5 million

entrepreneurs selling local, national and international phone services through the length and breadth of India. Many of

these are now graduating to sell internet services and could potentially be banking agents - that is the evolving story.

1.8.2 Challenges Remain

A World Bank study assessing access to financial institutions found that amongst rural households in Andhra

Pradesh and Uttar Pradesh, 59% lack access to deposit account and 78% lack access to credit. Considering that the

majority of the 360 million poor households (urban and rural) lack access to formal financial services, the numbers of

customers to be reached, and the variety and quantum of services to be provided are really large. Vijay Mahajan,

Managing Director of BASICS, estimated that 90 million farm holdings, 30 million non-agricultural enterprises and

50 million landless households in India collectively need approx US$30 billion credit annually. This is about 5% of

India's GDP and does not seem an unreasonable estimate.

A tiny segment of this US$30 billion potential market has been reached so far and this is unlikely to be

addressed by MFIs and NGOs alone. Reaching this market requires serious capital, technology and human resources.

However, 80% of the financial sector is still controlled by public sector institutions. Competition, consolidation and

convergence are all being discussed to improve efficiency and outreach but significant opposition remains; for

example, the All India Bank Employees Association has threatened to strike if the Government proceeds with its

policy of reducing its capital in public sector banks, merging public sector banks or even enhancing Foreign Direct

Investments in Indian private banks.

Many speakers at the Microfinance India conference talked about the significant and growing gap between

surging growth in South India, which contrasts with the stagnation in Eastern, Central and North Eastern India.

Microfinance on its own is unlikely to be able to address formidable challenges of underdevelopment, poor

infrastructure and governance.

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The Self Help Group movement is beginning to focus on issues of quality and there were some interesting

discussions on embedding social performance monitoring as a part of the regular management information systems.

At the time of the conference, a leading and responsible MFI was being investigated by the authorities for

charging "high" rates of interest. Per unit transaction costs of small loans are high but many opinion leaders still

persist with the notion poor people cannot be charged rates that are higher than commercial bank rates. The reality of

the high transaction costs of serving small customers, their continuing dependence on the informal sector, the fact that

most bankers shy away from retailing to this market as a business opportunity, and the poor quality of services

currently provided does not figure prominently in this discourse. While the central bank has deregulated most interest

rates, including lending to and by MFIs, interest rates restrictions on commercial bank for retail loans below

US$5,000 (all microfinance and beyond) remain and caps on deposit rates also discourage sharing transaction costs

with customers.But most conference participants accepted the imperatives to build sustainable institutions.

Closing Remarks

In my view, savings service is the neglected daughter of the family of financial services. I use this metaphor

because of the sustained discrimination against and frequent disregard for savings services, despite their productive

and reproductive role in financial services. This is evident from different nomenclature used at both the international

(UN International Year of Microcredit, MicroCredit summit) and national levels (Priority Sector Lending; Annual

Credit Policy; Credit/ deposit ratio). Savings services can be a useful entry point for the unbanked to build up a

history with the formal financial institutions before customers are entitled to other financial services. With the greater

spotlight on knowing the customer and the fact that poor households do not have a salary slip, utility bills, clear land

titles or unique identity papers, a regular savings record could be the first building block to membership of the formal

financial sector. What is more, with savings services, poor customers need to trust the financial institution and not the

other way round.

Microfinance is not yet at the centre stage of the Indian financial sector. The knowledge, capital and

technology to address these challenges however now exist in India, although they are not yet fully aligned. With a

more enabling environment and surge in economic growth, the next few years promise to be exciting for the delivery

of financial services to poor people in India.

I would like to congratulate CARE, as the lead organisers, for successfully hosting this global cross learning

event. Unusually, the event ended with a statement of some objectively verifiable indicators (such as expansion of

urban microfinance, increased conference participation by public sector banks and redressal of North South divide)

on which the sector should track progress in a years' time.

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INTRODUCTIO

N OF

NABARD

&

SIDBI

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2.1 SIDBI Foundation for Micro Credit

Expanding the frontiers of Micro finance in India

Small Industries Development Bank of India (SIDBI), an apex financial institution for promotion, financing

and development of small scale industries in India, has launched a major project christened "SIDBI Foundation for

Micro Credit" (SFMC) as a proactive step to facilitate accelerated and orderly growth of the micro finance sector in

India. SFMC is envisaged to emerge as the apex wholesaler for micro finance in India providing a range of financial

and non-financial services such as loan funds, grant support, equity and institution building support to Micro Finance

Institutions (MFIs) so as to facilitate their development into financially sustainable entities, besides developing a

network of service providers for the sector. SFMC is also facilitating the advocacy for appropriate policies and

regulations for the growth of the sector. Operations of SFMC, in the coming years, are expected to contribute

significantly towards development of a more formal, extensive and effective micro finance sector serving the poor in

India.

INTRODUCTION

It is estimated that almost 260 mn. people are living in poverty in India. Under the internationally accepted

poverty line of 1 USD a day, adjusted for the purchasing power, some 39 % of India's population would be

considered as poor. The Govt. of India, since independence, has been making concerted efforts to provide financial

services to the poor at affordable cost in its endeavour to solve the problems of poverty and unemployment. It laid

special emphasis on expanding the network of banks all over the country in order to provide credit to the poor and

weaker sections of the society. Besides, the Government also launched several subsidised wage and self-employment

programmes for the benefit of the poor.

Despite all these efforts, there still exists a massive gap between the demand for credit by poor households

and the supply of credit by formal financial and social institutions. Of the 75 mn. poor households in India, of which

60 mn. are rural households and 15 mn. urban households, it is estimated that the total annual requirement of credit

for rural households would be at least Rs.120 bn. on the basis of Rs.2000/- per family. Another estimate for micro

finance services, excluding housing, is Rs.500 bn. assuming that annual average credit usage is Rs.6000/- per rural

poor household and Rs.9000/- per urban poor household. Housing credit requirement is estimated at Rs.10 bn. every

year. In addition, the clients require saving and insurance services . The dependence of poor on informal and non-

institutional sources of credit still remains very high.

In response to the inadequate credit flow to the poor from the formal financial sector, micro finance

operations in India, as in many other countries, started developing on an alternative track with the active involvement

of Non-Government Organisations (NGOs). Currently, there are two main institutional models of delivery of micro

finance in India - the SHG Bank Linkage model supported by NABARD, one of the leading apex Development

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Financial Institutions in India and the MFI model, predominantly supported by SIDBI. The second approach being

on-lending through MFIs was initiated by the Friends of Women's World Banking and the Government sponsored

Rashtriya Mahila Kosh; however the same was further developed and financed by SFMC. It is estimated that

outstandings of the SHG linkage program as on March 31, 2003 is Rs.10 bn, while the aggregate outstanding

portfolio of the MFIs is estimated to be about Rs. 2400 mn.

SIDBI - A Developmental Financial Institution

Small Industries Development Bank of India (SIDBI), established in April 1990 under an act of Parliament

(the Small Industries Development Bank of India Act, 1989), is an apex institution with the role to

serve as the principal financial institution for promotion, financing and development of industry in

the small scale sector, and

co-ordinate the functions of the institutions engaged in promotion, financing or developing industry in the

small scale sector.

SIDBI has emerged as a major surveyor of a wide variety of financial services to the small scale sector

through its direct finance, refinance, equity finance and other schemes of assistance, besides extending support

services. As on March 31, 2003, SIDBI had:

an equity base of Rs.4500 mn

total assets of Rs. Rs.174 bn

net worth of Rs. Rs.40.75 bn

Capital Adequacy Ratio of 44.03%.

total sanctions of Rs.862 bn. during 1990-2003

total disbursement of Rs.591 bn. during 1990-2003

total portfolio outstanding of Rs. 127 bn.

