Micro- Finance in India

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  • 1. A SUMMER TRAINING PROJECT REPORT ON “MICRO-FINANCE IN INDIA” UNDERTAKEN AT (District Central Co-Operative Bank Ltd.)Project Report Submitted to Vikram University, UjjainTowards Partial Fulfillment of the Requirement for the Degree Of MASTER OF BUSINESS ADMINISTRATION By Neha Jain
  • 2. DECLARATIONI NEHA JAIN, student of MBA 3rd semester studying at Mandsaur Institute ofTechnology (MIT), hereby declare that the summer training report on “Micro-Finance” submitted to Vikram University, Ujjain is the result of my own effort inthe training, which I did as a part of the curriculum for the fulfillment of Masterof Business Administration (MBA) degree. It has not been duplicated from anyother earlier works and all information provided in this report is genuine. Theall fact and figure in the project are true. There are taken from the companyweb site and from company brochure and etc. I also declare that all of thecontent of this report is true to the best of my knowledge and belief.This report submitted for the partial fulfillment of MBA program. It has notbeen submitted to any other university or for any other degree.DATE- NAME OF STUDENTPLACE- NEHA JAIN 2
  • 3. PROJECT GUIDE CERTIFICATEThis is to certify that the Project Report entitled “Micro Finance in India”which is being submitted herewith for the award of the degree of Master ofBusiness Administration (MBA) of Vikram University, Ujjain is the result of theoriginal research work completed by Neha Jain under my supervision andguidance and to the best of my knowledge and belief, the work embodied inthis Project Report has not formed earlier.Place: SignatureDate: 3
  • 4. CONTENTChapters No. Particulars Page No. (Executive summary Of the Project) (10-11)Chapter I : Introduction (12-18)Chapter II : Profile of the organization (19-25)Chapter III : Conceptual Background (26-30)Chapter IV : Micro-Finance in India (31-79)Chapter V : Findings Suggestions and Conclusion (80-81) Bibliography (82) 4
  • 5. CHAPTER DETAILS CHAPTER IINTRODUCTION Introduction of Micro- Finance Need of the Study Objectives of the Study Scope of the Study CHAPTER IIPROFILE OF THE ORGANISATION Introduction & History of the District Cooperative Central Bank Vision and Mission Structure of the District Cooperative Central Bank Ltd. Product & Services Financial Health of District Cooperative Central Bank Ltd. Function of District Cooperative Central Bank Ltd. CHAPTER IIICONCEPTUAL BACKGROUND Studies analyzing the Micro Financing in India Rationale of the Study CHAPTER IVMICRO- FINANCE IN INDIA Origin of Micro Finance Demand for Micro-credit or Micro- Finance Key Players In The Micro Finance System Self Help Groups (SHGs) Microfinance Models 5
  • 6. Role, Functions and Working Mechanism of Financial Institutions Marketing of Microfinance Products Success Factors of Microfinance in India Issues Related to Microfinance in India CHAPTER VFindings, Suggestions and Conclusion Findings & Suggestions ConclusionTerminal Item:- Bibliography 6
  • 7. EXECUTIVE SUMMARYMicro finance approaches have emerged in India over the past decade,involving the provision of thrift, credit and other financial services andproducts, with the aim to raise income levels and improve living standards.The most notable among these micro finance approaches is a nationwideattempt, pioneered by Non- Governmental Organizations and now supportedby the state, to create links between commercial banks and NGOs andinformal local groups. Micro finance through Self Help Groups (SHGs) ispropagated as an alternative system of credit delivery for the poorest of thepoor groups. Recognizing their importance, both Reserve Bank of India andNational Bank for Agriculture and Rural Development (NABARD) have beenspreading the promotion and linkage of SHGs to the banking system throughrefinance support and initiating other proactive policies and systems.Microfinance sector has grown rapidly over the past few decades. NobelLaureate Muhammad Yunus is credited with laying the foundation of themodern MFIs with establishment of Grameen Bank, Bangladesh in 1976.Today it has evolved into a vibrant industry exhibiting a variety of businessmodels. Microfinance Institutions (MFIs) in India exist as NGOs (registered associeties or trusts), Section 25 companies and Non-Banking FinancialCompanies (NBFCs). Commercial Banks, Regional Rural Banks (RRBs),cooperative societies and other large lenders have played an important role inproviding refinance facility to MFIs. Banks have also leveraged the Self-HelpGroup (SHGs) channel to provide direct credit to group borrowers.With financial inclusion emerging as a major policy objective in the country,Microfinance has occupied centre stage as a promising conduit for extendingfinancial services to unbanked sections of population. At the same time,practices followed by certain lenders have subjected the sector to greaterscrutiny and need for stricter regulation. 7
  • 8. The microfinance sector is having a healthy growth rate, there have been anumber of concerns related to the sector, like grey areas in regulation,transparent pricing, low financial literacy etc. In addition to these concernsthere are a few emerging concerns like cluster formation, insufficient funds,multiple lending and over-indebtedness which are arising because of theincreasing competition among the MFIs.Today, the microfinance industry and the greater development communityshare the view that permanent poverty reduction requires addressing themultiple dimensions of poverty. For the international community, this meansreaching specific Millennium Development Goals (MDGs) in education,womens empowerment, and health, among others. For microfinance, thismeans viewing microfinance as an essential element in any countrys financialsystem. 8
  • 9. CHAPTER-1 INTRODUCTION “MICRO-FINANCE IN INDIA”Introduction of Micro-Finance:-Micro-finance is defined as any activity that includes the provision of financialservices such as credit, savings, and insurance to low income individualswhich fall just above the nationally defined poverty line, and poor individualswhich fall below that poverty line, with the goal of creating social value. Thecreation of social value includes poverty alleviation and the broader impact ofimproving livelihood opportunities through the provision of capital for microenterprise, and insurance and savings for risk mitigation and consumptionsmoothing.A large variety of actors provide microfinance in India, using a range ofmicrofinance delivery methods. Since the ICICI Bank in India, various actorshave endeavored to provide access to financial services to the poor increative ways. Governments also have piloted national programs, NGOs haveundertaken the activity of raising donor funds for on-lending, and some bankshave partnered with public organizations or made small inroads themselves inproviding such services. This has resulted in a rather broad definition ofmicrofinance as any activity that targets poor and low-income individuals for 9
  • 10. the provision of financial services. The range of activities undertaken inmicrofinance include group lending, individual lending, the provision ofsavings and insurance, capacity building, and agricultural businessdevelopment services. Whatever the form of activity however, the overarchinggoal that unifies all actors in the provision of microfinance is the creation ofsocial value.Microfinance Definition:-According to International Labor Organization (ILO), “Microfinance is aneconomic development approach that involves providing financial servicesthrough institutions to low income clients”.In India, Microfinance has been defined by “The National MicrofinanceTaskforce, 1999” as “provision of thrift, credit and other financial services andproducts of very small amounts to the poor in rural, semi-urban or urban areasfor enabling them to raise their income levels and improve living standards”."The poor stay poor, not because they are lazy but because they have noaccess to capital."Traditionally micro finance was focused on providing a very standardizedcredit product. The poor, just like anyone else, (in fact need like thirst) need adiverse range of financial instruments to be able to build assets, stabilizeconsumption and protect themselves against risks. Thus, we see abroadening of the concept of micro finance--- our current challenge is to findefficient and reliable ways of providing a richer menu of micro financeproducts. Micro finance is not merely extending credit but extending credit tothose who require most for their and family‟s survival.Concept and Features of Micro-Finance:-Microfinance features are as follows 1. It is a tool for empowerment of the poorest. 2. Delivery is normally through Self Help Groups (SHGs). 3. It is essentially for promoting self-employment, generally used for: 10
  • 11. (a) Direct income generation (b) Rearrangement of assets and liabilities for the household to participate in future opportunities and (c) Consumption smoothing. 4. It is not just a financing system, but a tool for social change, especially for women. 5. Because micro credit is aimed at the poorest, micro-finance lending technology needs to mimic the informal lenders rather than the formal sector lending. It has to: (a) Provide for seasonality (b) Allow repayment flexibility (c) Fix a ceiling on loan sizesMicrofinance approach is based on certain proven truths which are not alwaysrecognized. These are: 1. That the poor are bankable; successful initiatives in micro finance demonstrate that there need not be a tradeoff between reaching the poor and profitability - micro finance constitutes a statement that the borrowers are not „weaker sections‟ in need of charity, but can be treated as responsible people on business terms for mutual profit . 2. That almost all poor households need to save, have the inherent capacity to save small amounts regularly and are willing to save provided they are motivated and facilitated to do so. 3. That easy access to credit is more important than cheap subsidized credit which involves lengthy bureaucratic procedures. 4. Peer pressure in groups helps in improving recoveries.Who are the clients of micro finance?The typical micro finance clients are low-income persons that do not haveaccess to formal financial institutions. Micro finance clients are typically self-employed, often household-based entrepreneurs. In rural areas, they areusually small farmers and others who are engaged in small income-generating activities such as food processing and petty trade. In urban areas, 11
  • 12. micro finance activities are more diverse and include shopkeepers, serviceproviders, artisans, street vendors, etc. Micro finance clients are poor andvulnerable non-poor who have a relatively unstable source of income. As we broaden the notion of the types of services micro financeencompasses, the potential market of micro finance clients also expands. Itdepends on local conditions and political climate, activeness of cooperatives,SHG & NGOs and support mechanism. For instance, micro credit might havea far more limited market scope than say a more diversified range of financialservices, which includes various types of savings products, payment andremittance services, and various insurance products. For example, many verypoor farmers may not really wish to borrow, but rather, would like a saferplace to save the proceeds from their harvest as these are consumed overseveral months by the requirements of daily living. Central government inIndia has established a strong & extensive link between NABARD (NationalBank for Agriculture & Rural Development), State Cooperative Bank, DistrictCooperative Banks, Primary Agriculture & Marketing Societies at national,state, district and village level.The Need in India:- India is said to be the home of one third of the world‟s poor; official estimates range from 26 to 50 percent of the more than one billion population. About 87 percent of the poorest households do not have access to credit. The demand for microcredit has been estimated at up to $30 billion; the supply is less than $2.2 billion combined by all involved in the sector.Due to the sheer size of the population living in poverty, India is strategicallysignificant in the global efforts to alleviate poverty and to achieve theMillennium Development Goal of halving the world‟s poverty by 2015.Microfinance has been present in India in one form or another since the 1970sand is now widely accepted as an effective poverty alleviation strategy. Overthe last five years, the microfinance industry has achieved significant growth 12
  • 13. in part due to the participation of commercial banks. Despite this growth, thepoverty situation in India continues to be challenging.Principles:-Some principles that summarize a century and a half of development practicewere encapsulated in 2004 by Consultative Group to Assist the Poor (CGAP)and endorsed by the Group of Eight leaders at the G8 Summit on June 10,2004: Poor people need not just loans but also savings, insurance and money transfer services. Microfinance must be useful to poor households: helping them raise income, build up assets and/or cushion themselves against external shocks. “Microfinance can pay for itself.” Subsidies from donors and government are scarce and uncertain, and so to reach large numbers of poor people, microfinance must pay for itself. Microfinance means building permanent local institutions. Microfinance also means integrating the financial needs of poor people into a country‟s mainstream financial system. “The job of government is to enable financial services, not to provide them.” “Donor funds should complement private capital, not compete with it.” “The key bottleneck is the shortage of strong institutions and managers.” Donors should focus on capacity building. Interest rate ceilings hurt poor people by preventing microfinance institutions from covering their costs, which chokes off the supply of credit. Microfinance institutions should measure and disclose their performance – both financially and socially. 13
  • 14. NEED OF THE STUDY:- The need of microfinance arises because the rural India requires sources of finance for poverty alleviation, procurement of agricultural and farms input. Micro finance is a program to support the poor rural people to pay its debt and maintain social and economic status in the villages. As we know that India is agriculture based economy so microfinance may be a tools to empower the farmers and rural peoples to make agriculture profitable. So the researchers are interested to find out the scopes of microfinance in rural India. This report is highlighting a picture rural India as a profitable segment for microfinance institutionsOBJECTIVES OF THE STUDY:-  To analyze the growth of microfinance sector developed in India and see potential for the microfinance institutions, NGOs, SHGs in the market.  To analyze the structure and pattern of microfinance program in rural Indian by the MFIs, NBFCs.  To understands the marketing of microfinance products in rural market.  To study the importance and role of microfinance in poverty alleviation and profitable agriculture activities.  To demonstrate the effects of Microfinance as a part of Financial Inclusion in India.  Is Microfinance really a tool to fight against poverty? 14
