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, Ujjain
Towards Partial Fulfillment of the Requirement for the Degree
Of
MASTER OF BUSINESS ADMINISTRATION
By
Neha Jain

2. DECLARATION
I NEHA JAIN, student of MBA 3rd semester studying at Mandsaur Institute of
Technology (MIT), hereby declare that the summer training report on “Micro-
Finance” submitted to Vikram University, Ujjain is the result of my own effort in
the training, which I did as a part of the curriculum for the fulfillment of Master
of Business Administration (MBA) degree. It has not been duplicated from any
other earlier works and all information provided in this report is genuine. The
all fact and figure in the project are true. There are taken from the company
web site and from company brochure and etc. I also declare that all of the
content 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 not
been submitted to any other university or for any other degree.
DATE- NAME OF STUDENT
PLACE- NEHA JAIN
2

3. PROJECT GUIDE CERTIFICATE
This 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 of
Business Administration (MBA) of Vikram University, Ujjain is the result of the
original research work completed by Neha Jain under my supervision and
guidance and to the best of my knowledge and belief, the work embodied in
this Project Report has not formed earlier.
Place: Signature
Date:
3

4. CONTENT
Chapters 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)
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5. CHAPTER DETAILS
CHAPTER I
INTRODUCTION
Introduction of Micro- Finance
Need of the Study
Objectives of the Study
Scope of the Study
CHAPTER II
PROFILE 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 III
CONCEPTUAL BACKGROUND
Studies analyzing the Micro Financing in India
Rationale of the Study
CHAPTER IV
MICRO- 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
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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 V
Findings, Suggestions and Conclusion
Findings & Suggestions
Conclusion
Terminal Item:-
Bibliography
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7. EXECUTIVE SUMMARY
Micro finance approaches have emerged in India over the past decade,
involving the provision of thrift, credit and other financial services and
products, with the aim to raise income levels and improve living standards.
The most notable among these micro finance approaches is a nationwide
attempt, pioneered by Non- Governmental Organizations and now supported
by the state, to create links between commercial banks and NGOs and
informal local groups. Micro finance through Self Help Groups (SHGs) is
propagated as an alternative system of credit delivery for the poorest of the
poor groups. Recognizing their importance, both Reserve Bank of India and
National Bank for Agriculture and Rural Development (NABARD) have been
spreading the promotion and linkage of SHGs to the banking system through
refinance support and initiating other proactive policies and systems.
Microfinance sector has grown rapidly over the past few decades. Nobel
Laureate Muhammad Yunus is credited with laying the foundation of the
modern MFIs with establishment of Grameen Bank, Bangladesh in 1976.
Today it has evolved into a vibrant industry exhibiting a variety of business
models. Microfinance Institutions (MFIs) in India exist as NGOs (registered as
societies or trusts), Section 25 companies and Non-Banking Financial
Companies (NBFCs). Commercial Banks, Regional Rural Banks (RRBs),
cooperative societies and other large lenders have played an important role in
providing refinance facility to MFIs. Banks have also leveraged the Self-Help
Group (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 extending
financial services to unbanked sections of population. At the same time,
practices followed by certain lenders have subjected the sector to greater
scrutiny and need for stricter regulation.
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8. The microfinance sector is having a healthy growth rate, there have been a
number of concerns related to the sector, like grey areas in regulation,
transparent pricing, low financial literacy etc. In addition to these concerns
there are a few emerging concerns like cluster formation, insufficient funds,
multiple lending and over-indebtedness which are arising because of the
increasing competition among the MFIs.
Today, the microfinance industry and the greater development community
share the view that permanent poverty reduction requires addressing the
multiple dimensions of poverty. For the international community, this means
reaching specific Millennium Development Goals (MDGs) in education,
women's empowerment, and health, among others. For microfinance, this
means viewing microfinance as an essential element in any country's financial
system.