SIDBI's MICRO CREDIT SCHEME

SIDBI had started its Micro Credit initiatives in 1994 as a development project, with the objective to

encourage reaching out financial services to the poor through the informal sector institutions. Accordingly support

was extended to well managed NGOs for onlending to the rural poor with emphasis on outreach to poor women, for

taking up income generation activities at the grassroot level. The lessons learned from the pilot operations of the MCS

from 1994 to 1998 were as follows

3. Need for market oriented rate of interest both at the SIDBI and the MFI levels

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4. Collateral based lending to be replaced by lending based on systematic appraisal of credit absorption capacity

of the MFI Need for specialised and formal type of intermediaries (MFIs) viv-a-vis the NGOs

5. Intensive and all round capacity building of MFIs for qualitative growth of the sector

6. Need for equity support to MFIs

The SIDBI Foundation for Micro Credit (SFMC) came into operation in January 1999,

incorporating the lessons from the pilot phase with a mission "to create a national network of strong, viable

and sustainable Micro Finance Institutions (MFIs) from the informal and formal sector to provide micro

finance services to the poor, especially women".

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2.2 INTRODUCTION OF NABARD

Introduction

NABARD is set up as an apex Development Bank with a mandate for facilitating credit flow for promotion

and development of agriculture, small-scale industries, cottage and village industries, handicrafts and other rural

crafts. It also has the mandate to support all other allied economic activities in rural areas, promote integrated and

sustainable rural development and secure prosperity of rural areas. In discharging its role as a facilitator for rural

prosperity NABARD is entrusted with

1.Providing refinance to lending institutions in rural areas

2.Bringing about or promoting institutional development and

3.Evaluating, monitoring and inspecting the client banks

Offers training and research facilities for banks, cooperatives and organizations working in the field of rural

development

Helps the state governments in reaching their targets of providing assistance to eligible institutions in agriculture and

rural development

Some of the milestones in NABARD's activities are:

Refinance disbursement under ST-Agri & Others and MT-Conversion/ Liquidity support aggregated

Rs.16952.83 crore during 2007-08.

Refinance disbursement under Investment Credit to commercial banks, state cooperative banks, state

cooperative agriculture and rural development banks, RRBs and other eligible financial institutions during

2007-08 aggregated Rs.9046.27 crore.

Through the Rural Infrastructure Development Fund (RIDF) Rs.8034.93 crores were disbursed

during 2007-08. With this, a cumulative amount of Rs.74073.41 crore has been sanctioned for

280227 projects as on 31 March 2008 covering irrigation, rural roads and bridges, health and

education, soil conservation, drinking water schemes, flood protection, forest management etc.

Under Watershed Development Fund with a corpus of Rs.613.71 crore as on 31 March 2008, 416 projects in

94 districts of 14 states have benefited.

Farmers now enjoy hassle free access to credit and security through 714.68 lakh Kisan Credit Cards that have

been issued through a vast rural banking network.

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Under the Farmers' Club Programme, a total of 28226 clubs covering 61789 villages in 555 districts have

been formed, helping farmers get access to credit, technology and extension services.

Mission

Promoting sustainable and equitable agriculture and rural development through effective credit support,

related services, institution building and other innovative initiatives.

In pursuing this mission, NABARD focuses its activities on:

Credit functions, involving preparation of potential-linked credit plans annually for all districts of

the country for identification of credit potential, monitoring the flow of ground level rural credit,

issuing policy and operational guidelines to rural financing institutions and providing credit facilities

to eligible institutions under various programmes

Development functions, concerning reinforcement of the credit functions and making credit more

productive

Supervisory functions, ensuring the proper functioning of cooperative banks and regional rural banks

Objectives

NABARD was established in terms of the Preamble to the Act, "for providing credit for the promotion of

agriculture, small scale industries, cottage and village industries, handicrafts and other rural crafts and other allied

economic activities in rural areas with a view to promoting IRDP and securing prosperity of rural areas and for

matters connected therewith in incidental thereto".

The main objectives of the NABARD as stated in the statement of objectives while placing the bill before the

Lok Sabha were categorized as under :

The National Bank will be an apex organisation in respect of all matters relating to policy, planning

operational aspects in the field of credit for promotion of Agriculture, Small Scale Industries,

Cottage and Village Industries, Handicrafts and other rural crafts and other allied economic

activities in rural areas.

The Bank will serve as a refinancing institution for institutional credit such as long-term, short-term

for the promotion of activities in the rural areas.

The Bank will also provide direct lending to any institution as may approved by the Central

Government.

The Bank will have organic links with the Reserve Bank and maintain a close link with in.

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Organization Structure

Major Activities

Preparing of Potential Linked Credit Plans for identification of exploitable potentials under agriculture and

other activities available for development through bank credit.

Refinancing banks for extending loans for investment and production purpose in rural areas.

Providing loans to State Government/Non Government Organizations (NGOs)/Panchayati Raj

Institutions (PRIs) for developing rural infrastructure.

Supporting credit innovations of Non Government Organizations (NGOs) and other non-formal

agencies.

Extending formal banking services to the unreached rural poor by evolving a supplementary credit

delivery strategy in a cost effective manner by promoting Self Help Groups (SHGs)

Promoting participatory watershed development for enhancing productivity and profitability of

rainfed agriculture in a sustainable manner.

On-site inspection of cooperative banks and Regional Rural Banks (RRBs) and iff-site surveillance over

health of cooperatives andRRBs.

Role and Functions

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NABARD is an apex institution accredited with all matters concerning policy, planning and operations in the

field of credit for agriculture and other economic activities in rural areas.

It is an apex refinancing agency for the institutions providing investment and production credit for

promoting the various developmental activities in rural areas

It takes measures towards institution building for improving absorptive capacity of the credit

delivery system, including monitoring, formulation of rehabilitation schemes, restructuring of credit

institutions, training of personnel, etc.

It co-ordinates the rural financing activities of all the institutions engaged in developmental work at

the field level and maintains liaison with Government of India, State Governments, Reserve Bank of

India and other national level institutions concerned with policy formulation.

It prepares, on annual basis, rural credit plans for all districts in the country; these plans form the

base for annual credit plans of all rural financial institutions

It undertakes monitoring and evaluation of projects refinanced by it.

It promotes research in the fields of rural banking, agriculture and rural development

Subsidiaries of NABARD

Nabcons

NABARD Consultancy Services (Nabcons) is a wholly owned subsidiary promoted by National Bank for

Agriculture and Rural Development (NABARD) and is engaged in providing consultancy in all spheres of

agriculture, rural development and allied areas. Nabcons leverages on the core competence of the NABARD in the

areas of agricultural and rural development, especially multidisciplinary projects, banking, institutional development,

infrastructure, training, etc., internalized for more than two decades.

The Company is registered under the Company's Act, 1956, with an authorized capital of Rs 250 million (US

$5.75 million) and paid up capital of Rs 50 million (US $1.15 million).

In tune with NABARD's mission to bring about rural prosperity, Nabcons has more than just commercial

interest in the assignments it undertakes.

Economic Scenario

In the dynamics of the rural India , infrastructural, technological, managerial and attitudinal changes

are constantly taking place. In many parts of the country the dynamism of the farmer together with

supportive policies and technological changes have radically altered the rural economy. On the other hand,

there is also a stark fact that in extensive areas, there exists a weak and emaciated form of agriculture with

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peasantry still struggling. Agriculture in rain fed conditions continuous to be unstable. Farmers in many

parts of the country are still operating under unsecured and unrecorded tenancy arrangements and declining

farm size as a result of land fragmentation and proliferation of concealed tendencies will continue to put

downward pressure on land productivity.