  • 15. SCOPE OF THE STUDY:- 1. The provision of a revolving line of credit to support rural microenterprises and agricultural activities, 2. Institutional strengthening of the executing and implementing agencies for Project implementation, and Group formation and strengthening of sub-borrowers and beneficiaries. The activities financed were: i. Agriculture, including livestock, vegetable production, and marketing;ii. Manufacturing, including agricultural tools and equipment, food processing, and handicrafts; andiii. Services, including retail shops and numerous trading activities. 15
  • 16. CHAPTER 2 PROFILE OF THE ORGANISATION District Cooperative Central Bank Ltd. (DCCB)Introduction:-District co-operative Bank are federations of primary credit societies inspecified areas normally extending to the whole district menace they arecalled as district co-operative banks. These banks have a few privateindividuals as shareholders who provide both finance of management. Theirmain task is to lend to village primary societies, but they were expected toattract deposits from the general public. But the expectation has not beenfulfilled and many of the co-operative central banks act as intermediariesbetween the State Co-operative Bank on the one hand and the village primarycredit societies on the other. First fully fledged DCCB as per the provisions ofthe Act of 1912 was started in Jabalpur District of the Central Province.Co-operative banks function on the basis of no-profit no-loss. Co-operativebanks, as a principle, do not pursue the goal of profit maximization. Therefore,these banks do not focus on offering more than the basic banking services.So, co-operative banks finance small borrowers in industrial and tradesectors, besides professional and salary classes. Co operative Banks in Indiaare registered under the Co-operative Societies Act. 16
  • 17. The cooperative bank is also regulated by the RBI. They are governed by theBanking Regulations Act 1949 and Banking Laws (Co-operative Societies)Act, 1965.Mission:-  Mission/Targets of the bank are to help the self helped groups by providing them loans at low rate.  Providing the education to the workers/employees of the cooperative societies.  Managing the financial status of the cooperative societies.Vision:-  To providing the loans to the cooperative societies to establish the viaduct pariyojana.  Starting the new schemes for the cooperative societies to recover the N.P.A.(non performing assets )  Opening the education center for cooperative societies to improve/increase the business through giving them proper training & suggestions.  Providing the loans for new schemas time to time.  Repairing the plans for encouraging & awarding the employees of the BankStructure of District Co-Operative Banks In India:-District Co-operative Central Banks (DCCBs) occupy the middle level positionin the three tier co-operative credit structure of the country. Districtcooperative central bank ltd. Mandsaur is regulated by Reserve Bank of India(RBI), National Bank for Agriculture & Rural development (NABARD) andMadhya Pradesh State Cooperative Bank (MPSCB) that is Apex Bank ofBhopal. District cooperative central banks have several branches which areknown as Primary Agricultural Credit Society (PACS). PACS provide servicesto different societies Grameen Sewa Sansthan (GSS) and Large-sizedAdivasi Multipurpose Societies (LAMPS) so that it covered all the rural area 17
  • 18. DISTRICT COOPERATIVE BANK STRUCTURE RBI NABARD MPSCB DCCB BRANCHES PACS GSS LAMPSBoard of the DCCBThe Board of the DCCB comprises elected Chairmen of PACS, representativeof the State Government and the State Cooperative Bank apart from the CEOof the DCCB who would be the member secretary. The board meetsperiodically to review the performance of the bank and provide policyguidance.The board of the DCCB thus represents the interests of the majorstakeholders in the bank. The Directors from the PACS take care of the PACSwho are major borrowers from DCCBs. The representative of the StateCooperative Bank protects the interest of the major provider of funds to theDCCB. The Government is an important stakeholder as the DCCBs functionsunder the administrative control of the registrar of cooperative societies.Moreover the bye-laws of the DCCBs are framed under the Cooperative Act 18
  • 19. of the respective states in which they function. In terms of competencies theDirectors from PACS bring in are empathetic understanding of the needs ofthe members of the cooperative sector in the district. The State CooperativeBank representative provides mainly banking and regulatory competencywhile the State Government representative adds administrative skills to theboard. In order to carry out its functions effectively, the board can constitutesub committees of the board.Products and Services of DCCB:-The following services are provided by the Bank to the farming communitythrough 98 Primary Agricultural Co-Operative Societies and general public inthe district as detailed hereunder:1. AGRICULTURAL LOANS Short Term Loans (Seasonal Agricultural Operations) Medium Term Loans Long Term Loans (Investment Credit Loans)2. NON-AGRICULTURAL LOANS Loans to Employees Co-operative Credit Societies Cash Credit Loans to PACS (for Fertilizer Business) Cash Credit Loans to Weavers (through HWCS/SWCS)3. GOLD ORNAMENTS PLEDGE LOANS4. LOANS TO THE GOVERNMENT SPONSERED SCHEMESSuch as - Self Help Groups, SUPs, CMEY, Rural Artisan Credit Cards, etc.5. LOCKER FACILITY6. ISSUE OF DEMAND DRAFTS 19
  • 20. 7. OTHER SERVICES: Collection of Cheques:The Bank undertakes the collection of local and outstation cheques at anominal commission. Standing Instructions:The Bank undertakes all types of standing instructions issued by thecustomers on their accounts with the bank. Safe Deposit Lockers:Safe deposit lockers are available at all the branches of the bank of varioussizes to suit the needs of different customers. Demand Drafts:We undertake issue of demand drafts and Banker Cheques through allbranches.We have taken up financing for various purposes under schematic and non-schematic lending which are as follows-1. Bore well with SIP set. 2. Pipe line.3. Dairy Scheme of 2 animals 4. Commercial Dairy of 20 Animals loan5. Rural Road Transport 6. Drip Irrigation7. Sugarcane Crusher 8. Jeep Loan9. Tractor Loan 10. Lorry Loan11. Auto Rickshaw loan 12. Sericulture13. S.H.G. Linkage 14. Salary Earners loan15. Consumer Durable 16. Kisan Credit Card17. Education loan 18. Housing loan19. Swarojgar Credit Card 20. Agri – Clinic 20
  • 21. 21. Warm compost 22. Gold Loan, Petty Loan23. Two Wheeler loan 24. Plantation and Horticulture with Drip Irrigation25. Over Draft loan to Individuals, Firms, Business, Industries, Sugar khandasariesFinancial Health of Bank:-The Bank has grown rapidly in the last 4 decades and its operation in theDistrict. Highlights Rs. in Lakhs (2010-11)  Share Capital- 2193.26  Reserve Fund- 4725.88  Deposits- 33261.14  Loan & Advances- 41266.87  Working Capital- 60353.98  Profit- 518.18Functions of DCCB:-The functions of the Central Cooperative bank are guided by the followingmotives. (RBI, 1976)20 To act as the connecting link between primary credit societies and State Cooperative Banks. To provide credit facilities to its member societies to enable them function more effectively. To act as a balancing center by diverting funds from surplus primary credit societies to deficient primary credit societies. To guide and control and working of its member societies. To maintain a supervisory staff to watch carefully the activities of its member societies. To strengthen the cooperative credit movement in the district. 21
  • 22. CHAPTER-3 LITRATURE REVIEWIn this chapter the existing literature on the issues and impact of microfinancehas been reviewed. There are several studies conducted in this area in lastcouple of years. In this chapter the first section covers studies which areconducted to analyze micro finance and its activities in various states ofIndia and last section covers the rationale of the study.Studies analyzing the Micro Financing in India:-Seibel and Parhusib (1990) mentioned in their study that expansion of creditcoverage through state interventions approach was based on the premise thatrural micro entrepreneur are enable to organize themselves. They needsubsidized credit for increasing their income and are too poor to serve.The study by Yaron (1994) found that microfinance is much more thanmicrocredit, stating:” Provision of thrift, credit and other financial services andproducts of very small amounts to the poor in rural, semi-urban and urbanareas for enabling them to raise their income levels and improve livingstandards”. The Self Help Group promoters emphasize that mobilizing savingis the first building block of financial services. Micro Finance progr ams haverapidly expended in recent years. Some examples are: Membership of Sa-Dhan (a leading association) has expended from 43 to 96 communitydevelopment. The CARE CASH program took on the challenge of workingwith small NGO-MFIs and community owned-managed microfinanceorganization.The study also reveals that results in term of microfinance outreachcan be identified that represents achievements that are far beyond anyambitious out reach out come that could have been imagined only fifteenyears is a very short span of timeAccording to Otero (1994) to be successful, financial intermediaries,providing services and generating domestic resources must have thecapacity to achieve excellent repayment and generate domestic resources. 22
  • 23. They must have the capacity to achieve access to clients in order to do soMFI need to find ways to cut down on their administrative cost. This can bedone through simplified and decentralized loan applicating approval andcollection processes, hence reduce costBarry (1996) is of the view that MFIs to become financially viable, selfsustaining and interegal to the communities in which they oper ate, must havethe potential to attract more resources and services to clients. Despite thefocus of MFI s, only about 2% of the suffering world and 500 million smallentrepreneurs are estimated to have access to financial sector.Benjamin and Piprek (1997) have traced a traditional approach in ruralfinance. Under this approach the key problem area visualize the ruralfinance market included a lack of market in rural areas, absence ofmoderate technology in rural areas and prevalence of unspurious moneylenders. A considerable of body of literature has accumulated and monitoringthe development of micro finance sector.Borbora and Mahanta (2000) analyse the impact of micro financing throughSHGs taking the case of Rashtriya Grammen Vikas Nidhi in Assam andfound that 80% of the SHG members were from poor families, andbelonged to the age group of 8 to 50 years. This was the case for bothsavings and taking loan. The repayment performance was about 91% and theprogram has been successful in expanding outreach covering last number ofgroups.Singh (2001) has undertaken a study in Uttarpradesh comparing the preand post situations of women SHG s. He found that the average value ofassets increased by 46% and the annual income per household increasedby 20% between pre and post SHG periods. The borrowing for consumptionpurpose was also done during pre SHG, but it was completely absent in thepost - SHG situation. The important benefit of SHG s is compulsorysavings, even cutting the necessary expenditures. But the commercialbanks are prompt in linking SHG s with loan. 23
  • 24. A study conducted by NABARD (2002) covering 560 households from 223SHG s in 11 states of India elucidated that there has been positive result inthe standard of living of SHG s members in case of assetowenership.saving and borrowing capacity , income generating activitiesand income levels. The average value of asset including livestock andconsumer durable has increased considerably. The housing condition of thepeople has improved, from the mud walls to thatched roofs to brick walls andtiled roofs. Almost all members and the members developed saving habit inpost SHG. The trend of consumption loans has come down; in contrast theloan for income generating purpose has incr eased considerably during thepre SHG periodThe study by Sapovadia (2007) explores that the typical micro financeclients are self employed, household-based entrepreneurs and lowincome persons that don t have access to formal financial institutionsand also lack business skills. Micro entrepreneurs face many huddles ingetting started. They sometimes lack the skills necessary to managethe financial aspect of their business line and in large number of cases theyindulge in particular business by default. Various micro enterprisedevelopment programs have helped micro entrepreneurs in achievinggreat success and growth. These micro entrepreneur developmentprograms have immensely helped micro entrepreneurs, who look forcollateral security, or are in capable to find such collateral needed to securealone or those who have low credit. They providing them with trainingsupport, help in developing business plan, and assistance in buildingtheir business. Therefore the study reveals that successful microentrepreneurs have contributed much to society by creating wealth, economicassets and jobs.The study of Sinha (2007) reveals that micro finance sector has seena series of critical developments in India. MFI s have started to leverage thenew found management expertise to achieve scale and spread theiroperations well beyond their traditional operational areas. Rating data from alar ge sample of lending MFI s shows that these have recorded high growthrate to the order of 80% per annum in terms of number of borrowers and 24