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9. CHAPTER-1 INTRODUCTION
“MICRO-FINANCE IN INDIA”
Introduction of Micro-Finance:-
Micro-finance is defined as any activity that includes the provision of financial
services such as credit, savings, and insurance to low income individuals
which fall just above the nationally defined poverty line, and poor individuals
which fall below that poverty line, with the goal of creating social value. The
creation of social value includes poverty alleviation and the broader impact of
improving livelihood opportunities through the provision of capital for micro
enterprise, and insurance and savings for risk mitigation and consumption
smoothing.
A large variety of actors provide microfinance in India, using a range of
microfinance delivery methods. Since the ICICI Bank in India, various actors
have endeavored to provide access to financial services to the poor in
creative ways. Governments also have piloted national programs, NGOs have
undertaken the activity of raising donor funds for on-lending, and some banks
have partnered with public organizations or made small inroads themselves in
providing such services. This has resulted in a rather broad definition of
microfinance as any activity that targets poor and low-income individuals for
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10. the provision of financial services. The range of activities undertaken in
microfinance include group lending, individual lending, the provision of
savings and insurance, capacity building, and agricultural business
development services. Whatever the form of activity however, the overarching
goal that unifies all actors in the provision of microfinance is the creation of
social value.
Microfinance Definition:-
According to International Labor Organization (ILO), “Microfinance is an
economic development approach that involves providing financial services
through institutions to low income clients”.
In India, Microfinance has been defined by “The National Microfinance
Taskforce, 1999” as “provision of thrift, credit and other financial services and
products of very small amounts to the poor in rural, semi-urban or urban areas
for enabling them to raise their income levels and improve living standards”.
"The poor stay poor, not because they are lazy but because they have no
access to capital."
Traditionally micro finance was focused on providing a very standardized
credit product. The poor, just like anyone else, (in fact need like thirst) need a
diverse range of financial instruments to be able to build assets, stabilize
consumption and protect themselves against risks. Thus, we see a
broadening of the concept of micro finance--- our current challenge is to find
efficient and reliable ways of providing a richer menu of micro finance
products. Micro finance is not merely extending credit but extending credit to
those 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:
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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 sizes
Microfinance approach is based on certain proven truths which are not always
recognized. 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 have
access to formal financial institutions. Micro finance clients are typically self-
employed, often household-based entrepreneurs. In rural areas, they are
usually small farmers and others who are engaged in small income-
generating activities such as food processing and petty trade. In urban areas,
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12. micro finance activities are more diverse and include shopkeepers, service
providers, artisans, street vendors, etc. Micro finance clients are poor and
vulnerable non-poor who have a relatively unstable source of income.
As we broaden the notion of the types of services micro finance
encompasses, the potential market of micro finance clients also expands. It
depends on local conditions and political climate, activeness of cooperatives,
SHG & NGOs and support mechanism. For instance, micro credit might have
a far more limited market scope than say a more diversified range of financial
services, which includes various types of savings products, payment and
remittance services, and various insurance products. For example, many very
poor farmers may not really wish to borrow, but rather, would like a safer
place to save the proceeds from their harvest as these are consumed over
several months by the requirements of daily living. Central government in
India has established a strong & extensive link between NABARD (National
Bank for Agriculture & Rural Development), State Cooperative Bank, District
Cooperative 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 strategically
significant in the global efforts to alleviate poverty and to achieve the
Millennium Development Goal of halving the world‟s poverty by 2015.
Microfinance has been present in India in one form or another since the 1970s
and is now widely accepted as an effective poverty alleviation strategy. Over
the last five years, the microfinance industry has achieved significant growth
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13. in part due to the participation of commercial banks. Despite this growth, the
poverty situation in India continues to be challenging.
Principles:-
Some principles that summarize a century and a half of development practice
were 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.
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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 institutions
OBJECTIVES 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?
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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; and
iii. Services, including retail shops and numerous trading activities.