On the positive front, new high demand sub-sectors are emerging in areas of horticulture live stock

and dairying, fisheries, poultry and forestry. The hitherto neglected areas of processing storage,

transportation and marketing of agricultural produce is witnessing a surge of investments from private

corporate houses. The task of doubling the agricultural credit in three years (2003-2006) has been creditably

achieved. Growth of Micro Credit Sector has helped in increasing the reach of financial institutions and

imparting vibrancy to the rural economic scenario with special focus on emergency of women as agents of

development.

In coming future the economy and institutions in rural areas would be acting and reacting with each

other to reinforce each other strength. Focus of NABARD would be to highlight such expectations of the

economy of the area, strengths of agricultural credit institutions and the hopes of the people on which credit

institutions impinge.

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RESEARCH

METHODOLO

GY

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3. RESEARCH METHODOLOGY

3.1 Title of the Project

“The Role & Implementation of Micro Finance”

3.2 Objective of the Study

To know the perception of the consumer about micro finance.

To get a deep knowledge of the financial product of micro finance.

Conduct market survey on a sample selected from the entire population and derived opinion on that

research.

To get some information about the market share of different microfinance leader institutions as compared

to the giants like Private Banks and to know the standing of the different institutions in the market.

To get some good market exposure by dealing with the prospects face to face.

To study consumer perceptions or customer‘s view points on product, service and other decisive

attributes determining the choice of Micro Finance Institutions.

To create Awareness in the market about the role of Micro Finance.

To find out ways that could help Micro Finance Institutions increase its existing market share for

Micro Finance.

To find out new potential markets/untapped segment.

Data collection approach,

This was carried out by internal data (Primary Data)

a) Collection of information from company,

b) Data provided by company,

c) Systematic collection of information direct from branch manager.

External data collection (secondary Data)

a) Internet

c) Newspapers

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Define the research problem,

a) Improve existing services and satisfy customer expectation.

b) Find out the selling module which will help the company in its business.

Approach to the problem

Objective or theoretical framework

The objective of this research is to identify the major reasons need for the micro finance institutions.

As according to industry analysts, this category has grown only on promotions and for now, except for

promotions, nothing seems to be working. Therefore, ideally, this research should be able to bring to the fore, certain

other factors that could lead to a growth of this industry services.

At the very least, the research should corroborate the existing assumptions regarding the influencing factors.

It should be in a position to verify that the steps various players are taking to stimulate volumes are in the right

direction, and would eventually lead to an increase in market share.

Research Questions

What is the perception of people towards the micro finance institutions?

What are different factors that influence the customer when He/She deal with services of these institutions?

Who are the major reasons behind the loan and saving?

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Preliminary Investigation

Secondary data analysis

Collection of Quantitative data

Measurement

Questionnaire Design

Survey

Sampling Process

Target population

Sample Size

Sampling technique

Field Work

Plan for Analysis of Data

Descriptive Analysis

Chi-Square test

Analysis of Variance

Research Design

The methodology followed for analyzing the consumer loan size and saving is as shown in the figure.

PPrreelliimmiinnaarryy IInnvveessttiiggaattiioonn

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This phase involved preliminary investigation of the various factors which could possibly affect the

consumer‘s about the microfinance services by various institutions and helpful for the poor people. The Secondary

data gathered was analyzed to understand the current scenario of the Micro finance in India. The analysis of the

secondary data also helped us find different attributes of the poor people in saving and investment.

CCoolllleeccttiioonn ooff QQuuaannttiittaattiivvee ddaattaa

MMeeaassuurreemmeenntt aanndd SSccaalliinngg PPrroocceedduurreess

Non-Comparative rating scale is used in which respondents evaluate only one object at a time, and for this

reason non-comparative scales are often referred to as monadic scales. Non-comparative techniques consist of

continuous and itemized rating scales.

We have used continuous rating scale in order to rate the choices for different loan source and investment of

saving in different options in the percentage form.

QQuueessttiioonnnnaaiirree DDeessiiggnn

The form of each question is also important. Closed end question include all the possible answers and

subjects matters choices among them.

I have made questionnaire consisting twenty seven questions to get customer‘s view about microfinance.

Which provide answers that are easier to interpret and tabulate? I have used simple, direct, unbiased wording

questions, which are arranged in a logical order. I have asked personal questions at last so that they do not become

defensive. I have tried to know what is the perception about microfinance system, where they want to invest, up to

what amount and since when.

Questionnaire of the customer

SSuurrvveeyy

Different Survey methods were used for collection of data. The principle method used was Personal

Interviewing of the respondents. In-Home interviews were conducted by us at various locations in Jaipur.

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3.5 SSaammpplliinngg PPrroocceessss

TTaarrggeett PPooppuullaattiioonn

The target population is the collection of elements or objects that process the information sought by the

researcher and about which inferences are to be made. Our target population involves the consumers of different

Microfinance Institutions in Jaipur City. The users include the old and the young population.

SSaammppllee SSiizzee && SSaammpplliinngg TTeecchhnniiqquuee

It denotes the number of elements to be included in the study. Due to time constraints the sample size chosen

is very small 200.

A mixture of Simple Random sampling and convenience sampling was used for sampling, with care being

taken to get responses from customers of different age groups

Fieldwork

The survey was conducted keeping in mind role of microfinance. The survey was conducted in the different Areas of

Jaipur. We made several trips to the households to gather information from relevant people.

DDaattaa IInntteerrpprreettaattiioonn AAnndd AAnnaallyyssiiss

((ii)) DDaattaa AAnnaallyyssiiss PPllaann

This chapter shows how the information needed to answer the some key research questions have been

extracted via the questionnaire.

((iiii)) MMeetthhooddoollooggyy

QQuueessttiioonnnnaaiirree CChheecckkiinngg//EEddiittiinngg

The questionnaire is checked for completion and interviewing quality. Editing is the review of the

questionnaire with the objective of increasing accuracy and precision.

CCoollllaattiioonn ooff DDaattaa

The data is collated in the excel sheet and view of the data was also taken for further analysis.

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How The Analysis Was Done:

The main idea behind conducting analysis is to see that what the possibilities in our research are? In the

analysis we will go through a systematic approach starting from looking in to our target markets, its needs and then

discussing the specific problems and constraints through which our micro financial Institutions are going through in

Jaipur. We will divide the different area of Jaipur in to different provincial categories and then see what are the

current pros and cons. The innovation in the micro financial sector and their success will be analysed and then we will

offer new alternatives and products that are in demand or successful in the regions having similarities in needs,

attitudes, culture. The organizational behaviour of the MFIs will also be touched in this regards.

3.6 Scope of Studies:

It is suggested that in future, the research must be more numerically analysed to find that which product suits

the market. Every product must be analysed. Its efficiency and acceptability can only be judged by the financial

statements of an MFI. So, it is also suggested that in the further study in the field must include the profit and loss, the

number of the people accepting the product, the cost of reaching the client specifically for each product. By doing so

the MFI would be in a better position to select the product that suits the region and exclude other products that are

going in loss or not demanded

3.7 Limitations of the study

I am a human being, so there is some limitation of the human beings which is reflected in this research.

The following are the limitation of this research study.

1. The sample size of 200 might not represent the perception of whole population, as the sample size is too

small for total population of Jaipur city. Findings from the feedback of these 200 respondents have been

generalized for the entire microfinance market of Jaipur.

2. The opinion expressed by the respondents may be biased.

3. The attitude of the research might be biased.

4. One of the most influencing and most critical limitations is that I am not trained for the research study and

this is my second study. I tried hard to come at conclusion, but there is lack of expertise.

5. Another limitation is that there is lack of time. If I give more time then studies will be more effective.

6. There have been few instances wherein respondents have shown lack of interest towards participating in the

study, leading to dishonest or incomplete answers. This could lead to few inaccurate assumptions or variance

in the findings.

7. This research project is limited only to the microfinance (loan). This study does not involve the other services

of microfinance institutions those are offer in the market.