  • 25. around 40% per annum in terms of portfolio, reaching from 300,000 to onemillion clients each. The study also reveals that expansion has either to lessdeveloped areas of the country viz,-orissa, Jharkhand, Rajasthan, MadhyaPradesh, Tripur a, Assam or to areas such as Maharashtra that alsohave substantial numbers of low income families in some regions even if theiroverall development indicators are income families in some regions even iftheir overall development indicators are not as low as those for the otherstates.Sinha (2007) reveals that self-help groups (SHG s) are started by non-profit organization (NGO s) that gener ally have broad anti-poverty agenda.Financing through SHGs linked in 2007 it represents an increase of 31%over the cumulative number of SHG s ever linked and an increase of11% over the number of new SHG s linked in 2006.The SBLP bank linkage program expanded by 37% in 13 priority states.These statesaccount for 67% of rural poor. These states were identifiedby NABARD in 2005 for special efforts and location-specific strategies.Growth was particularly rapid in Maharashtra. As a result, the westernregion experienced, the fastest growth of all the regions, and its share in totalnumber of poor. The two regions which have the most catching up to do arethe central and eastern regions, whose share of groups lag behind their shareof the poor by 21 and 11% points respectively.Microfinance, the supply of banking services to the poor, is high on thepublic agenda and is attracting increased interest from academics. Thedevelopment-enhancing aspect of micro finance has been recentlyrecognized with the Nobel prize awarded to Mohammad Yunus andGrameen Bank. Microfinance is also increasingly becoming aninvestment opportunity. The total stock of foreign capital investment inmicrofinance more than tripled between 2004 and 2006, to US $4 billionwith the establishment of 40 new specialized international investmentfunds.(Roy,2008)Hans (2008) analyzed that credit is one of the critical inputs foreconomic development. Its timely availability in the right quantity and at an 25
  • 26. affordable cost goes a long way in contributing to the well-being of the peopleespecially in the lower rungs of society. The study reveals that the extent ofexclusion from credit markets is much more, as number of loan accountsconstituted only 13 percent of adult population. Regional differences aresignificant with the credit coverage at 25 percent for southern region and aslow as 7.7 and 9 percent respectively in North Eastern and Central Regions.Within India, the Micro Finance Revolution in western and southernIndia has received most attention, both in media as well as academic aswell as academic research. Some prominent MFI s in these are namelySHARE, BASIX, SEWA, MYRADA and PRADHAN. Andhra Pradesh inparticular has witnessed remarkable growth in micro finance activities and itssuccess stories have been widely reported well. In comparison easternIndia has not enjoyed the lime light in the stage of micro finance.Rationale of the Study:-From the review it can be seen that most of the studies are either tooaggregative or wherever disaggregation has been done, it has been done withreference to one aspect. Most of the studies have been done covering theinstitutional level micro financing so there is enough scope of researchin this area. Keeping this in view the present study has been undertaken tocover the micro financing in India for the period 1994 to 2007. Further theperiod has been divided in to two sub- periods. Period I, 1994-1999 andPeriod II, 2000-2007 to find out whether 2000 onwards period has beenassociated with increase in micro financing activities. The study hasorganized in such a way, that it helps explain in brief the micro financingactivities in India, it also provides an insight of spatial distribution of MFI s inIndia. This study tries to cover the state-wise, agency- wise and region-wisegrowth to provide a complete view of Micro Financing activities in India. 26
  • 27. CHAPTER-4 MICRO-FINANCE IN INDIAMicrofinance in India has had a significant shift from the days whenmicrofinance was being discussed as the next big innovation to address thepoverty issues in India to being discussed in terms of the next big investmentopportunity. The language of microfinance has undergone a fundamentalchange in the two decades of its evolutionOrigin of Microfinance:-Although neither of the terms microcredit or microfinance were used in theacademic literature nor by development aid practitioners before the 1980s or1990s, respectively, the concept of providing financial services to low incomepeople is much older.While the emergence of informal financial institutions in Nigeria dates back tothe 15th century, they were first established in Europe during the 18th centuryas a response to the enormous increase in poverty since the end of theextended European wars (1618 – 1648). In 1720 the first loan fund targetingpoor people was founded in Ireland by the author Jonathan Swift. After aspecial law was passed in 1823, which allowed charity institutions to becomeformal financial intermediaries a loan fund board was established in 1836 anda big boom was initiated. Their outreach peaked just before the governmentintroduced a cap on interest rates in 1843. At this time, they provided financialservices to almost 20% of Irish households. The credit cooperatives created inGermany in 1847 by Friedrich Wilhelm Raiffeisen served 1.4 million people by1910. He stated that the main objectives of these cooperatives “should be tocontrol the use made of money for economic improvements, and to improvethe moral and physical values of people and also, their will to act bythemselves.”In the 1880s the British controlled government of Madras in South India, triedto use the German experience to address poverty which resulted in more thannine million poor Indians belonging to credit cooperatives by 1946. During thissame time the Dutch colonial administrators constructed a cooperative rural 27
  • 28. banking system in Indonesia based on the Raiffeisen model which eventuallybecame Bank Rakyat Indonesia (BRI), now known as the largest MFI in theworld.Based on the concept of “self-help,” small groups of women have formed intogroups of ten to twenty and operate a savings-first business model wherebythe member‟s savings are used to fund loans. The results from these self-helpgroups (SHGs) are promising and have become a focus of intenseexamination as it is proving to be an effective method of poverty reduction.Evolution of Micro Finance in India (1960 to Today)Microfinance in India emerged as an effort to reach out to the un-banked,lower income segments of the population 1960 to 1980 1990 2000Phase 1: Social Phase 2: Financial Phase 3: FinancialBanking Systems Approach Inclusion1.Nationalization of 1.Peer-pressure 1.NGO-MFIs and SHGsprivate commercial gaining more legitimacybanks2.Expansion of rural 2.Establishment of 2.MFIs emerging asbranch network MFIs, typically of non- strategic partners to profit origins diverse entities interested in the low- income segments3.Extension of 3.Consumer financesubsidized credit emerged as high growth area4.Establishment of Rural 4.Increased policyRegional Banks regulation5.Establishment of apex 5.Increasinginstitution such as commercialization 28
  • 29. National Bank forAgriculture and RuralDevelopment and SmallIndustries DevelopmentBank of IndiaPhase 1: In the 1960‟s, the credit delivery system in rural India was largelydominated by the cooperative segment. The period between 1960 and 1990,referred to as the “social banking” phase. This phase includes nationalizationof private commercial banks, expansion of rural branch networks, extension ofsubsidized credit, establishment of Regional Rural Banks (RRBs) and theestablishment of apex institutions such as the National Bank for Agricultureand Rural Development (NABARD) and the Small scale IndustriesDevelopment Board of India (SIDBI).Phase 2: After 1990, India witnessed the second phase “financial systemapproach” of credit delivery. In this phase NABARD initiated the Self HelpGroup (SHG) - Bank Linkage Bank Linkage program, which links informalwomens groups to formal banks. This concept held great appeal for non-government organizations (NGOs) working with the poor, prompting many ofthem to collaborate with NABARD in the program. This period also witnessedthe entry of Microfinance Institutions (MFIs), largely of non-profit origins, withexisting development programs.Phase 3: In 2000, the third phase in the development of Indian microfinancebegan, marked by further changes in policies, operating formats, andstakeholder orientations in the financial services space. This phaseemphasizes on “inclusive growth” and “financial inclusion.” This period alsosaw many NGO-MFIs transform into regulated legal formats such as Non-Banking Finance Companies (NBFCs). Commercial banks adopted innovativeways of partnering with NGO-MFIs and other rural organizations to extendtheir reach into rural markets. MFIs have emerged as strategic partners toindividuals and entities interested in reaching out to Indias low income clientsegments. 29
  • 30. Policy Attention to Microfinance After 20001999 --- Official definition of microfinance by RBIAugust 2000 --- Micro Credit/Rural Credit included in the list of permittednon-banking financial company (NBFC) activities considered for ForeignDirect Investment (FDI)2005 --- MFIs acknowledged for the first time in the Budget Speech by theFinance Minister “Government intends to promote MFIs in a big way. The wayforward, I believe, is to identify MFIs, classify and rate such institutions, andempower them to intermediate between the lending banks and thebeneficiaries.”January 2006 --- Announcement of the business correspondent modelFebruary 2006 --- Budget Speech by the Finance Minister promises a formalstatutory framework for the promotion, development and regulation of themicrofinance sectorMarch 2006 --- Comprehensive guidelines by RBI on loan securitizationJuly 2006 --- RBI master circular allows NGOs involved in microfinance toaccess External Commercial Borrowings (ECB) up to USD 5 million (INR20.25 crores) during a year.March 2007 --- Finance Minister introduces the “Micro Finance SectorDevelopment and Regulation Bill 2007” in LokSabhaMicrofinance Today:-In the 1970s a paradigm shift started to take place. The failure of subsidizedgovernment or donor driven institutions to meet the demand for financialservices in developing countries let to several new approaches. Some of themost prominent ones are presented below.Bank Dagan Bali (BDB) was established in September 1970 to serve lowincome people in Indonesia without any subsidies and is now “well-known as 30
  • 31. the earliest bank to institute commercial microfinance”. In 1973 ACCIONInternational, a United States of America (USA) based non-governmentalorganization (NGO) disbursed its first loan in Brazil and in 1974 ProfessorMuhammad Yunus started what later became known as the Grameen Bankby lending a total of $27 to 42 people in Bangladesh. One year later the Self-Employed Women‟s Association started to provide loans of about $1.5 to poorwomen in India. Although the latter examples still were subsidized projects,they used a more business oriented approach and showed the world that poorpeople can be good credit risks with repayment rates exceeding 95%, even ifthe interest rate charged is higher than that of traditional banks. Anothermilestone was the transformation of BRI starting in 1984. Once a loss makinginstitution channeling government subsidized credits to inhabitants of ruralIndonesia it is now the largest MFI in the world, being profitable even duringthe Asian financial crisis of 1997 – 1998.In February 1997 more than 2,900 policymakers, microfinance practitionersand representatives of various educational institutions and donor agenciesfrom 137 different countries gathered in Washington D.C. for the first MicroCredit Summit. This was the start of a nine yearlong campaign to reach 100million of the world poorest households with credit for self-employment by2005. According to the Microcredit Summit Campaign Report 67,606,080clients have been reached through 2527 MFIs by the end of 2002, with41,594,778 of them being amongst the poorest before they took their firstloan. Since the campaign started the average annual growth rate in reachingclients has been almost 40 percent. If it has continued at that speed morethan 100 million people will have access to microcredit by now and by the endof 2005 the goal of the microcredit summit campaign would be reached. Asthe president of the World Bank James Wolfensohn has pointed out, providingfinancial services to 100 million of the poorest households means helping asmany as 500 – 600 million poor people.Strategic Policy Initiatives:-Some of the most recent strategic policy initiatives in the area of Microfinancetaken by the government and regulatory bodies in India are: 31
  • 32. Working group on credit to the poor through SHGs, NGOs, NABARD, 1995 The National Microfinance Taskforce, 1999 Working Group on Financial Flows to the Informal Sector (set up by PMO), 2002 Microfinance Development and Equity Fund, NABARD, 2005 Working group on Financing NBFCs by Banks- RBIActivities in Microfinance:- Microcredit: It is a small amount of money loaned to a client by a bank or other institution. Microcredit can be offered, often without collateral, to an individual or through group lending. Micro savings: These are deposit services that allow one to save small amounts of money for future use. Often without minimum balance requirements, these savings accounts allow households to save in order to meet unexpected expenses and plan for future expenses. Micro insurance: It is a system by which people, businesses and other organizations make a payment to share risk. Access to insurance enables entrepreneurs to concentrate more on developing 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 capital that can fluctuate depending on the political or economic climate, remittances are a relatively steady source of funds.Role of Microfinance:-The micro credit of microfinance program was first initiated in the year 1976 inBangladesh with promise of providing credit to the poor without collateral ,alleviating poverty and unleashing human creativity and endeavor of the poorpeople. Microfinance impact studies have demonstrated that 32
  • 33. 1. Microfinance helps poor households meet basic needs and protects them against risks. 2. The use of financial services by low-income households leads to improvements in household economic welfare and enterprise stability and growth. 3. By supporting women‟s economic participation, microfinance empowers women, thereby promoting gender-equity and improving household well-being. 4. The level of impact relates to the length of time clients have had access to financial services.Legal Regulations:-Banks in India are regulated and supervised by the Reserve Bank of India(RBI) under the RBI Act of 1934, Banking Regulation Act, Regional RuralBanks Act, and the Cooperative Societies Acts of the respective stategovernments for cooperative banks.NBFCs are registered under the Companies Act, 1956 and are governedunder the RBI Act. There is no specific law catering to NGOs although theycan be registered under the Societies Registration Act, 1860, the Indian TrustAct, 1882, or the relevant state acts. There has been a strong reliance on self-regulation for NGO MFIs and as this applies to NGO MFIs mobilizing depositsfrom clients who also borrow. This tendency is a concern due to enforcementproblems that tend to arise with self-regulatory organizations. In January2000, the RBI essentially created a new legal form for providing microfinanceservices for NBFCs registered under the Companies Act so that they are notsubject to any capital or liquidity requirements if they do not go into thedeposit taking business. Absence of liquidity requirements is concern to thesafety of the sector. 33