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16. CHAPTER 2
PROFILE OF THE ORGANISATION
District Cooperative Central Bank Ltd. (DCCB)
Introduction:-
District co-operative Bank are federations of primary credit societies in
specified areas normally extending to the whole district menace they are
called as district co-operative banks. These banks have a few private
individuals as shareholders who provide both finance of management. Their
main task is to lend to village primary societies, but they were expected to
attract deposits from the general public. But the expectation has not been
fulfilled and many of the co-operative central banks act as intermediaries
between the State Co-operative Bank on the one hand and the village primary
credit societies on the other. First fully fledged DCCB as per the provisions of
the 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-operative
banks, 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 trade
sectors, besides professional and salary classes. Co operative Banks in India
are registered under the Co-operative Societies Act.
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17. The cooperative bank is also regulated by the RBI. They are governed by the
Banking 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
Bank
Structure of District Co-Operative Banks In India:-
District Co-operative Central Banks (DCCBs) occupy the middle level position
in the three tier co-operative credit structure of the country. District
cooperative central bank ltd. Mandsaur is regulated by Reserve Bank of India
(RBI), National Bank for Agriculture & Rural development (NABARD) and
Madhya Pradesh State Cooperative Bank (MPSCB) that is Apex Bank of
Bhopal. District cooperative central banks have several branches which are
known as Primary Agricultural Credit Society (PACS). PACS provide services
to different societies Grameen Sewa Sansthan (GSS) and Large-sized
Adivasi Multipurpose Societies (LAMPS) so that it covered all the rural area
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18. DISTRICT COOPERATIVE BANK STRUCTURE
RBI NABARD
MPSCB
DCCB
BRANCHES
PACS
GSS LAMPS
Board of the DCCB
The Board of the DCCB comprises elected Chairmen of PACS, representative
of the State Government and the State Cooperative Bank apart from the CEO
of the DCCB who would be the member secretary. The board meets
periodically to review the performance of the bank and provide policy
guidance.
The board of the DCCB thus represents the interests of the major
stakeholders in the bank. The Directors from the PACS take care of the PACS
who are major borrowers from DCCBs. The representative of the State
Cooperative Bank protects the interest of the major provider of funds to the
DCCB. The Government is an important stakeholder as the DCCBs functions
under the administrative control of the registrar of cooperative societies.
Moreover the bye-laws of the DCCBs are framed under the Cooperative Act
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19. of the respective states in which they function. In terms of competencies the
Directors from PACS bring in are empathetic understanding of the needs of
the members of the cooperative sector in the district. The State Cooperative
Bank representative provides mainly banking and regulatory competency
while the State Government representative adds administrative skills to the
board. In order to carry out its functions effectively, the board can constitute
sub committees of the board.
Products and Services of DCCB:-
The following services are provided by the Bank to the farming community
through 98 Primary Agricultural Co-Operative Societies and general public in
the 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 LOANS
4. LOANS TO THE GOVERNMENT SPONSERED SCHEMES
Such as - Self Help Groups, SUPs, CMEY, Rural Artisan Credit Cards, etc.
5. LOCKER FACILITY
6. ISSUE OF DEMAND DRAFTS
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20. 7. OTHER SERVICES:
Collection of Cheques:
The Bank undertakes the collection of local and outstation cheques at a
nominal commission.
Standing Instructions:
The Bank undertakes all types of standing instructions issued by the
customers on their accounts with the bank.
Safe Deposit Lockers:
Safe deposit lockers are available at all the branches of the bank of various
sizes to suit the needs of different customers.
Demand Drafts:
We undertake issue of demand drafts and Banker Cheques through all
branches.
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 loan
5. Rural Road Transport 6. Drip Irrigation
7. Sugarcane Crusher 8. Jeep Loan
9. Tractor Loan 10. Lorry Loan
11. Auto Rickshaw loan 12. Sericulture
13. S.H.G. Linkage 14. Salary Earners loan
15. Consumer Durable 16. Kisan Credit Card
17. Education loan 18. Housing loan
19. Swarojgar Credit Card 20. Agri – Clinic
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21. 21. Warm compost 22. Gold Loan, Petty Loan
23. Two Wheeler loan 24. Plantation and
Horticulture with Drip
Irrigation
25. Over Draft loan to Individuals, Firms,
Business, Industries, Sugar
khandasaries
Financial Health of Bank:-
The Bank has grown rapidly in the last 4 decades and its operation in the
District. 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- 518.18
Functions of DCCB:-
The functions of the Central Cooperative bank are guided by the following
motives. (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.