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8. Today the competition in the microfinance sector has become very stiff. Today each and every company is

trying to increase their reach in the market. This situation has created a scenario in which to search a good

customer for microfinance has become very difficult.

9. By adopting our research in this sector a positive impact can be achieved in the following.

Increase in income of the institution and market penetration

Increase in income of the clients

Change in consumption pattern of the clients as well as up gradation of their living standards.

Increase in the education expenditures

Improvement in the agricultural as well as other cottage industries revenues

Change in the health expenses

Increased women empowerment

But to make these results possible we have some challenges that must be turned in to opportunities by

ensuring Sustainability and effectiveness of the organization as a single entity as well as in each and every department

(including HR and MIS), by developing products that are pro-poor and pro-women, by increasing the outreach and

enhancing the scale, by taking diversified and new initiative and keep on innovating and exploring the market and its

needs.

The results of our study have some limitations. Since, in our study there is a lack of numerical data, the exact

situation of the nature of the products was not possible. If we were able to find the data defining the success of each

and every product, we would have been in a better position to suggest that which product is suitable for the

sustainability of a MFI. Since some of the examples were taken from the international environment, so it is not

always the case that the results would be true in every case. A lot of it has to do with the culture, tradition and social

behaviours of the people and the region where they live. If a primary research in the market of result would show

more exact results that show the true picture.

Alternatives

From Group Lending To The Individual Lending:

As discussed above in the constraints that there are limitations in the Grameen model which is adopted by most of the

MFI´s all over the world. Micro lending should also include individual lending as non potential clients enter the

system and they can not repay the loan due to which potential members suffer. They can not apply for the loan for the

next time. ―Individual lending requires frequent and close contact with the individual clients. It is most often

successful in the urban areas where client access is possible. Individual lending can also be successful in the rural

areas, particularly through saving and credit cooperatives or credit unions. In both urban and rural areas individual

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lending is focused on financing production oriented businesses, whose operators are generally better off than the very

poor.‖ (Ledgerwood, 1997 page 68).

Low Income Govt. Clients Should Also Be Included In The Recipient List Of Mfi´S:

Low income govt. clients should also be allowed to take the facilities of the micro financial services. As they

have regular cash flows and they have ability to pay back.

Experienced Bankers Should Be Hired By These Institutions:

Most of the MFI´s do not have experienced bankers. High experienced persons should be inducted at the top

and the middle level. NGO transformed MFI´s should also increase the banking knowledge of their employees. It will

be beneficial for them to introduce new products and create a banking environment. When the professional peoples

will be there they could be able to analyze the markets, demand from the clients. They could be able to devise better

policies and set clear objectives to make their MFIs sustainable and profitable.

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FACTS

AND

FINDINGS

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Recently, as more practitioners, bankers, donors, and scholars have soldiered forth into the world of self-help

groups, many have reported findings worth noting. Here are just a few:

Moneylender activities. In Karnataka, CRS partner ODP reports that in four districts near Mysore,

moneylender rates have dropped from 120% per year to 36% in villages where ODP groups operate.

Groups helping others, Many groups with members that include the poor in a village extend themselves to the

very poorest. They do so in several ways. Groups in Jharkhand report that members save a handful of rice each day.

At the end of the month, members sell the collective rice to their poorest neighbors for about half the price that they

would sell it to market vendors.

In Orissa, several groups faced the problem of day laborers (the poorest of the poor and often members of

scheduled castes) being unable to save the same amount as other group members in a village. Further, these poorer

community members could not attend the same meetings as the better-off ones;meeting times were inconvenient.

Self-help groups have helped the poorest women to form their own groups. In these new groups, members save as

little as Rs. 5 per month. Leaders set meeting times when members can all meet, often early in the morning.

Social Clustering. With NGO support, groups cluster themselves as part of more powerful, village-level

entities. Clustering, or the grouping of groups, is taking place so that groups can solve community problems and bring

in more resources efficiently. Social clusters have worked to stem murder (Madya Pradesh), to stop rape (Jharkhand),

to improve schools (Kerala), to manage watershed and income generation projects (Rajasthan), and to reclaim land

(Uttar Pradesh).

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Data Analysis

& Interpretation

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5. DATA ANALYSIS & INTERPRETATION

Analysis of Questionnaire

Here I have formed a questionnaire to study why people go for microfinance institutions. What is people‘s

major motive behind investing in different options? Do they decide upon their own or they take guidance of a person?

What is their perception about these institutions?

The Researcher surveyed a total of 200 peoples who had Loan from Micro finance institutions across Jaipur

city as part of the project. The observations could be analyzed and interpreted as follows:

Questions:-

There are 27 questions in the questionnaire. Out of these 27 questions, 26 Questions are close ended and one question

is an open ended one.

Q. 1 Loan taker in different area (According to sex). Table 1

Small Village Town City Big City Total

Men 61 57 24 7 149

Women 26 13 10 2 51

Total 87 70 34 9 200

Graph 1

0

10

20

30

40

50

60

70

Small Village Town City Big City

Men

Women

The loan takers are in the small village and in the small village and mostly are male.

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The second large market is the town for the micro finance institutions and in this market the male are the big

segments for loan.

The third is city and fourth is big city according to loan distribution.

In the Jaipur city the women ratio is very less in comparison to male.

Q. 2 Age of the person taking loan at entry? Table 2

Below 25 26-35 36-45 46-55 Above 55

10 68 95 21 6

Graph 2

34.00%5.00% 3.00%

10.50%

47.50%

Below 25

26-35

36-45

46-55

Above 55

.

The maximum number of person taking loan is in his age group of 36 – 45.

The next level is the age group of 26 – 35.

The lowest level is the above 55.

Q. 3 What is your educational qualification? Table 3

Graduate Post Graduate Professional PG Under Graduate 10th

/12th

Illiterate

23 26 37 13 56 45

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Graph3

13.00%

11.50%

28.00% 6.50%

18.50%

22%

Graduate

Post Graduate

Professional PG

Under Graduate

10th/12th

Illiterate

The

educational qualification of persons who preferably take loan is of 10th/12

th

Than second group is of illiterate, so the main market of loan taker is 10th/12

th and illiterate person.

Than the third, fourth, fifth and sixth is Professional PG, Post Graduate, Graduate and undergraduate

respectively.

Q. 4 What is your Profession? Table 4

Govt. Employee Self Employee Professional Private Employee

19 83 11 87

Graph 4

5.50%43.50%

9.50%41.50% Govt. Employee

Self Employee

Professional

Private Employee

Most of the people loan taker is Private Employee than the second are self employee.

The third and fourth are Govt. Employee and professional respectively.

So we can say micro finance institutions are very help full for the private employee and self employee.

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Q. 5 What is your Gross income? Table 5

Below 60000 60000-80000 80000-100000 Above 100000

103 78 12 7

Graph 5

39.00%

51.50%

3.50%

6.00%

Below 60000

60000-80000

80000-100000

Above 100000

A very large group is below 60000 income group and second is 60000 to 80000.

So we can say the income of these people is very less and they very need for microfinance service and

microfinance institutions are help full for their development.

Q. 6 What is your business size on the base of turnover? Table 5

0 – 2 lac 2 – 5 lac 5 – 7 lac more then 7 lac

96 74 24 6

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Graph 5

12.00%

3.00%

48.00%

37.00%

0 – 2 lac

2 – 5 lac

5 – 7 lac

more then 7 lac

Most of the people business size is 0-2 lack and the second is 2-5 lack.

The microfinance institutions are playing a big role to expand their business size and full fill the loan

requirement for new enterprises.

Q. 7 What is your social category? Table 7

Gen OBC ST/SC Minority

42 57 84 17

Graph 7

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42.00% 8.50%

21.00%28.50%

Gen

OBC

ST/SC

Minority

Most of the people are ST/SC whose are taking advantages of micro financé.

The next level of group is OBC, General and Minority respectively.