  • 34. Development Process through Micro FinanceDonors and Banks Micro-Finance Government and Banks Implementing Organizations Individual Awareness/Promotional Work Individual Promotion and Formation of SHGsMicro Enterprise Consolidation of SHGs Micro Enterprise Savings Consumption Credit Delivery Production Needs Needs Recovery Follow-up Monitoring Income Generation Farm Related (Sustainable & Growth Non-Farm Related Oriented) Self-Sustainability of SHGs Economic Empowerment through use of Micro-Credit as an entry point for overall Empowerment 34
  • 35. Micro-finance interventions through different organizations National Government Funded Donors/Bilater Financial Banks Programs al ProjectsInstitutions Implementing OrganizationsResource/Supp Indirectly ort engaged inOrganizations Directly engaged Micro- in Micro-Finance Finance Individuals SHGs Members 35
  • 36. Micro-finance changing the face of poor India:-Micro-Finance is emerging as a powerful instrument for poverty alleviation inthe new economy. In India, micro-Finance scene is dominated by Self HelpGroups (SHGs) - Banks linkage Program, aimed at providing a cost effectivemechanism for providing financial services to the unreached poor. In theIndian context terms like "small and marginal farmers", " rural artisans" and"economically weaker sections" have been used to broadly define micro-finance customers. A more refined model of micro-credit delivery has evolvedlately, which emphasizes the combined delivery of financial services alongwith technical assistance, and agricultural business development services.When compared to the wider SHG bank linkage movement in India, privateMFIs have had limited outreach. However, we have seen a recent trend oflarger microfinance institutions transforming into Non-Bank FinancialInstitutions (NBFCs). This changing face of microfinance in India appears tobe positive in terms of the ability of microfinance to attract more funds andtherefore increase outreach.Demand for Micro-Credit or Micro-Finance:-In terms of demand for micro-credit or micro-finance, there are threesegments, which demand funds. They are: At the very bottom in terms of income and assets, are those who are landless and engaged in agricultural work on a seasonal basis, and manual laborers in forestry, mining, household industries, construction and transport. This segment requires, first and foremost, consumption credit during those months when they do not get labor work, and for contingencies such as illness. They also need credit for acquiring small productive assets, such as livestock, using which they can generate additional income. The next market segment is small and marginal farmers and rural artisans, weavers and those self-employed in the urban informal sector as hawkers, vendors, and workers in household micro- 36
  • 37. enterprises. This segment mainly needs credit for working capital, a small part of which also serves consumption needs. This segment also needs term credit for acquiring additional productive assets, such as irrigation pump sets, bore wells and livestock in case of farmers, and equipment (looms, machinery) and work sheds in case of non-farm workers. The third market segment is of small and medium farmers who have gone in for commercial crops such as surplus paddy and wheat, cotton, groundnut, and others engaged in dairying, poultry, fishery, etc. Among non-farm activities, this segment includes those in villages and slums, engaged in processing or manufacturing activity, running provision stores, repair workshops, tea shops, and various service enterprises. These persons are not always poor, though they live barely above the poverty line and also suffer from inadequate access to formal credit.Well these are the people who require money and with Microfinance it ispossible. Right now the problem is that, it is SHGs which are doing this andefforts should be made so that the big financial institutions also turn up andstart supplying funds to these people. This will lead to a better India and willdefinitely fulfill the dream of our late Prime Minister, Mrs. Indira Gandhi, i.e.Poverty. One of the statements is really appropriate here, which is as:“Money, says the proverb makes money. When you have got a little, it isoften easy to get more. The great difficulty is to get that little.”AdamsSmith.Today India is facing major problem in reducing poverty. About 25 millionpeople in India are under below poverty line. With low per capita income,heavy population pressure, prevalence of massive unemployment andunderemployment, low rate of capital formation, misdistribution of wealth andassets, prevalence of low technology and poor economics organization andinstability of output of agriculture production and related sectors have madeIndia one of the poor countries of the world. 37
  • 38. Present Scenario of IndiaIndia falls under low income class according to World Bank. It is secondpopulated country in the world and around 70 % of its population lives in ruralarea. 60% of people depend on agriculture, as a result there is chronicunderemployment and per capital income is only $ 3262. This is not enoughto provide food to more than one individual. The obvious result is abjectpoverty, low rate of education, low sex ratio and exploitation. The major factoraccount for high incidence of rural poverty is the low asset base. According toReserve Bank of India, about 51 % of people house possess only 10% of thetotal asset of India .This has resulted low production capacity both inagriculture (which contribute around 22-25% of GDP) and Manufacturingsector. Rural people have very low access to institutionalized credit (fromcommercial bank).Poverty alleviation programs and conceptualizations of Microfinance:-There have been continuous efforts of planners of India in addressing thepoverty. They have come up with development programs like Integrated RuralDevelopment program (IRDP), National Rural Employment Program (NREP),Rural Labor Employment Guarantee Program (RLEGP) etc. But theseprograms have not been able to create massive impact in poverty alleviation.The production oriented approach of planning without altering the mode ofproduction could not but result of the gains of development by owners ofinstrument of production. The mode of production does remain same as theowners of the instrument have low access to credit which is the major factor ofproduction. Thus in Nineties National bank for agriculture and ruraldevelopment (NABARD) launches pilot projects of Microfinance to bridge thegap between demand and supply of funds in the lower rungs of ruraleconomy. Micro finance the buzzing word of this decade was meant to curethe illness of rural economy. With this concept of Self Reliance, SelfSufficiency and Self Help gained momentum. The Indian microfinance isdominated by Self Help Groups (SHGs) and their linkage to Banks. 38
  • 39. Deprived of the basic banking facilities, the rural and semi urban Indianmasses are still relying on informal financing intermediaries like moneylenders, family members, friends etc.Distribution of Indebted Rural Households: Agency wiseCredit Agency Percentage of Rural HouseholdsGovernment 6.1Cooperative Societies 21.6Commercial banks and RRBs 33.7Insurance 0.3Provident Fund 0.7Other Institutional Sources 1.6All Institutional Agencies 64.0Landlord 4.0Agricultural Moneylenders 7.0Professional Moneylenders 10.5Relatives and Friends 5.5Others 9.0All Non Institutional Agencies 36.0All Agencies 100.0 Source: Debt and Investment Survey, GoI 1992 39
  • 40. Key Players in the Micro Finance SystemThe key players of micro-finance include:I) National Bank for Agricultural and Rural Development (NABARD):-NABARD is an apex institution, accredited with all matters concerning policy,planning and operations in the fields of credit for agriculture and othereconomic activities in rural areas in India. NABARD was established in 1982as a Development Bank, in terms of the Preamble of the Act, “for providingand regulating credit and other facilities for the promotion and development ofagriculture, small scale industries, cottage and village industries, handicraftsand other rural crafts and other allied economic activities in rural areas with aview to promoting integrated rural development and securing prosperity ofrural areas and for matters connected therewith or incidental thereto”. Thecorporate mission set by NABARD for making available microfinance servicesto the very poor envisages coverage of one third of the rural poor through onemillion SHGs by the year 2006-07. The propose targets are given in thefollowing table: Target of SHG and Bank No. of New Cumulative Bank Loan Cumulative SHGs to be No. of SHGs requirement Bank CreditYear linked to be linked during the involved at during at the end of year (Rs in the end of the year the year millions ) the year (Rs. In millions) 1,25,000 ** 5,85,000 7,909 ** 18,1722002-03 1,10,000 6,95,000 14,172 32,8842003-04 1,05,000 8,00,000 28,184 61,0682004-05 1,00,000 9,00,000 41,256 1,02,2342005-06 1,00,000 10,00,000 49,588 1,51,912 2006-07Source: NABARD 40
  • 41. In November 1998 a high-powered Task Force on supportive Policy andregulatory framework for Micro finance (henceforth referred to as the TaskForce) was set up by NABARD at the instance of RBI. The objective of theTask Force were among others, to come up with suggestions for a regulatoryframework that brings the operations of the Microfinance Institutions into themainstream, to access the possible role of self-regulatory organizations and toexplore the need for a separate legal framework for micro finance.ii) Reserve Bank of India (RBI):-The earliest reference to micro credit in a formal statement of monetary andcredit policy of RBI was in former RBI President Dr. Bimal Jalan‟s Monetaryand Credit Policy Statement of April 1999. The policy attached importance tothe work of NABARD and public sector banks in the area of micro credit. Thebanks were urged to make all out efforts for provision of micro credit,especially forging linkages with SHGs, either at their own initiative or byenlisting support of Non- Government Organization (NGOs). The micro creditextended by the banks is reckoned as part of their priority sector lending, andthey are free to device appropriation loan and saving products in this regardconsiderable work had been done by RBI in this sector since 1991. In 1991-92 a pilot project for linking up SHGs with banks was launched by NABARD inconsultation with the RBI. In 1994, the RBI constituted a working group onSHGs. On the recommendation of the SHGs would be reckoned as part oftheir lending to weaker sections and such lending should be reviewed bybanks and also at the State Level Bankers‟ Committee (SLBC) level, atregular interval.iii) Self Help Groups (SHGs):-The origin of SHGs is from the brainchild of Grameen Bank of Bangladesh,which was founded by Mohammed Yunus SHG was started and formed in1975. The establishment of SHGs can be traced to the existence of one ormore problem areas around which the consciousness of rural poor is built andthe process of group formation initiated. Since SHGs have been able tomobilize savings from persons or groups who were not normally expected tohave any „saving‟ and also to recycle effectively the pooled resources 41
  • 42. amongst the members, their activities have attracted attention as a supportivemechanism for meeting the credit needs of the poor (NABARD, 2004).iv) Micro Finance Institutions (MFIs):-A range of institutions in public sector as well as private sector offers themicro finance services in India. Based on asset sizes, MFIs can be dividedinto three categories: 1. 5-6 institutions which have attracted commercial capital and scaled up dramatically when last five years. The MFIs which include SKS, SHARE and Grameen Style program but after 2000, converted into for- profit, regulated entities mostly Non-Banking Finance Companies (NBFCs). 2. Around 10-15 institutions with high growth rate, including both News and recently form for-profit MFIs. Some of MFIs are Grameen Koota, Bandhan and ESAF. 3. The bulk of India‟s 1000 MFIs are NGOs struggling to achieve significant growth. Most continues to offer multiple developmental activities in addition to microfinance and have difficulty accessing growth trends.Private MFIs in India, barring a few exceptions, are still fledging efforts andare therefore unregulated. They secure micro finance clients with varyingquality and using different operating models.v) Non Government Organizations (NGOs):-The Non Government Organizations involved in promoting SHGs and linkingthem with the Formal Financial Agencies (FFAs) perform the followingfunctions:- Organizing the poor people into groups- Training and helping them in the organizational, managerial and financialmatters- Helping them access more credit and linkage with formal financial agencies- Channelizing the group effort for various development activities- Helping them in availing opportunities, widening the options available foreconomic development 42
  • 43. Self Help Groups (SHGs)Self- help groups (SHGs) play today a major role in poverty alleviation in ruralIndia. A growing number of poor people (mostly women) in various parts ofIndia are members of SHGs and actively engage in savings and credit (S/C),as well as in other activities (income generation, natural resourcesmanagement, literacy, child care and nutrition, etc.). The S/C focus in theSHG is the most prominent element and offers a chance to create somecontrol over capital, albeit in very small amounts. The SHG system hasproven to be very relevant and effective in offering women the possibility tobreak gradually away from exploitation and isolation.How self-help groups work:-NABARD (1997) defines SHGs as "small, economically homogenous affinitygroups of rural poor, voluntarily formed to save and mutually contribute to acommon fund to be lent to its members as per the group members decision".Most SHGs in India have 10 to 25 members, who can be either only men, oronly women, or only youth, or a mix of these. As womens SHGs or sanghahave been promoted by a wide range of government and non- governmentalagencies, they now make up 90% of all SHGs.The rules and regulations of SHGs vary according to the preferences of themembers and those facilitating their formation. A common characteristic of thegroups is that they meet regularly (typically once per week or once perfortnight) to collect the savings from members, decide to which member to 43