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22. CHAPTER-3 LITRATURE REVIEW
In this chapter the existing literature on the issues and impact of microfinance
has been reviewed. There are several studies conducted in this area in last
couple of years. In this chapter the first section covers studies which are
conducted to analyze micro finance and its activities in various states of
India 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 credit
coverage through state interventions approach was based on the premise that
rural micro entrepreneur are enable to organize themselves. They need
subsidized credit for increasing their income and are too poor to serve.
The study by Yaron (1994) found that microfinance is much more than
microcredit, stating:” Provision of thrift, credit and other financial services and
products of very small amounts to the poor in rural, semi-urban and urban
areas for enabling them to raise their income levels and improve living
standards”. The Self Help Group promoters emphasize that mobilizing saving
is the first building block of financial services. Micro Finance progr ams have
rapidly expended in recent years. Some examples are: Membership of Sa-
Dhan (a leading association) has expended from 43 to 96 community
development. The CARE CASH program took on the challenge of working
with small NGO-MFIs and community owned-managed microfinance
organization.
The study also reveals that results in term of microfinance outreach
can be identified that represents achievements that are far beyond any
ambitious out reach out come that could have been imagined only fifteen
years is a very short span of time
According to Otero (1994) to be successful, financial intermediaries,
providing services and generating domestic resources must have the
capacity to achieve excellent repayment and generate domestic resources.
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23. They must have the capacity to achieve access to clients in order to do so
MFI need to find ways to cut down on their administrative cost. This can be
done through simplified and decentralized loan applicating approval and
collection processes, hence reduce cost
Barry (1996) is of the view that MFIs to become financially viable, self
sustaining and interegal to the communities in which they oper ate, must have
the potential to attract more resources and services to clients. Despite the
focus of MFI s, only about 2% of the suffering world and 500 million small
entrepreneurs are estimated to have access to financial sector.
Benjamin and Piprek (1997) have traced a traditional approach in rural
finance. Under this approach the key problem area visualize the rural
finance market included a lack of market in rural areas, absence of
moderate technology in rural areas and prevalence of unspurious money
lenders. A considerable of body of literature has accumulated and monitoring
the development of micro finance sector.
Borbora and Mahanta (2000) analyse the impact of micro financing through
SHGs taking the case of Rashtriya Grammen Vikas Nidhi in Assam and
found that 80% of the SHG members were from poor families, and
belonged to the age group of 8 to 50 years. This was the case for both
savings and taking loan. The repayment performance was about 91% and the
program has been successful in expanding outreach covering last number of
groups.
Singh (2001) has undertaken a study in Uttarpradesh comparing the pre
and post situations of women SHG s. He found that the average value of
assets increased by 46% and the annual income per household increased
by 20% between pre and post SHG periods. The borrowing for consumption
purpose was also done during pre SHG, but it was completely absent in the
post - SHG situation. The important benefit of SHG s is compulsory
savings, even cutting the necessary expenditures. But the commercial
banks are prompt in linking SHG s with loan.
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24. A study conducted by NABARD (2002) covering 560 households from 223
SHG s in 11 states of India elucidated that there has been positive result in
the standard of living of SHG s members in case of asset
owenership.saving and borrowing capacity , income generating activities
and income levels. The average value of asset including livestock and
consumer durable has increased considerably. The housing condition of the
people has improved, from the mud walls to thatched roofs to brick walls and
tiled roofs. Almost all members and the members developed saving habit in
post SHG. The trend of consumption loans has come down; in contrast the
loan for income generating purpose has incr eased considerably during the
pre SHG period
The study by Sapovadia (2007) explores that the typical micro finance
clients are self employed, household-based entrepreneurs and low
income persons that don t have access to formal financial institutions
and also lack business skills. Micro entrepreneurs face many huddles in
getting started. They sometimes lack the skills necessary to manage
the financial aspect of their business line and in large number of cases they
indulge in particular business by default. Various micro enterprise
development programs have helped micro entrepreneurs in achieving
great success and growth. These micro entrepreneur development
programs have immensely helped micro entrepreneurs, who look for
collateral security, or are in capable to find such collateral needed to secure
alone or those who have low credit. They providing them with training
support, help in developing business plan, and assistance in building
their business. Therefore the study reveals that successful micro
entrepreneurs have contributed much to society by creating wealth, economic
assets and jobs.