So we can say for the development of ST/SC and OBC microfinance is very helpful.

Q. 8 What is your economic category? Table 8

BPL Middle class Lower Middleclass APL

116 6 9 69

Graph 8

4.50%

34.50%

58.00%

3.00%

BPL

Middle class

Lower Middleclass

APL

Most of the customers are BPL and second are APL

So we can say microfinance institutions are playing a very important role to improve the living standard and

the requirement of BPL and APL.

Q. 9 Area of residence? Table 9

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Small Village Town City Big City

87 70 34 9

Graph 9

35.00%43.50%

4.50%17.00%

Small Village

Town

City

Big City

Most of the customers are from the small villagers and the second are from town

The people of City and Big city are is very less.

So we can say in the village and town the microfinance institutions can grow and they can make a plan

according to the villagers. So they take advantage of the very large market for the growth of the business.

Q. 10 What is your family size? Table 10

Unmarried Married More than 12 Between 7to12 Less than 6

17 29 34 76 44

Graph 10

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17.00%38.00%

22.00%8.50%

14.50% Unmarried

Married

More than 12

Between 7to12

Less than 6

Most of the family size is between 7 to 12.

Than the second, third fourth and fifth size is Less than 6, more than 12, married and unmarried respectively.

So we can say microfinance institutions are focus the right family size segment in this segment the bed debts

of loan risk is very less because the family size is not a big so they are not burden on the house hold.

Q. 11 What is your monthly saving amount (approximate)? Table 11

Below 500 500 to 1000 1000 to 1500 1500 and above

57 102 28 13

Graph 11

14.00%

6.50%28.50%

51.00%

Below 500

500 to 1000

1000 to 1500

1500 and above

Most of the

persons saving are between 500 to 1000 and the second is below 500.

Than the third and fourth is between 1000 to 1500 and above 1500.

So we can say these are repay the loan amount very well. There is a very rare condition for the bed debts of

the loan amount and this is the main advantage for the microfinance institution for the good repayment ratio.

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Q. 12 Forms of Savings (Percentage) % Table 12

Bank Cash Gold Livestock Self Help Group Land

37 17 17 47 71 11

Graph 12

6%

3.50%

23.50%39.50%

19.50%8.50%

Bank

Cash

Gold

Livestock

Self Help Group

Land

Most of the persons are invest the money in the Self Help Group because these saving are very less so they

can invest small saving easily in comparison to other big saving options.

The second option which is choose by the people is livestock because if the saving amount is enough than

they want to invest to generate the more return in comparison of Self Help Group so they invest in Live stock

like cow, goat, buffalo etc. for milk and resale.

Very less person have the saving into the cash form.

Some big savers are invest the saving into the bank, gold and land, because in these option the savers have a

large amount of saving and we can say the big bundle of saving.

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Q. 13 Source of credit? Table13

Bank Co-Opt. Society SHG Money Lender Friends Relative Neighbors

9 17 88 63 10 8 5

Graph 13

3% 4%

44.00%

31.50%

5.00%4.50%

8.50%

Bank

Co-Operative Society

Self Help Group

Money Lender

Friends

Relative

Neighbors

Most of the want to take a loan from the Self Help Group and these second chose is money lender. Because

they provide the loan immediately.

People want to avoid to the bank due to high transaction cost, and avoid friend, relative and neighbors for due

to obligations.

Q. 14 Availability of loan? Table14

Low Medium High Very High

67 103 19 11

Graph 14

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9.50%5.50%33.50%

51.50%Low

Medium

High

Very High

The availability of loan is medium and the second position according to people is low and the third and fourth

position is high and very high respectively.

So we can say the loan requirement of the people is fulfill easily with some negosecatition.

People compromising in the rate of interest and the cost charging against the transaction cost and full fill the loan

requirement.

Q. 15 Are you satisfied by interest amount of charges agents‟ loan? Table 15

Fully Satisfied Somewhat Satisfied Dissatisfied Extremely Dissatisfied

13 56 124 7

Graph 15

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62.00%

3.50%6.50%28.00%

Fully Satisfied

Somewhat Satisfied

Dissatisfied

Extremely Dissatisfied

Mostly persons are dissatisfied because the interest rate charged by the microfinance institutions is very high,

and they are convenient to repay the installment and the very high interest rate.

Than the some are some what satisfied whose can able to repay the loan installment and high interest rate.

So we can say in the case of satisfaction the people are taking the loan to fulfill the very urgent need and the

satisfaction level vary according to need.

Q. 16 Purpose of Credit? Table 16

Buying of seeds 34 To start a new enterprise 5

Consumption purposes 13 To construct their home 4

Buying of fertilizers 28 To meet the unforeseen situations like flood,

famine, cyclone etc.

1

Buying of plant protection chemicals 26 For social functions in the family such as

marriage, childbirth etc.

2

For educating their children 9 To buy assets like plough, bullocks, bullock

carts, potters wheel, handloom etc

57

For medical purposes 21 Total 200

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Graph 16

6.50%

17.00%

4.50% 13.00% 14.00%11%

28%

2%

1%

1%3%

Buying of seeds

Consumption purposesBuying fertilizers

Buying of plant protection chemicals

For educating their children

For medicial purposesTo start a new enterprise

To construct their home

To meet the unforeseen situations like flood, famine, cyclone etc.For social functions in the family such as marriege, childbirth etc.

To buy assets like plough, bullocks, bullock carts, potter wheel, handloom etc.

Most of the customers taken the loan for the buy assets like plough, bullocks, bullock carts, potters wheel,

handloom etc and the second, third and fourth is buying of seeds, buying fertilizers and buying a plant

protection chemicals.

Consumption purpose, education of children, medical purpose, is very less people those taking a loan to

fulfill these type of requirements.

Start a new enterprises, constriction their home, social functions in the family such as marriage, childbirth

etc., meet the unforeseen situations like flood, famine, cyclone etc., are very less those want to take loan

from the microfinance institutions because they type of work want to big loan amount and microfinance

institutions charge a high interest rate.

Q. 17 Loan requirement? Table 17

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Short term Long term

137 63

Graph 17

68.50%

31.50% Short term

Long term

Most of the persons have a short term loan requirement for the general purpose like consumption, education,

medical, buying a seeds, buying a plant protection chemical etc.

Very few customers have a long term loan requirement mostly those who want to constriction their house and

start a new enterprises they take a long term loan.

Q. 18 Range (Loan Size) Table 18

Rs.0-

500

Rs.500-

1000

Rs.1000-

3000

Rs.3000-

5000

Rs.5000-

7000

Rs.7000-

10000

Rs.10000-

15000

Rs.15000

above

5 10 25 29 79 34 11 7

Graph 18

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6%

4%

16%

12.50%14.50%

39.50%

2.50%5.00%

Rs. 0-500

Rs. 500-1000

Rs.1000- 3000

Rs. 3000-5000

Rs. 5000-7000

Rs. 7000-10000

Rs. 10000-15000

Rs. Above 15000

Most of the person want a loan in between the 5000 to 7000, because their need are general need like

education, medical and consumption etc. so they demand these loan size.

To buying a seeds, plant protection chemical they demand the loan between 7000 to 10000.

10000 to 15000 and above 15000 loan size demand is very less they type of loan demand the person who start

new enterprise, construction their house and for the social function.

So we can say the micro fiancé institutions are help full to full the general requirement of the people.

Q. 19 What is your repayment period? Table 19

Less then 3 month 3 to 6 month 6 to 12 month 12 to 18 month 18 to 24 month 24 and

above

6 76 69 23 17 9

Graph 19

5%

34.50%

11.50%

8.50%3.00%38.00%

Less then 3 month

3 to 6 month

6 to 12 month

12 to 18 month

18 to 24 month

24 and above

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Maximum number of loan taker repay the loan amount into 3 to 6 and second duration is 6 to 12 months

respectively.