  • 44. give a loan, discuss joint activities (such as training, running of a communalbusiness, etc.), and to mitigate any conflicts that might arise. Most SHGs havean elected chairperson, a deputy, a treasurer, and sometimes other officeholders.Most SHGs start without any external financial capital by saving regularcontributions by the members. These contributions can be very small (e.g. 10Rs per week). After a period of consistent savings (e.g. 6 months to one year)the SHGs start to give loans from savings in the form of small internal loansfor micro enterprise activities and consumption. Only those SHGs that haveutilized their own funds well are assisted with external funds through linkageswith banks and other financial intermediaries.However, it is generally accepted that SHGs often do not include the poorestof the poor, for reasons such as:(a) Social factors (the poorest are often those who are socially marginalizedbecause of caste affiliation and those who are most skeptical of the potentialbenefits of collective action).(b) Economic factors (the poorest often do not have the financial resourcesto contribute to the savings and pay membership fees; they are often the oneswho migrate during the lean season, thus making group membership difficult).(c) Intrinsic biases of the implementing organizations (as the poorest ofthe poor are the most difficult to reach and motivate, implementing agenciestend to leave them out, preferring to focus on the next wealth category).Sources of capital and links between SHGs and Banks:-SHGs can only fulfill a role in the rural economy if group members haveaccess to financial capital and markets for their products and services. Whilethe groups initially generate their own savings through thrift (whereby thriftimplies savings created by postponing almost necessary consumption, whilesavings imply the existence of surplus wealth), their aim is often to link up withfinancial institutions in order to obtain further loans for investments in ruralenterprises. NGOs and banks are giving loans to SHGs either as "matching 44
  • 45. loans" (whereas the loan amount is proportionate to the groups savings) or asfixed amounts, depending on the groups record of repayment,recommendations by group facilitators, collaterals provided, etc.How SHGs save:-Self-help groups mobilize savings from their members, and may then on-lendthese funds to one another, usually at apparently high rates of interest whichreflect the members‟ understanding of the high returns they can earn on thesmall sums invested in their micro-enterprises, and the even higher cost offunds from money lenders. If they do not wish to use the money, they maydeposit it in a bank. If the members‟ need for funds exceeds the group‟saccumulated savings, they may borrow from a bank or other organization,such as a micro-finance non-government organization, to augment their ownfund.The system is very flexible. The group aggregates the small individual savingand borrowing requirements of its members, and the bank needs only tomaintain one account for the group as a single entity. The banker mustassess the competence and integrity of the group as a micro-bank, but oncehe has done this he need not concern himself with the individual loans madeby the group to its members, or the uses to which these loans are put. He cantreat the group as a single customer, whose total business and transactionsare probably similar in amount to the average for his normal customers,because they represent the combined banking business of some twenty„micro-customers‟. Any bank branch can have a small or a large number ofsuch accounts, without having to change its methods of operation.Unlike many customers, demand from SHGs is not price-sensitive. Illiteratevillage women are sometimes better bankers than some with moreprofessional qualifications. They know that rapid access to funds is moreimportant than their cost, and they also know, even though they might not beable to calculate the figures, that the typical micro-enterprise earns well over500% return on the small sum invested in it. The groups thus chargethemselves high rates of interest; they are happy to take advantage of thegenerous spread that the NABARD subsidized bank lending rate of 12% 45
  • 46. allows them, but they are also willing to borrow from NGO/MFIs which on-lendfunds from SIDBI at 15%, or from „new generation‟ institutions such as BasixFinance at 18.5% or 21%.Comparative Analysis of Micro-finance Services offered to the poor:-Source: R. Arunachalam - Alternative Technologies in the Indian Micro-finance Industry 46
  • 47. Micro-Finance Models1. Self Help Group (SHG) Bank Linkage Model:-The microfinance movement started in India with the introduction of the SHG-Bank Linkage Program in the 1980s by NGOs that was later formalized by theGovernment of India in the early 1990s. Pursuant to the program, banks,which are primarily public sector regional rural banks, are encouraged topartner with SHGs to provide them with funding support, which is oftensubsidized.A self help group, or SHG, is a group of 10 to 20 poor women in a village whocome together to contribute regular savings to a common fund to deposit witha bank as collateral for future loans. The group has collective decision makingpower and obtains loans from the partner bank. The SHG then loans thesefunds to its members at terms decided by the group. Members of the groupmeet on a monthly basis to conduct transactions and group leaders areresponsible for maintaining their own records, often with the help of NGOs orgovernment agency staff.NABARD is presently operating three models of linkage of banks with SHGsand NGOs:Model – 1: In this model, the bank itself acts as a Self Help GroupPromoting Institution (SHPI). It takes initiatives in forming the groups,nurtures them over a period of time and then provides credit to them aftersatisfying itself about their maturity to absorb credit. About 16% of SHGs and13% of loan amounts are using this model (as of March 2002).Model – 2: In this model, groups are formed by NGOs (in most of the cases)or by government agencies. The groups are nurtured and trained by theseagencies. The bank then provides credit directly to the SHGs, after observingtheir operations and maturity to absorb credit. While the bank provides loansto the groups directly, the facilitating agencies continue their interactions withthe SHGs. Most linkage experiences begin with this model with NGOs playinga major role. This model has also been popular and more acceptable to 47
  • 48. banks, as some of the difficult functions of social dynamics are externalized.About 75% of SHGs and 78% of loan amounts are using this model.Model – 3: Due to various reasons, banks in some areas are not in a positionto even finance SHGs promoted and nurtured by other agencies. In suchcases, the NGOs act as both facilitators and micro- financeintermediaries. First, they promote the groups, nurture and train them andthen approach banks for bulk loans for on-lending to the SHGs. About 9% ofSHGs and 13% of loan amounts are using this model.Impact of the SHG Bank Linkage Program:-Given these quantitative achievements, what has been the impact of theprogram? The main findings are that: Microfinance has reduced the incidence of poverty through increase in income, enabled the poor to build assets and thereby reduce their vulnerability. It has enabled households that have access to it to spend more on education than non-client households. Families participating in the program have reported better school attendance and lower dropout rates. In certain areas it has 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. It has contributed to a reduced dependency on informal money lenders and other non institutional sources. 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 federations have experimented with undertaking livelihood activities and grain banks have been successfully built into the SHG model in the eastern region.2. Micro Finance Institution (MFIs) Model:-MFIs are an extremely heterogeneous group comprising NBFCs, societies,trusts and cooperatives. They are provided financial support from external 48
  • 49. donors and apex institutions including the Rashtriya Mahila Kosh (RMK),SIDBI Foundation for micro-credit and NABARD and employ a variety of waysfor credit deliverySince 2000, commercial banks including Regional Rural Banks have beenproviding funds to MFIs for on lending to poor clients. Though initially, only ahandful of NGOs were “into” financial intermediation using a variety of deliverymethods, their numbers have increased considerably today. While there is nopublished data on private MFIs operating in the country, the number of MFIsis estimated to be around 800. Legal Forms of MFIs in India:Types of MFIs Estimated Legal Acts under which Number* Registered1. Not for Profit MFIs 400 to 500 Societies Registration Act, 1860 or similar Provincial Actsa.) NGO - MFIs Indian Trust Act, 1882b.) Non-profit Companies 10 Section 25 of the Companies Act, 19562. Mutual Benefit MFIs 200 to 250 Mutually Aided Cooperativea.) Mutually Aided Societies Act enacted by StateCooperative Societies Government(MACS) and similarly set upinstitutions3. For Profit MFIs 6 Indian Companies Act, 1956a.) Non-Banking Financial Reserve Bank of India Act, 1934Companies (NBFCs)Total 700 - 800The estimated number includes only those MFIs, which are actuallyundertaking lending activity. Adapted from www.nabard.org 49
  • 50. Structures of a Microfinance Institution:-Microfinance institutions broadly operate under a wide range of legalstructures. They could be registered as- 1. NGO, 2. Trusts, 3. Sec 25 Companies, 4. Cooperative Societies, 5. Cooperative Banks, 6. Regional Rural Banks, 7. Local Area Banks, 8. Public and Private Sector banks, 9. Business Correspondents and 10. Non-Banking Finance Companies.For instance, SKS Microfinance is registered with the RBI as a non-deposittaking NBFC and is regulated by the RBI3. Bank Partnership Model:-This model is an innovative way of financing MFIs. The bank is the lender andthe MFI acts as an agent for handling items of work relating to creditmonitoring, supervision and recovery. In other words, the MFI acts as anagent and takes care of all relationships with the client, from first contact tofinal repayment. A sub - variation of this model is where the MFI, as an NBFC,holds the individual loans on its books for a while before securitizing them and 50
  • 51. selling them to the bank. Such refinancing through securitization enables theMFI enlarged funding access.4. Banking Correspondents:-The proposal of “banking correspondents” could take this model a step furtherextending it to savings. It would allow MFIs to collect savings deposits fromthe poor on behalf of the bank. It would use the ability of the MFI to get closeto poor clients while relying on the financial strength of the bank to safeguardthe deposits. This regulation evolved at a time when there were genuine fearsthat fly-by-night agents purporting to act on behalf of banks in which thepeople have confidence could mobilize savings of gullible public and thenvanish with them.5. Service Company Model:-Under this model, the bank forms its own MFI, perhaps as an NBFC, and thenworks hand in hand with that MFI to extend loans and other services. Onpaper, the model is similar to the partnership model: the MFI originates theloans and the bank books them. But in fact, this model has two very differentand interesting operational features:(a) The MFI uses the branch network of the bank as its outlets to reachclients. This allows the client to be reached at lower cost than in the case of astand–alone MFI. In case of banks which have large branch networks, it alsoallows rapid scale up.(b) The Partnership model uses both the financial and infrastructure strengthof the bank to create lower cost and faster growth. The Service CompanyModel has the potential to take the burden of overseeing microfinanceoperations off the management of the bank and put it in the hands of MFImanagers who are focused on microfinance to introduce additional products,such as individual loans for SHG graduates, remittances and so on withoutdisrupting bank operations and provide a more advantageous cost structurefor microfinance. 51
  • 52. Role, Functions and Working Mechanism of Financial InstitutionsA. ICICI Bank:-“ICICI Bank is one bank that has developed a very clear strategy to expandthe provision of financial products and services to the poor in India as aprofitable activity”- Haruhiko Kuroda, President, Asian Development Bank.ICICI‟s microfinance portfolio has been increasing at an impressive speed.From 10,000 microfinance clients in 2001, ICICI Bank is now (2007) lending to1.8 million clients through its partner microfinance institutions, and itsoutstanding portfolio has increased from Rs. 0.20 billion (US$4.5 million) toRs. 9.98 billion (US$227 million).There is an increasing shift in the microfinance sector from grant-giving toinvestment in the form of debt or equity, and ICICI believes grant moneyshould be limited to the creation of facilitative infrastructure. “We need to stopsending government and funding agencies the signal that microfinance is nota commercially viable system”, says Nachiket Mor, Executive Director ofICICI Bank.As a result of banks entering the game, the sector has changed rapidly.“There is no dearth of funds today, as banks are looking into MFIs favorably,unlike a few years ago”, says Padmaja Reddy, the CEO of one of ICICIBank’s major MFI partners, Spandana.Bank Led ModelThe bank led model was derived from the SHG-Bank linkage program ofNABARD. Through this program, banks financed Self Help Groups (SHGs)which had been promoted by NGOs and government agencies. 52
  • 53. ICICI Bank drew up aggressive plans to penetrate rural areas through its SHGprogram. However, rather than spending time in developing ruralinfrastructure of its own, in 2000, ICICI Bank announced merger of Bank ofMadura (BoM), which had significant presence in the rural areas of SouthIndia, especially Tamil Nadu, with a customer base of 1.9 million and 87branches.Bank of Maduras SHG development program was initiated in 1995. Throughthis program, it had formed, trained and initiated small groups of women toundertake financial activities like banking, saving and lending. By 2000, it hadcreated around 1200 SHGs across Tamil Nadu and provided credit to them.Partnership ModelsA model of microfinance has emerged in recent years in which a microfinanceinstitution (MFI) borrows from banks and on-lends to clients; few MFIs havebeen able to grow beyond a certain point. Under this model, MFIs are unableto provide risk capital in large quantities, which limits the advances frombanks. In addition, the risk is being entirely borne by the MFI, which limits itsrisk-taking.This model aimed at synergizing the comparative advantages and financialstrength of the bank with social intermediation, mobilization power andinfrastructure of MFIs and NGOs. Through this model, ICICI Bank could saveon the initial costs of developing rural infrastructure and micro creditdistribution channels and could take advantage of the expertise of theseinstitutions in rural areas. Initially, ICICI Bank started off by lending to MFIsand NGOs in order to provide the necessary financial support to theiractivities. Later, ICICI Bank came up with a plan where the NGO/MFIcontinued to promote their microfinance schemes, while the bank met thefinancial requirements of the borrowers.Other Microfinance InitiativesAs a part of microfinance initiatives in the agriculture sector, ICICI Bankdeveloped Farmer Service Centers (FSC). An FSC was managed by an 53