This is a very big advantage for the microfinance institutions they received the complete loan installment

with interest in very less period and they reinvest the money into the loan amount, so the productivity of

money goes very high.

Q. 20 What is your rate of payment ratio? Table 20

Below 90% 90 to 95% 95 to 98% above 98%

11 12 16 161

Graph 20

6.00% 5.50%

80.50%

8.00%

Below 90%

90 to 95%

95 to 98%

above 98%

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The repayment ratio of loan amount is above 98 percent. The reason behind the very good for the growth of

the microfinance institutions is good repayment ratio.

The lowest repayment ratio below the 90 percent is only 11 in the sample size, the the 90% to 95% and 95%

to 98% is 12 and 16 respectively which is very less in comparison to above 98%.

So we can say these are some case which are found everywhere in the finance service. They are not affecting

the microfinance institutions at very big level. These institution are plan for these case and meet out the they

loss from the high interest rate and plenty.

Q. 21 Fine amount when defaulter (percent of installment)? Table 21

Below 2% 2 to 5% 5 to 10% Above10%

5 17 54 124

Graph 21

27.00%

62.00%

2.50%8.50%

Below 2 2 to 5% 5 to 10% Above10%

In the microfinance institutions the penalty amount is very high these are most above 10%.

In the sample size to 200 the 124 person told they bear and if they defaulter the above 10% of installment

amount charged by the microfinance institution.

In the second number the 5 to 10% amount charged by the microfinance institutions against the when person

can default in repayment of installment.

Very less people say 2% to 5% and below 2% penalty charged when they made default in repayment of loan

amount.

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So we can say the microfinance institutions create the high amount of penalty fear in the people. So the loan

taker repayment the installment timely and the risk of bed debts and dues go very less.

And we can say in other hand it‘s a very large burden on the loan taker, because mostly they have a genuine

reason to not repayment of the installment timely.

Q. 22 How many loan has your household subscribed? Table 22

1 2 3 4 More then 4

11 103 57 23 6

Graph 22

28.50%

11.50%3.00%5.50%

51.50%1

2

3

4

More then 4

In the sample size of 200 people 103 people subscribe the 2 loan.

The second, third, fourth and fifth position in the sample size is 3, 4, 1 and more than 4 respectively.

So we can continuous transaction with microfinance institutions, people and microfinance institutions both

are create the faith on each other, microfinance institutions are expand their business with the reliable

customer.

Q. 23 How you came to know about microfinance? Table 23

Relatives Company representative Advertisement You took your own initiative

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114 26 8 52

Graph 23

4.00%26.00%

57.00%

13.00%

Through relatives

Through company

representative

Through

advertisement

You took your

own initiative

Mostly persons know about the microfinance institutions through relatives and the secondly they took their

own initiative, because when we need the loan firstly we discuss with the relatives or search a good option

with is fulfill our requirement, and the transaction cost of the loan subscription is less and loan get in very

few time.

Company representative and the advertisement effect are not effective in the microfinance service.

Q. 24 Why did you choose microfinance institutions? Table 24

Due to early

settlement

Personal relationship Advice from friends or relatives Brand

name

131 13 53 3

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Graph 24

26.50%1.50%

65.50%

6.50%

Due to early settlement

Personal relationship

Advice from friends or

relatives

Brand name

Mostly person not want problem during the loan settlement and after taking the loan settlement so they want

to goes to the microfinance institutions, because in the microfinance institutions people come due to early

settlement at these institutions.

In the sample size of 200 some we found that 53 persons goes to microfinance institutions for the advice from

friends or relatives. So we can say the mouth publicity is very effective for the microfinance institutions.

Very less person want to go due to personal relationship and brand name.

Q. 25 In microfinance institutions the attitude of employees co-operative? Table 25

Fully Cooperative Somewhat cooperative Uncooperative Extremely Uncooperative

87 74 32 7

Graph 25

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16.00%3.50%43.50%

37.00%

Fully Cooperative

Somewhat cooperative

Uncooperative

Extremely Uncooperative

87 people in the sample size of 200 say the attitude of microfinance employee is fully cooperative, because

they aims are fulfill the public requirement, and 74 persons say somewhat cooperative means mostly are feel

good with employee.

Some people are saying uncooperative and, extremely uncooperative due to some person reasons.

Q. 26 How is your microfinance executive behaving? Table 26

Prompt at the time of

anniversary

He timely informs you about the

changes in the plan

No communication

from the executive

Very inconsistent/

irregular

communication

44 88 31 37

Graph 26

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44.00%

22.00% 18.50%

15.50%

Prompt at the time of anniversary

He timely informs you about the changes in the plan if any

No communication from the executive

Very inconsistent/ irregular communication

Mostly people say he timely informs about the changes in the plan if any.

Some people say when at the time of anniversary they communicate.

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SWOT

ANALYSIS

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6. SWOT ANALYSIS

SWOT analysis is the analysis of the internal and external factors, which have impact on the survival of any industry.

Now let‘s make SWOT analysis for microfinance industry.

STRENGTHS:

1) Micro finance is the part of the finance.

2) Some brand name institutions is enough to sell the products easily.

3) Range of products

4) Microfinance system has a long and strong history of solvency, financialStability

5) A synthesis that can be evolved out of the success of NGOs/CBOs engaged in microfinance is based on

certain preconditions, institutional and facilitating factors.

6) NGOs/ CBOs have been successful that have istilled financial value/ discipline through savings and have

demonstrated a matching value themselves before lending.

7) A recovery system based on social intermediation and various options including non-financial mechanisms

has proved to be effective. Another important feature has been the community governance.

8) The communities in which households are direct stake holders have successfully demonstrated the success of

programs.

9) A precondition for success is to involve community directly in the program. Experience indicates that savings

and credit are both critical for success and savings should precede credit. Chances of success more with

women: Programs designed with women are more successful.

WEAKNESSES:

Lack of advertisement, so most of the customers are not aware of the microfinance

One of the most successful models discussed around the world is the Grameen type.

It involves too much of external subsidy which is not replicable Grameen bank has not oriented itself towards

mobilising peoples' resources. The repayment system of 50 weekly equal instalments is not practical because

poor do not have a stable job and have to migrate to other places for jobs.

The communities are agrarian during lean seasons it becomes impossible for them to repay the loan. Pressure

for high repayment drives members to money lenders. Credit alone cannot alleviate poverty and the Grameen

model is based only on credit.

Micro-finance is time taking process. Haste can lead to wrong selection of activities and beneficiaries.

Most of the existing microfinance institutions are facing problems regarding skilled labour which is not

available for local level accounting.

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Drop out of trained staff is very high. One alternative is automation which is not looked at as yet. Most of the

models do not lend for agriculture. Agriculture lending has not been experimented.

Risk Management : yield risk and price risk

Insurance & Commodity Future Exchange could be explored

All the models lack in appropriate legal and financial structure. There is a need to have a sub-group to

brainstorm on statutory structure/ ownership control/ management/ taxation aspects/ financial sector

prudential norms. A forum/ network of micro-financier (self regulating organization) is desired.

OPPORTUNITY

Rural population is a major population segment in India. According to the 2001 Census ofIndia 2001, 72.22

percent of the total population is rural and dependent on agriculture andallied activities for their livelihood.

The failure of agricultural reforms and notadopting a farmer-oriented agricultural policy, growth rate of

employment in agriculturesector has declined from 2.32 per cent in 1972-73 to 1.2 per cent in 1983 to 0.65

per cent in1985.

Agriculture contributed only 31.7 percent to GDP in 1993-94 down from 56.5 per centin 1951. But this is not

the complete picture of the rural economy.

The rural economy has astrong base for employment generation. Rural economy still accounts nearly 40 per

cent ofIndia‘s GDP including 10 per cent of RNFS. Share of exports in GDP has increased from 6.2per cent

in 1991-92 to 9.2 per cent in 1994-95. Major contribution to exports comes from theagricultural and allied

sectors such as handloom, power loom, gem and jewellery, handicrafts,carpets, leather and mineral products,

all of which have at least one primary rural productionbase.

The rural market share of both consumer durable and non-durable products exceeds 40-50 per cent for most

items and is growing every year.

Papola (1991) while analysing the trends in rural non-farm employment, based on theanalysis of the data

from the quinquennial rounds of the National Sample Survey during the1970s and 1980s, reveals that the

share of rural area in total employment has declined fromaround 82 per cent in 1977-78 to 78 per cent in

1987-88; that the share of the rural non-agricultural employment has increased from around 14 per cent to 17

per cent in totalemployment; and from 17 per cent to 22 per cent in rural employment.

Appropriate strategies and policies need to be evolved to strengthen this trend towards diversification of rural

economy.Practically, all non-agricultural activities have shown a steady increase inemployment. It must be

recognised that increasingly larger components of ruralindustrial activities now consist of non-traditional

activities with forward andbackward linkages with agriculture. Unlike many traditional village industries

whichconstituted only secondary and supplementary occupations, these activities arepushed as main

occupations."

There is a vast untapped market in India.

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THREATS:

The main threat is from the other players who have grabbed the market share.

New private players are coming in this sector for earning the profit.

There is a cutthroat competition in this

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CONCLUSIONS

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7. CONCLUSIONS

After the deep study of the questionnaire and microfinance sector of India, I can tell certain conclusion ,

which can be summarized as:

1. This is the sector, which has most business opportunities perhaps in India.

2. Microfinance industry is one of the fastest growing sectors in India.

3. As far as the comparison of microfinance leader private bank, NGO and SHG is concerned, there are both

positive as well as negative impacts on both the sides.

4. For private players the negative aspect is that they have to fight with the public sector giant which is

established player with a high brand value.

5. But the positive impact is that the microfinance awareness has increased and the business of these institutions

has increased.

6. The microfinance institutions has spend less on promoting services, because mostly respondent does not fully

aware from the features & benefits of these institutions services.

7. Why is the new microfinance the world‘s best kept secret? Here is why: Western donors cannot take

substantial credit for the success of this model, so why publicize it? Though many international donors, such

as IFAD, DFID, GTZ, Misereor, and Ford Foundation have supported the new microfinance, the U.S.

government has been missing in action. Sadly, for many followers of positive trends in microfinance in the

United Sates, the SHG/bank linkage scheme will gain currency only when USAID blesses it as a ―best

practice.‖ That blessing will occur as experts realize that profitability in a microfinance institution, a best

practice of the old microfinance, comes to a handful of players and that breaking even is an elusive goal and,

if ever reached, is reached by virtue of having exacted huge subsidies in start-up costs and capital.

8. This essay argues for a return to our original intent in microfinance, that is to improve the lives of the very

poor. The new microfinance is a reaffirmation of our original intent, armed with new knowledge about how

to make our intent real.

9. Some valuable lessons can be drawn from the experience of successful Microfinance operation. First of all,

the poor repay their loans and are willing to pay for higher interest rates than commercial banks provided that

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access to credit is provided. The solidarity group pressure and sequential lending provide strong repayment

motivation and produce extremely low default rates. Secondly, the poor save and hence microfinance should

provide both savings and loan facilities. These two findings imply that banking on the poor can be a

profitable business. However, attaining financial viability and sustainability is the major institutional

challenge. Deposit mobilization is the major means for microfinance institutions to expand outreach by

leveraging equity (Sacay et al 1996). In order to be sustainable, microfinance lending should be grounded on

market principles because large scale lending cannot be accomplished through subsidies.

10. A main conclusion of this paper is that microfinance can contribute to solving the problem of inadequate

housing and urban services as an integral part of poverty alleviation programmes. The challenge 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 imposing unbearably high cost of monitoring its end-use

upon the lenders. A promising solution is to provide multi-purpose loans or composite credit for income

generation, housing improvement and consumption support. Consumption loan is found to be especially

important during the gestation period between commencing a new economic activity and deriving positive

income. Careful research on demand for financing and savings behaviour of the potential borrowers and their

participation in determining the mix of multi-purpose loans are essential in making the concept work (tall

1996).

11. Eventually it would be ideal to enhance the creditworthiness of the poor and to make them more "bankable"

to financial institutions and enable them to qualify for long-term credit from the formal sector. Microfinance

institutions have a lot to contribute to this by building financial discipline and educating borrowers about

repayment requirements.

After analyzing the survey the researcher also found that there are some new challenges and opportunities,

which can be, consider by the company for their betterment.

New challenges:-

1. Product innovation

2. Distribution

3. Customer service

4. New technology

5. Investment

6. Flexible product

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SUGGESTIONS

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8. SUGGESTION

Microfinance is an upcoming sector where high profit potentials are foreseen. In order to increase

the awareness about this, Microfinance institutions should advertise and market their different products in

an attractive way so that people develop their interest in this sector.

NGO, Commercial and Private Institutions are deal in this industry but now that companies have increased

to a great extent it should also follow some steps so that it does not loose hold over the market. Some of

these steps can be:

Company should improve upon the ways of claim settlement & it should be as quick as possible.

Company should increase the no. of employee both men and women to increase its market share in the finance

sector.

Training should be given to the employee agents so to make them more efficient. And management should also

be more efficient in coordination and controlling the employees.

Company should increase its advertisement budget to increase the level of advertisement, which in turn will help

the company to increase loyalty of customer towards the company & more and more new customers will join as a

potential client.

Paper work & documentation should be made less by the company so that customer‘s precious time is saved and

they are easily able to understand the procedure of the company.

To increase public awareness creative advertising should be done & company should issue the benefits of having

microfinance services in public interest to create desire among the customers to have various types of

microfinance services.

Company should have a brand ambassador to enhance its image in the mind of the people.

9. ANNEXURE

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QUESTIONNAIRE

1. Name _______________________________________Gender_________________

Address: ______________________________________________________________

______________________________________Contact No.:______________

2. Age of the person taking loan at entry

a) Below 25 [ ] b) 26-35 [ ]

c) 36-45 [ ] d) 46-55 [ ]

e) Above 55 [ ]

3. What is your educational qualification?

a) Graduate [ ] b) Post Graduate [ ]

c) Professional PG [ ] d) Under Graduate [ ]

e) 10th/12

th [ ] f) Illiterate [ ]

4. Profession tick the relevant

a) Private Employee [ ] b) Self Employee [ ]

c) Professional [ ] d) Govt. Employee [ ]

5. Gross income tick the relevant

a) Below 60000 [ ] b) 60000-80000 [ ]

c) 80000-100000 [ ] d) Above 100000 [ ]

6. What is your business size on the base of turnover?

a) 0 – 2 lac [ ] b) 2 – 5 lac [ ]

c) 5 – 7 lac [ ] d) more then 7 lac [ ]

7. What is your social category?

a) Gen [ ] b) OBC [ ]

c) ST/SC [ ] d) Minority [ ]

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8. What is your economic category?

a) BPL [ ] b) Middle class [ ]

c) Lower Middle Class [ ] d) APL [ ]

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9. Area of residence?

a) Small Village [ ] b) Town [ ]

c) City [ ] d) Big City [ ]

10. What is your family size?

a) Unmarried [ ] b) Married [ ]

c) More than 12 [ ] d)Between 7to12 [ ]

e) Less than 6 [ ]

11. What is your monthly saving amount (approximate)?

a) Below 500 [ ] b) 500 to 1000 [ ]

c) 1000 to 1500 [ ] d) 1500 and above [ ]

12. Forms of Savings (Percentage) %

a) Bank [ ] b) Cash [ ]

c) Gold [ ] d) Livestock [ ]

e) SHG [ ] f] Land [ ]

13. Source of credit?

a) Bank [ ] b) Co-Operative Society [ ]

c) Self Help Group (SHG) [ ] d) Money Lender [ ]

e) Friends/neighbors [ ] f] Relative [ ]

14. Availability of loan?

a) Low [ ] b) Medium [ ]

c) High [ ] d) Very High [ ]

Interest Rate…………..…… Transaction cost (include all loan expenses)………..