  • 54. agricultural input supply company which supplied inputs like seeds andtechnical knowhow to the farmers.FSCs were also managed by an extension service organization whichprovided inputs, credit and technology or by an NGO that provided all theservices that farmers needed for their agricultural needs. Working in closeassociation with farmers, FSCs provided them with services like advice onseeds, sowing techniques, pest control, weed control, usage and dosage ofherbicides, pesticides and fertilizers and other services associated withagriculture. The FSCs also provided crop-related information and services tofarmers, apart from facilitating the sale of agricultural produce. The FSCsarranged to procure the produce through agents and sold it in organizedagricultural markets thus getting better realization.The FutureThese agents contact several borrowers, thus expanding the reach of ICICIBank at a low cost. Taking the FSC initiative further, ICICI Bank plans toprovide farmers credit from sugar companies, seed companies, dairycompanies, NGOs, micro-credit institutions and food processing industries.SIG has been involved in a project in the southern state of Tamil Nadu to findout how wireless technology can be applied in the development of low costmodels of banking. Another plan to increase the reach in rural areas is tolaunch mobile ATM services. ICICI Bank branded trucks have started carryingATMs through a number of villagesSome Articles of News Paper:1. ICICI Bank to offer micro-finance to sex-workersMumbai, March 14: In a novel way to help sex-workers to live moremeaningfully, countrys largest private sector bank, ICICI Bank is planning tooffer financial assistance to them though the micro-finance route. 54
  • 55. For starters, the bank plans to launch the programme in Kolkata by enteringinto a tie-up with Durbar Mahila Samwanaya Samitee, an NGO working forthe welfare of around 65,000 sex-workers in and around the city.Source: (Press Trust of India) Posted online: Wednesday, March 14, 2007 at20:54 hours IST2. ICICI Bank launches new initiative in micro-financeICICI Bank has taken a stake of under 20 per cent in Financial InformationNetwork and Operations Private Ltd (FINO), which was launched onThursday, July 13, 2001.FINO would provide technological solutions as well as services to financeproviders to reach the underserved in the country. ICICI Bank is the leadfacilitator.According to Mr Nachiket Mor, Deputy Managing Director, ICICI Bank, FINOis an independent entity. "We would reduce our stake in the company whenrequired," he said.ICICI Bank expects to target 200 micro-finance institutions (MFIs) by March2007, he said, speaking on the sidelines of the press conference to launchFINO. At present, the bank has tie-ups with 100 MFIs.FINO is an initiative in the micro-finance sector. It would target 300-400 millionpeople who do not have access to basic financial services, said Mr ManishKhera, CEO, FINO. The company has an authorised capital of Rs 50 crore.MFIs, NBFCs, RRBs, co-operative banks, etc would directly or indirectly tie upwith FINO to use its services, he said. FINO would charge Rs 25-30 peraccount every year.Core banking productsFINO has partnered with IBM and I-flex to offer core banking products. Itwould also provide credit bureau services, which includes individual customer 55
  • 56. credit rating and analytics based on transaction history. It also launchedbiometric cards for customers, which would be a proof of identity and givecollateral to them. The card would also offer multiple products includingsavings, loans, insurance, recurring deposits, fixed deposits and remittances.The company would also build-up customer database, thus bringing them intomainstream banking."There was a need for automated structured data system like FINO" said MrMor. "Essential pieces of infrastructure are missing in India. We lack credit-tracking mechanism; therefore there was a need for an intervention likeFINO."The company expects to reach 25 million customers in five years and twomillion customers by the end of 2007.FINO aims bringing scale to "micro" business leading to lowering of costs forthe local financial institutions (LFIs) and act as an internal technologydepartment for the LFIs, said Mr Khera.The company is working on providing technological solutions in insurance,especially the health insurance sector to the under-privileged," he said. It isinteracting with Nabard, SIDBI and other banks to give shape to what FINOdoes, said Mr Khera.3. ICICI Banks thrust on micro-finance:-CHENNAI, MARCH 9. ICICI Bank has entered into partnerships with variousmicrofinance institutions (MFI) and non-Government organizations (NGOs) toscale up its micro lending business. Addressing presspersons here, today,Nachiket Mor, Executive Director, ICICI Bank, said, the partnership modelwould provide assured source of funding to NGOs and MFIs. The bank hadextended advances to the tune of Rs. 150 crores as on February 29, this year,under this scheme, Mr. Mor said.The bank had acquired a network of self-help groups (SHGs) developed bythe erstwhile Bank of Madura after its merger with ICICI Bank. Since then the 56
  • 57. SHG program had grown substantially and 10,175 groups had been promotedreaching out to 2.03 lakh women spread across 2,398 villages, the ExecutiveDirector said.One of the micro finance institutions, `Microcredit Foundation of India,established by K. M. Thiagarajan, former Chairman of Bank of Madura in2002, had initiated a program for microcredit through self-help groups.ICICI Bank has entered into a memorandum of understanding with MicrocreditFoundation to outsource SHG development, maintenance of groups, creditlinkage and recovery of loans.The MFI as Collection AgentTo address these constraints, ICICI Bank initiated a partnership model in2002 in which the MFI acts as a collection agent instead of a financialintermediary. This model is unique in that it combines debt as mezzaninefinance to the MFI (Mezzanine finance combines debt and equity financing: itis debt that can be converted by the lender into equity in the event of adefault.This source of financing is advantageous for MFIs because it is treated likeequity in the balance-sheet and enables it to raise money without additionalequity, which is an expensive financing source.).The loans are contracteddirectly between the bank and the borrower, so that the risk for the MFI isseparated from the risk inherent in the portfolio. This model is therefore likelyto have very high leveraging capacity, as the MFI has an assured source offunds for expanding and deepening credit. ICICI chose this model because itexpands the retail operations of the bank by leveraging comparativeadvantages of MFIs, while avoiding costs associated with entering the marketdirectly.SecuritizationAnother way to enter into partnership with MFIs is to securitize microfinanceportfolios. In 2004, the largest ever securitization deal in microfinance wassigned between ICICI Bank and SHARE Microfinance Ltd, a large MFIoperating in rural areas of the state of Andhra Pradesh. Technical assistance 57
  • 58. and the collateral deposit of US$325,000 (93% of the guarantee required byICICI) were supplied by Grameen Foundation USA. Under this agreement,ICICI purchased a part of SHARE‟s microfinance portfolio against aconsideration calculated by computing the Net Present Value of receivablesamounting to Rs. 215 million (US$4.9 million) at an agreed discount rate. Theinterest paid by SHARE is almost 4% less than the rate paid in commercialloans. Partial credit provision was provided by SHARE in the form of aguarantee amounting to 8% of the receivables under the portfolio, by way of alien on fixed deposit. This deal frees up equity capital, allowing SHARE toscale up its lending. On the other hand, it allows ICICI Bank to reach newmarkets. And by trading this high quality asset in capital markets, the bankcan hedge its own risks.Beyond MicrocreditMicrofinance does not only mean microcredit, and ICICI does not limit itself tolending. ICICI‟s Social Initiative Group, along with the World Bank and ICICILombard, the insurance company set up by ICICI and Canada Lombard, havedeveloped India‟s first index-based insurance product. This insurance policycompensates the insured against the likelihood of diminished agriculturaloutput/yield resulting from a shortfall in the anticipated normal rainfall withinthe district, subject to a maximum of the sum insured. The insurance policy islinked to a rainfall index.TechnologyOne of the main challenges to the growth of the microfinance sector isaccessibility. The Indian context, in which 70% of the population lives in ruralareas, requires new, inventive channels of delivery. The use of technologiessuch as kiosks and smart cards will considerably reduce transaction costswhile improving access. The ICICI Bank technology team is developing aseries of innovative products that can help reduce transaction costsconsiderably. For example, it is piloting the usage of smart cards with SewaBank in Ahmadabad. To maximize the benefits of these innovations, thedevelopment of a high quality shared banking technology platform which canbe used by MFIs as well as by cooperatives banks and regional rural banks is 58
  • 59. needed. ICICI is strongly encouraging such an effort to take place. Wipro andInfosys, I-Flex, 3iInfotech, some of the best Indian information technologycompanies specialized in financial services, and others, are in the process ofdeveloping exactly such a platform. At a recent technology workshop at theInstitute for Financial Management Research in Chennai, the ICICI BankAlternate Channels Team presented the benefits of investing in a commontechnology platform similar to those used in mainstream banking to some ofthe most promising MFIs.The Centre for Micro finance Research (CMFR)ICICI bank has created the Centre for Microfinance Research (CMFR) at theInstitute forFinancial Management Research (IFMR) in Chennai. Through research,research-based advocacy, high level training and strategy building, it aims tosystematically establish the links between increased access to financialservices and the participation of poor people in the larger economy. TheCMFR Research Unit supports initiatives aimed at understanding andanalyzing the following issues: impact of access to financial services; contractand product designs; constraints to household productivity; combination ofmicrofinance and other development interventions; evidence of creditconstraints; costs and profitability of microfinance organizations; impact ofMFI policies and strategies; people‟s behavior and psychology with respect tofinancial services; economics of micro-enterprises; and the effect ofregulations.Finally, the CMFR recognizes that while MFIs aim to meet the credit needs ofpoor households, there are other missing markets and constraints facinghouseholds, such as healthcare, infrastructure, and gaps in knowledge. Thesehave implications in terms of the scale and profitability of client enterprisesand efficiency of household budget allocation, which in turn impactshousehold well-being. The CMFR Microfinance Strategy Unit will addressthese issues through a series of workshops which will bring together MFIpractitioners and sectoral experts (in energy, water, roads, health, etc). Thelatter will bring to the table knowledge of best practices in their specific areas, 59
  • 60. and each consultation workshop will result in long-term collaboration betweenwith MFIs for implementing specific pilots.B. Bandhan:-(Ranked 2nd by Forbes Magazine in December 2007)Bandhan is working towards the twin objective of poverty alleviation andwomen empowerment. It started as a Capacity Building Institution (CBI) inNovember 2000 under the leadership of Mr. Chandra Shekhar Ghosh. Duringsuch time, it was giving capacity building support to local microfinanceinstitutions working in West Bengal.Bandhan opened its first microfinance branch at Bagnan in Howrah district ofWest Bengal in July 2002. Bandhan started with 2 branches in the year 2002-03 only in the state of West Bengal and today it has grown as strong as 412branches across 6 states of the country! The organization had recorded agrowth rate of 500% in the year 2003-04 and 611% in the year 2004-05. Tilldate, it has disbursed a total of Rs. 587 crores among almost 7 lakh poorwomen. Loan outstanding stands at Rs. 221 crores. The repayment rate isrecorded at 99.99%. Bandhan has staff strength of more than 2130employees.As on July 2008Column1 Column2No. of states :8No. of branches : 528No. of members : 1,182,741No. of staff : 3,191Cumulative loan disbursed : Rs.1,249 croresLoan outstanding : Rs. 417 croresOperational MethodologyBandhan follows a group formation, individual lending approach. A group of10-25 members are formed. The clients have to attend the group meetings for2 successive weeks. 2 weeks hence, they are entitled to receive loans. Theloans are disbursed individually and directly to the members. 60
  • 61. Economic and Social Background of Clients  Landless and asset less women  Family of 5 members with monthly income less than Rs. 2,500 in rural and Rs. 3,500 in urban  Those who do not own more than 50 decimal (1/2acre) of land or capital of its equivalent valueLoan SizeThe first loan is between Rs. 1,000 – Rs. 7,000 for the rural areas andbetween Rs. 1,000 – Rs. 10,000 for the urban areas. After the repayment,they are entitled to receive a subsequent loan which is Rs 1,000 - 5,000 morethan the previous loan.Service ChargeBandhan charges a service charge of 12.50% flat on loan amount. Bandhaninitially charged 17.50%. However from 1st July 2005, it has slashed down itslending rate to 15.00%. Then it was further reduced to 12.50% in May 2006.The reason is obvious. As overall productivity increased, operational costsdecreased. Bandhan, being a nonprofit organization wanted the benefit of lowcosts to ultimately trickle down to the poor.Monitoring SystemThe various features of the monitoring system are:  A 3 tier monitoring system – Region, Division and Head Office  Easy reporting system with a prescribed checklist format  Accountability at all levels post monitoring phase  Cross- checking at all the levels  The management team of Bandhan spends 90.00% of time at the fieldLiability structure for LoansWhen a member wants to join Bandhan, she at first has to get inducted into agroup. After she gets inducted into the group, the entire group proposes hername for a loan in the Resolution Book. Two members of the group along withthe member‟s husband have to sign as guarantors in her loan application 61
  • 62. form. If she fails to pay her weekly installment, the group inserts peerpressure on her. The sole purpose of the above structure is simply to createpeer pressure.C. Grameen Bank:-The Grameen Model which was pioneered by Prof Muhammed Yunus ofGrameen Bank is perhaps the most well known, admired and practised modelin the world. The model involves the following elements. Homogeneous affinity group of five Eight groups form a Centre Centre meets every week Regular savings by all members Loan proposals approved at Centre meeting Loan disbursed directly to individuals All loans repaid in 50 instalmentsThe Grameen model follows a fairly regimented routine. It is very costintensive as it involves building capacity of the groups and the customerspassing a test before the lending could start. The group members tend to beselected or at least strongly vetted by the bank. One of the reasons for thehigh cost is that staff members can conduct only two meetings a day and thusare occupied for only a few hours, usually early morning or late in the evening.They were used additionally for accounting work, but that can now be donemore cost effectively using computers. The model is also rather meetingintensive which is fine as long as the members have no alternative use fortheir time but can be a problem as members go up the income ladder.The greatness of the Grameen model is in the simplicity of design of productsand delivery. The process of delivery is scalable and the model could bereplicated widely. The focus on the poorest, which is a value attribute ofGrameen, has also made the model a favourite among the donor community. 62
  • 63. However, the Grameen model works only under certain assumptions. As allthe loans are only for enterprise promotion, it assumes that all the poor wantto be self-employed. The repayment of loans starts the week after the loan isdisbursed – the inherent assumption being that the borrowers can servicetheir loan from the ex-ante income.D. SKS Microfinance:-(CEO-Vikram Akula)Many companies say they protect the interests of their customers. Very fewactually sit in dirt with them, using stones, flowers, sticks, and chalk powder tofigure out if they will be able to repay a $20 loan at $1 a month. With thisapproach, this company has created its own loyal gang of over 2 millioncustomers.Its borrowers include agricultural laborers, mom-and-pop entrepreneurs,street vendors, home based artisans, and small scale producers, each livingon less than $2 a day. It works on a model that would allow micro-financeinstitutions to scale up quickly so that they would never have to turn poorperson away.Its model is based on 3 principles- 1. Adopt a profit-oriented approach in order to access commercial capital- Starting with the pitch that there is a high entrepreneurial spirit amongst the poor to raise the funds, SKS converted itself to for-profit status as soon as it got break even and got philanthropist Ravi Reddy to be a founding investor. Then it secured money from parties such as Unitus, a Seattle based NGO that helps promote micro-finance; SIDBI; and technology entrepreneur Vinod Khosla. Later, it was able to attract multimillion dollar lines of credit from Citibank, ABN Amro, and others. 2. Standardize products, training, and other processes in order to boost capacity- They collect standard repayments in round numbers of 25 or 30 rupees. Internally, they have factory style training models. They enroll about 500 loan officers every month. They participate in theory classes on Saturdays and practice what they have learned in the field during the week. They have shortened the training time for a 63
  • 64. loan officer to 2 months though the average time taken by other industry players is 4-6 months.3. Use Technology to reduce costs and limit errors- It could not find the software that suited its requirements, so it they built their own simple and user friendly applications that a computer-illiterate loan officer with a 12th grade education can easily understand. The system is also internet enabled. Given that electricity is unreliable in many areas they have installed car batteries or gas powered generators as back-ups in many areas.Scaling up Customer LoyaltyInstead of asking illiterate villagers to describe their seasonal pattern ofcash flows, they encourage them to use colored chalk powder and flowersto map out the village on the ground and tell where the poorest peoplelived, what kind of financial products they needed, which areas werelorded over by which loan sharks, etc. They set people‟s tiny weeklyrepayments as low as $1 per week and health and whole life insurancepremiums to be $10 a year and 25 cents per week respectively. They alsooffer interest free emergency loans. The salaries of loan officers are nottied to repayment rates and they journey on mopeds to borrowers‟ villagesand schedule loan meetings as early as 7.00 A.M. Deep customer loyaltyultimately results in a repayment rate of 99.5%.Leveraging the SKS brandIts payoff comes from high volumes. They are growing at 200% annually,adding 50 branches and 160,000 new customers a month. They are alsousing their deep distribution channels for selling soap, clothes, consumerelectronics and other packaged goods. 64
  • 65. Marketing Of Micro Finance Products 1. Contract Farming and Credit Bundling:-Banks and financial institutions have been partners in contract farmingschemes, set up to enhance credit. Basically, this is a doable model. Undersuch an arrangement, crop loans can be extended under tie-up arrangementswith corporate for production of high quality produce with stable marketingarrangements provided – and only, provided – the price setting mechanism forthe farmer is appropriate and fair. 2. Agri Service Centre – Rabo India:-Rabo India Finance Pvt Ltd. has established agri-service center in rural areasin cooperation with a number of agri-input and farm services companies. Theservices provided are similar to those in contract farming, but with additionalflexibility and a wider range of products including inventory finance. Besidesproviding storage facilities, each centre rents out farm machinery, providesagricultural inputs and information to farmers, arranges credit, sells otherservices and provides a forum for farmers to market their products. 3. Non Traditional Markets:-Similarly, Mother Dairy Foods Processing, a wholly owned subsidiary ofNational Dairy Development Board (NDDB) has established auction marketsfor horticulture producers in Bangalore. The operations and maintenance ofthe market is done by NDDB. The project, with an outlay of Rs.15 lakh, covers200 horticultural farmers associations with 50,000 grower members forwholesale marketing. Their produce is planned with production and supplyassurance and provides both growers and buyers a common platform tonegotiate better rates. 4. Apni Mandi:-Another innovation is that of The Punjab Mandi Board, which hasexperimented with a „farmers‟ market‟ to provide small farmers located inproximity to urban areas, direct access to consumers by elimination of 65
  • 66. middlemen. This experiment known as "Apni Mandi" belongs to both farmersand consumers, who mutually help each other. Under this arrangement a sumof Rs. 5.2 lakh is spent for providing plastic crates to 1000 farmers. Eachfarmer gets 5 crates at a subsidized rate. At the mandi site, the Boardprovides basic infrastructure facilities. At the farm level, extension services ofdifferent agencies are pooled in. These include inputs subsidies, better qualityseeds and loans from Banks. Apni Mandi scheme provides self-employmentto producers and has eliminated social inhibitions among them regarding theretail sale of their produce.Success Factors of Micro-Finance in IndiaOver the last ten years, successful experiences in providing finance to smallentrepreneur and producers demonstrate that poor people, when givenaccess to responsive and timely financial services at market rates, repay theirloans and use the proceeds to increase their income and assets. This is notsurprising since the only realistic alternative for them is to borrow frominformal market at an interest much higher than market rates. Communitybanks, NGOs and grass root savings and credit groups around the world haveshown that these microenterprise loans can be profitable for borrowers andfor the lenders, making microfinance one of the most effective povertyreducing strategies.A. For NGOs 1. The field of development itself expands and shifts emphasis with the pull of ideas, and NGOs perhaps more readily adopt new ideas, especially if the resources required are small, entry and exit are easy, tasks are (perceived to be) simple and people‟s acceptance is high – all characteristics (real or presumed) of microfinance. 2. Canvassing by various factors, including the National Bank for Agriculture and Rural Development (NABARD), Small Industries 66
  • 67. Development Bank of India (SIDBI), Friends of Women‟s World Banking (FWWB), Rashtriya Mahila Kosh (RMK), Council for Advancement of People‟s Action and Rural Technologies (CAPART), Rashtriya Gramin Vikas Nidhi (RGVN), various donor funded programmes especially by the International Fund for Agricultural Development (IFAD), United Nations Development Programme (UNDP), World Bank and Department for International Development, UK (DFID)], and lately commercial banks, has greatly added to the idea pull. Induced by the worldwide focus on microfinance, donor NGOs too have been funding microfinance projects. One might call it the supply push.3. All kinds of things from khadi spinning to Nadep compost to balwadis do not produce such concrete results and sustained interest among beneficiaries as microfinance. Most NGO-led microfinance is with poor women, for whom access to small loans to meet dire emergencies is a valued outcome. Thus, quick and high „customer satisfaction‟ is the USP that has attracted NGOs to this trade.4. The idea appears simple to implement. The most common route followed by NGOs is promotion of SHGs. It is implicitly assumed that no „technical skill‟ is involved. Besides, external resources are not needed as SHGs begin with their own savings. Those NGOs that have access to revolving funds from donors do not have to worry about financial performance any way. The chickens will eventually come home to roost but in the first flush, it seems all so easy.5. For many NGOs the idea of „organising‟ – forming a samuha – has inherent appeal. Groups connote empowerment and organising women is a double bonus. 67
  • 68. 6. Finally, to many NGOs, microfinance is a way to financial sustainability. Especially for the medium-to-large NGOs that are able to access bulk funds for on-lending, for example from SIDBI, the interest rate spread could be an attractive source of revenue than an uncertain, highly competitive and increasingly difficult-to-raise donor funding.B. For Financial Institutions and banks:- Microfinance has been attractive to the lending agencies because of demonstrated sustainability and of low costs of operation. Institutions like SIDBI and NABARD are hardnosed bankers and would not work with the idea if they did not see a long term engagement – which only comes out of sustainability (that is economic attractiveness). On the supply side, it is also true that it has all the trappings of a business enterprise, its output is tangible and it is easily understood by the mainstream. This also seems to sound nice to the government, which in the post liberalisation era is trying to explain the logic of every rupee spent. That is the reason why microfinance has attracted mainstream institutions like no other developmental project. Perhaps the most important factor that got banks involved is what one might call the policy push. Given that most of our banks are in the public sector, public policy does have some influence on what they will or will not do. In this case, policy was followed by diligent, if meandering, promotional work by NABARD. The policy change about a decade ago by RBI to allow banks to lend to SHGs was initially followed by a seven-page memo by NABARD to all bank chairmen, and later by sensitisation and training programmes for bank staff across the country. Several hundred such programmes were conducted by NGOs alone, each involving 15 to 20 bank staff, all paid for by NABARD. The policy push was sweetened by the NABARD refinance scheme that offers much more favourable terms (100% refinance, wider spread) than for other rural lending by banks. NABARD also did some system setting work and banks lately have been given targets. The canvassing, training, refinance and close follow up by NABARD has resulted in widespread bank involvement. 68
  • 69. Moreover, for banks the operating cost of microfinance is perhaps much lessthan for pure MFIs. The banks already have a vast network of branches. Tothe extent that an NGO has already promoted SHGs and the SHG portfolio isperforming better than the rest of the rural (if not the entire) portfolio,microfinance via SHGs in the worst case would represent marginal addition tocost and would often reduce marginal cost through better capacity utilisation.In the process the bank also earns brownie points with policy makers andmeets its priority sector targets.It does not take much analysis to figure out that the market for financialservices for the 50-60 million poor households of India, coupled with about thesame number who are technically above the poverty line but are severelyunder-served by the financial sector is a very large one.Further, bank-groups are motivated by a number of cross-selling opportunitiesin the market, for deposits, insurance, remittances and eventually mutualfunds. Since the larger banks are offering all these services now through theirgroup companies, it becomes imperative for them to expand their distributionchannels as far and deep as possible, in the hope of capturing the entirefinancial services business of a household.Finally, both agri-input and processing companies such as EID Parry, fast-moving consumer goods (FMCG) companies such as Hindustan Levers, andconsumer durable companies such as Philips have realised the potential ofthis big market and are actively using SHGs as entry points. Some amount offree-riding is taking place here by companies, for they are using channelswhich were built at a significant cost to NGOs, funding agencies and/or thegovernment.On the whole, the economic attractiveness of microfinance as a business isgetting established and this is a sure step towards mainstreaming. We knowthat mainstreaming is a mixed blessing, and one tends to exchange scale atthe cost of objectives. So it needs to be watched carefully. 69