15. Are you satisfied by interest amount of charges agents‘ loan?

a) Fully Satisfied [ ] b) Somewhat Satisfied [ ]

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c) Dissatisfied [ ] d) Extremely Dissatisfied [ ]

16. Purpose of Credit?

People have borrowed for different purposes: -

a) Buying of seeds [ ]

b) Buying of fertilizers [ ]

c) Buying of plant protection chemicals [ ]

d) To buy assets like plough, bullocks, bullock carts, potters wheel, handloom etc [ ]

e) For social functions in the family such as marriage, childbirth etc. [ ]

f] Consumption purposes [ ]

g] For educating their children [ ]

h] For medical purposes. [ ]

I] To start a new enterprise [ ]

j] To construct their home [ ]

k] To meet the unforeseen situations like flood, famine, cyclone etc. [ ]

17. Loan requirement?

a) Short term [ ] b) Long term [ ]

18. Range (Loan Size)

a] Rs. 0 to Rs.500 [ ] b] Rs. 500-Rs. 1000 [ ]

c] Rs.1000 to Rs. 3000 [ ] d] Rs. 3000 to Rs. 5000 [ ]

e] Rs. 5000 to Rs. 7000 [ ] f] Rs. 7000 to Rs. 10000 [ ]

g] Rs. 10,000 to Rs. 15,000 [ ] h] Rs. 15,000 and above [ ]

19. What is your repayment period?

a) Less the 3 month [ ] b) 3 to 6 month [ ]

c) 6 to 12 month [ ] d) 12 to 18 month [ ]

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c) 18 to 24 month [ ] d) 24 and above [ ]

20. What is your rate of payment?

a) Below 90% [ ] b) 90 to 95% [ ]

c) 95 to 98% [ ] d) above 98% [ ]

21. Fine amount when defaulter (percent of installment)?

a) Below 2% [ ] b) 2 to 5% [ ]

c) 5 to 10% [ ] d) Above10% [ ]

22. How many loan has your household subscribed?

a) 1 [ ] b) 2 [ ]

c) 3 [ ] d) 4 [ ]

e) More then 4 [ ]

23. How you came to know about microfinance?

a) Through relatives [ ]

b) Through company representative [ ]

c) Through advertisement [ ]

d) You took your own initiative [ ]

24. Why did you choose microfinance institutions?

a) Due to early settlement [ ]

b) Personal relationship [ ]

c) Advice from friends or relatives [ ]

d) Brand name [ ]

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25. In microfinance institutions the attitude of employees co-operative?

a) Fully Cooperative [ ] b) Somewhat cooperative [ ]

c) Uncooperative [ ] e) Extremely Uncooperative [ ]

26. How is your microfinance executive behaving?

a) Prompt at the time of anniversary [ ]

b) He timely informs you about the changes in the plan if any [ ]

c) No communication from the executive [ ]

d) Very inconsistent/ irregular communication [ ]

27. Do you want to give any suggestions for make better to the microfinance system so people can take maximum benefit

of this system? ________________________________

_________________________________________________________________________

Date :- (Signature)

Thank You.

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10. BIBLIOGRAPHY

Books Referred:

Kothari CR ―Reserch Methodology‖ Second education year 2004 publication Himalaya.

Philip Kotler, Kevin Keller, Abraham Koshy and Mithileshwar Jha, ―Marketing Management‖, twelfth edition,

published by Pearson Prentice Hall (year 2007)

Naresh Malhotra, ―Marketing Research‖

Journals:

The management review (2003), ―Microfinance in India :discussion:,June.

The management review (2003), ―Microfinance : An introduction‖, June.

R.Nedunchezian and N Sivasankaran (2009), ―Assessing the performance of stackeholder of micro finance

program‖, The Icfaian journal, management research vol 8 No.1 January 2009

Anand (2008), ―High cost of finance in Microcredit business in Andhra Pradesh (India): Problems and possible

solution‖, The Icfain journal of management research, vol 7 No.4

Websites Referred:

www.cgap.org

www.lhan.org

www.dhan.org

www.grameenfoundation.org

www.pradan.net

www.thehindubusinessline.com

www.wikipedia.com

www.google.com

11. GLOSSARY

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Micro credit: This is a small amount of money loaned to a client by a bank or other institution. Micro credit

can be offered, often without collateral, to an individual or through group lending.

Micro finance: This refers to loans, savings, insurance, transfer services and other financial products targeted

at low-income clients.

Micro insurance: This is a system by which people, businesses and other organizations make payments to

share risk, Access to insurance enables entrepreneurs to concentrate more on growing their businesses while

mitigating other risks affecting property, health or the ability to work.

Remittances: These are transfer of funds from people in one place to people in another, usually across

borders to family and friends. Compared with other sources of money that can fluctuate depending on the

political or economic climate, remittances are a relatively steady source of funds.

Micro Savings: These are deposit services that allow people to store small amounts of money for future use,

often without minimum balance requirements. Savings accounts allow households to save small amounts of

money to meet unexpected expenses and plan for future investments such as education and old age.

Micro Entrepreneurs: These are people who own small scale businesses that are known as micro

enterprises. These businesses usually employ less than 5 people and can be based out of the home. They can

provide the sole source of family income or supplement other forms of income. Typical micro entrepreneur

activities include retail kiosks sewing work ships, carpentry shops and market stalls.

Bankable: These people are those deemed eligible to obtain financial services that can lead to income

generation, repayment of loans, savings, and the building of assets.

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ABBREVIATIONS

ADB (Asian Development bank)

ADBP (Agricultural development bank of Pakistan)

AKRSP (Aga Khan Rural Support Program)

BOK (Bank of Khyber)

BRAC (Bangladesh Rural Advancement Committee)

CB (Co-operative Banks )

CBFS (Community based financial systems)

CBs (Co-operative Banks).

GDP (Gross Domestic Product)

GTZ (Gesellschaftfur Tecnische Zusammenarbeit)

HDR (Human Development Report)

HFI (Housing Finance Institutions)

HFIs (Housing Finance Institutions),

HUDCC (Housing and Urban Development Coordinating Council )

IFAD (International Fund for Agriculture Development )

KB (Khushhali Bank)

KfW (Kreditanstalt fur Wiederaufbau )

LMSE (Leasing to Small and Micro Scale Enterprises Program)

MBB (Micro Bankning Bulletin)

MDG (Millennium Development Goals)

MFI (Micro finance Institution)

N. A‘s(Northern Areas)

NBCFDC (National Backward Classes Finance Development Corporation)

NGO (Non-Government Organizations)

NHDC (National Handicrafts Development Corporation

NJI (New Jubilee Insurance Company)

NMFDC (National Minorities Finance Development Corporation)

NRSP (National Rural Support program)

NWFP (North West Frontier Province)

OPP (Orangi Pilot Project)

OXFAM (Oxford Committee for Famine & Relief)

PMN (Pakistan Micro finance Network)

RDB (Rural Development Banks )

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RDBs (Rural Development Banks),

RRBs (Regional Rural Banks)

Rs. (Pakistani Rupee) currency

RSP (Rural Support Program)

SDC (Swiss Agency for Development Co-operation)

SEWA (Self-help Women's Association

SHG (Self Help Groups )

SKS India - Swayam Krishi Sangam

SME (Small and medium Enterprises)

UCB (Urban Co.op Banks)s

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