  • 70. Issues Related to Microfinance in India A. Problems faced by Borrowers:-1. Coercion:-One of the most important moral issues being raised in relation tomicrofinance is that of coercion. After 54 people killed themselves in the stateof Andhra Pradesh in October 2010, Indian authorities placed microfinanceinstitutions (MFI) under a microscope, and drafted new rules the MFIcompanies must follow. The farmers were reportedly deep in debt tomicrofinance institutions (MFIs). "Microfinance institutions chargeexorbitant interest rates. The poor are driven to take their own livesbecause of their burden of debt and the brutal methods used to call inthe loans", the chief minister of Andhra Pradesh said.2. Brutal and Aggressive Debt-Collection Tactics:-"The people calling in the loans are often not aware of the code of conduct ofthe MFIs”. Many of the MFIs have been resort to brutal methods for collectionof debt from these borrowers. News items like the one below are quitecommon in India. “Unable to repay Rs. 235, Farmer kills self.”MFI Loan Suicide, Hyderabad NewsA farmer committed suicide by consuming pesticides, allegedly after beingharassed by the collection agents of a microfinance institution at in Nalgondadistrict, Andhra Pradesh.”3. Joint Microfinance:Joint microloans are granted to a group of people who are jointly responsiblefor repaying the loan. Individual failures to pay (due to illness or a “bad week”)are avoided and group pressure serves as a strong incentive in ensuringresponsible behavior by making loans to individuals within a lending circle. 70
  • 71. The individuals meet regularly, ostensibly creating a self-help group. In reality,all the borrowers in the group are responsible for making the loan repaymentif a member defaults, so peer pressure is a very strong factor."However, in case of default either due to business failures, unproductiveexpenditure or greed to consume more, all members are troubled.4. High Interest Rates:-Many in the urban centres would commit suicide if the banks start charging us24 per cent rate of interest. Even at 8.5 per cent rate of interest, those whohave drawn housing loans, find it difficult to make monthly EMI payments.Imagine the stress and threat under which the poor in the rural areas arebeing made to borrow at 24 per cent rate of interest.Whatever the justification for charging 24 per cent rate of interest, how canhuman beings exploit a hungry stomach in the name of a successful businessmodel?5. Not aimed at lifting people out of poverty:-Micro finance serves not to lift people out of poverty but, assist those near orslightly above the poverty line. Money is given to those people who have apossibility of returning the principle amount. This leads to the fact that lendingmoney to these people is feasible and sustainable, while lending to thepoorest of the poor is not.6. Poverty alleviation mission has now been reduced to a Money makingtactic of MNCsMicro finance has now, become a weapon for multinational companies to selltheir products, by collaborating with such institutions. This in turn, isdestroying the spirit of micro credit.MFIs have reached 20 million people in a few years, a success owingsomething to light regulation that facilitated much innovation andexperimentation. Some MFIs have become large institutions, and large ones 71
  • 72. need tougher regulation. But care should be taken to give MFIs, especiallysmaller ones, continued scope for innovation and experimentation. B. Problems faced by Lenders:-1. Sustainability:-The first challenge relates to sustainability. MFI model is comparativelycostlier in terms of delivery of financial services. An analysis of 36 leadingMFIs by Jindal & Sharma shows that 89% MFIs sample were subsidydependent and only 9 were able to cover more than 80% of their costs. This ispartly explained by the fact that while the cost of supervision of credit is high,the loan volumes and loan size is low. It has also been commented that MFIspass on the higher cost of credit to their clients who are „interest insensitive‟for small loans but may not be so as loan sizes increase. It is, therefore,necessary for MFIs to develop strategies for increasing the range and volumeof their financial services.2. Lack of Capital:-The second area of concern for MFIs, which are on the growth path, is thatthey face a paucity of owned funds. This is a critical constraint in their beingable to scale up. Many of the MFIs are socially oriented institutions and do nothave adequate access to financial capital. As a result they have high debtequity ratios. Presently, there is no reliable mechanism in the country formeeting the equity requirements of MFIs.The IPO issue by Mexico based „Compartamos‟ was not accepted by puristsas they thought it defied the mission of an MFI. The IPO also brought forth theissue of valuation of an MFI3. Financial service delivery:-Another challenge faced by MFIs is the inability to access supply chain. Thischallenge can be overcome by exploring synergies between microfinanceinstitutions with expertise in credit delivery and community mobilization and 72
  • 73. businesses operating with production supply chains such as agriculture. Thelatter players who bring with them an understanding of similar clientsegments, ability to create microenterprise opportunities and willingness tonurture them, would be keen on directing microfinance to such opportunities.This enables MFIs to increase their client base at no additional costs.Those businesses that procure from rural India such as agriculture and dairyoften identify finance as a constraint to value creation. Such businesses mayfind complementarities between an MFI‟s skills in management of creditprocesses and their own strengths in supply chain management.ITC Limited, with its strong supply chain logistics, rural presence and aninnovative transaction platform, the e-choupal, has started exploring synergieswith financial service providers including MFIs through pilots with vegetablevendors and farmers. Similarly, large FIs such as Spandana foresee a largerrole for themselves in the rural economy ably supported by value creatingpartnerships with players such as Mahindra and Western Union MoneyTransfer. 28ITC has initiated a pilot project called „pushcarts scheme‟ along with BASIX (amicrofinance organization in Hyderabad). Under this pilot, it works with twentywomen head load vendors selling vegetables of around 10- 15 kg per day.BASIX extends working capital loans of Rs. 10,000/- , capacity building andbusiness development support to the women. ITC provides support throughsupply chain innovations by: i. Making the Choupal Fresh stores available to the vendors, this avoids the hassle of bargaining and unreliability at the traditional mandis (local vegetable markets). ii. Continuously experimenting to increase efficiency, augmenting incomes and reducing energy usage across the value chain. For instance, it has forged a partnership with National Institute of Design (NID), a pioneer in the field of design education and research, to design user-friendly pushcarts that can reduce the physical burden. iii. Taking lessons from the pharmaceutical and telecom sector to identify technologies that can save energy and ensure temperature control in 73
  • 74. push carts in order to maintain quality of the vegetables throughout the day. The model augments the incomes of the vendors from around Rs.30-40 per day to an average of Rs.150 per day. From an environmental point of view, push carts are much more energy efficient as opposed to fixed format retail outlets.4. HR IssuesRecruitment and retention is the major challenge faced by MFIs as they striveto reach more clients and expand their geographical scope. Attracting theright talent proves difficult because candidates must have, as a prerequisite, amindset that fits with the organization‟s mission.Many mainstream commercial banks are now entering microfinance, who arepoaching staff from MFIs and MFIs are unable to retain them for other jobopportunities.85% of the poorest clients served by microfinance are women. However,women make up less than half of all microfinance staff members, and fill evenfewer of the senior management roles. The challenge in most countries stemsfrom cultural notions of women‟s roles, for example, while women are singlethere might be a greater willingness on the part of women‟s families to letthem work as front line staff, but as soon as they marry and certainly oncethey start having children, it becomes unacceptable. Long distances and longhours away from the family are difficult for women to accommodate and fortheir families to understand.5. Micro insuranceFirst big issue in the micro insurance sector is developing products that reallyrespond to the needs of clients and in a way that is commercially viable.Secondly, there is strong need to enhance delivery channels. These deliverychannels have been relatively weak so far. Micro insurance companies offerminimal products and do not want to go forward and offer complex productsthat may respond better. Micro insurance needs a delivery channel that haseasy access to the low-income market, and preferably one that has been 74
  • 75. engaged in financial transactions so that they have controls for managingcash and the ability to track different individuals.Thirdly, there is a need for market education. People either have noinformation about micro insurance or they have a negative attitude towards it.We have to counter that. We have to somehow get people - without having tosit down at a table - to understand what insurance is, and why it benefitsthem. That will help to demystify micro insurance so that when agents come,people are willing to engage with them.6. Adverse selection and moral hazard:-The joint liability mechanism has been relied upon to overcome the twinissues of adverse selection and moral hazard. The group lending models arecontingent on the availability of skilled resources for group promotion andentail a gestation period of six months to one year. However, there is notsufficient understanding of the drivers of default and credit risk at the level ofthe individual. This has constrained the development of individual models ofmicro finance. The group model was an innovation to overcome the specificissue of the quality of the portfolio, given the inability of the poor to offercollateral. However, from the perspective of scaling up micro financialservices, it is important to proactively discover models that will enable directfinance to individuals. 75
  • 76. CHAPTER-5 FINDINGS, SUGGESTIONS & CONCLUSIONFindings & Suggestions:-Despite all efforts, the World Bank estimates that the Indian microfinanceactivity currently reaches only 4% to the poor. According to a 2003 NationalGovernment survey found that 22% of all cultivator households access creditfrom informal sources and only 27% from formal sources. This shows thatthere exists a wide annual supply demand gap in micro credit. It is thereforesuggested to increase outreach of micro finance particularly by formalinstitutions. Since self-help micro-credit schemes are often landed as one ofthe most effective mechanisms to reach the poor, measures must be taken toensure that the poor are not excluded.Participation of poor in formation, implementation and monitoring of theprogram affecting the poor is a necessity. Micro finance or micro creditprogram should no longer be a sub program of SGSY. It should rather be anindependent economic program. There is also a need to develop the capacityof SHGs. More innovation in the form of business facilitators andcorrespondents will be needed for banks to increase their outreach for banksto ensure financial inclusion. 76
  • 77. Conclusion:-Microfinance refers to a movement that envisions “a world in which many poorand near-poor households, have permanent access to an appropriate rangeof high quality financial services, including not just credit but also savings,insurance and fund transfers.” The microfinance sector in India has developeda successful and sustainable business model which has been able toovercome challenges traditionally faced by the financial services sector inservicing the low income population by catering to its specific needs,capacities and leveraging pre-existing community support networks.The main conclusion of this topic is that micro finance can contribute tosolving the problem of inadequate housing and urban services as an integralpart of poverty alleviation program. The challenges lies in finding the level offlexibility in the credit instrument that could make it match the multiple creditrequirements of the low income borrowers without improving unbearably highcost of monitoring to end use lenders. A promoting solution is to providemultipurpose loans or composite credit for income generation, housingimprovement and consumption support. Micro finance can indeed besustained in Singh the long run in a profitable manner; going by the increasingnumber of commercial banks that have evinced interest in this area, the futuredoes seem bright.The changing face of microfinance in India appear to be positive in terms ofthe ability of microfinance to attract more funds and therefore increaseoutreach and we are now interested in measuring how this positionsmicrofinance in terms of poverty alleviation and social impact a going forward.Micro finance remains a powerful tool for development. It may not be apanacea, but it has brought a sea of change in the lives of many. Onlyspreading the outreach of micro finance will bring down the cost of capital andthe operating cost and to strengthen the bonding between micro finance andthe formal financial system. However, for sustainable development the poorrural economy, focus must be on development of rural infrastructure and ruraleconomy, to ensure that there will exist activities that require finance. 77
  • 78. BIBLIOGRAPHY1. De Aghion, Beatriz Armendáriz & Jonathan Morduch. The Economics of Microfinance, The MIT Press, Cambridge, Massachusetts, 2005.2. The Future of microfinance in India: By Sukhwinder Singh Arora, Financial Sector Team, Policy Division, DFID3. R Srinivasan and M S Sriram, “Microfinance in India- Discussion”4. Report, “Status of Microfinance in India 2006-2007”, NABARD5. Ledgerwood, Joanna and Victoria White. Transforming Microfinance Institutions: Providing Full Financial Services to the Poor. World Bank, 2006.6. Raven Smith, “ The Changing Face of Microfinance in India- The costs and benefits of transforming from an NGO to a NBFC”, 20067. Annie Duflo, Research Co-ordinator, Centre for Micro Finance Research, “ICICI Banks the poor in India”, Page 13, Microfinance Matters, Issue 17, October 20058. R. Arunachalam - Alternative Technologies in the Indian Micro- finance Industry WEBLIOGRAPHY9. http://www.scribd.com/doc/1194640/Micro-Finance10. www.sidbi.in11. http://www.apexbank.in/aboutus.html12. www.rbi.org.in13. http://www.nabard.org/microfinance/mf_institution.asp14. www.wikipedia.org15. http://business-standard.com/india/news/after-sks-success-more- microfinance-public-issues-arethe-horizon/406417/16. http://www.microfinanceinsights.com/blog-details.php?bid=223 78