The study of Sinha (2007) reveals that micro finance sector has seen
a series of critical developments in India. MFI s have started to leverage the
new found management expertise to achieve scale and spread their
operations well beyond their traditional operational areas. Rating data from a
lar ge sample of lending MFI s shows that these have recorded high growth
rate to the order of 80% per annum in terms of number of borrowers and
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25. around 40% per annum in terms of portfolio, reaching from 300,000 to one
million clients each. The study also reveals that expansion has either to less
developed areas of the country viz,-orissa, Jharkhand, Rajasthan, Madhya
Pradesh, Tripur a, Assam or to areas such as Maharashtra that also
have substantial numbers of low income families in some regions even if their
overall development indicators are income families in some regions even if
their overall development indicators are not as low as those for the other
states.
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 of
11% 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 identified
by NABARD in 2005 for special efforts and location-specific strategies.
Growth was particularly rapid in Maharashtra. As a result, the western
region experienced, the fastest growth of all the regions, and its share in total
number of poor. The two regions which have the most catching up to do are
the central and eastern regions, whose share of groups lag behind their share
of the poor by 21 and 11% points respectively.
Microfinance, the supply of banking services to the poor, is high on the
public agenda and is attracting increased interest from academics. The
development-enhancing aspect of micro finance has been recently
recognized with the Nobel prize awarded to Mohammad Yunus and
Grameen Bank. Microfinance is also increasingly becoming an
investment opportunity. The total stock of foreign capital investment in
microfinance more than tripled between 2004 and 2006, to US $4 billion
with the establishment of 40 new specialized international investment
funds.(Roy,2008)
Hans (2008) analyzed that credit is one of the critical inputs for
economic development. Its timely availability in the right quantity and at an
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26. affordable cost goes a long way in contributing to the well-being of the people
especially in the lower rungs of society. The study reveals that the extent of
exclusion from credit markets is much more, as number of loan accounts
constituted only 13 percent of adult population. Regional differences are
significant with the credit coverage at 25 percent for southern region and as
low as 7.7 and 9 percent respectively in North Eastern and Central Regions.
Within India, the Micro Finance Revolution in western and southern
India has received most attention, both in media as well as academic as
well as academic research. Some prominent MFI s in these are namely
SHARE, BASIX, SEWA, MYRADA and PRADHAN. Andhra Pradesh in
particular has witnessed remarkable growth in micro finance activities and its
success stories have been widely reported well. In comparison eastern
India 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 too
aggregative or wherever disaggregation has been done, it has been done with
reference to one aspect. Most of the studies have been done covering the
institutional level micro financing so there is enough scope of research
in this area. Keeping this in view the present study has been undertaken to
cover the micro financing in India for the period 1994 to 2007. Further the
period has been divided in to two sub- periods. Period I, 1994-1999 and
Period II, 2000-2007 to find out whether 2000 onwards period has been
associated with increase in micro financing activities. The study has
organized in such a way, that it helps explain in brief the micro financing
activities in India, it also provides an insight of spatial distribution of MFI s in
India. This study tries to cover the state-wise, agency- wise and region-wise
growth to provide a complete view of Micro Financing activities in India.
26

27. CHAPTER-4 MICRO-FINANCE IN INDIA
Microfinance in India has had a significant shift from the days when
microfinance was being discussed as the next big innovation to address the
poverty issues in India to being discussed in terms of the next big investment
opportunity. The language of microfinance has undergone a fundamental
change in the two decades of its evolution
Origin of Microfinance:-
Although neither of the terms microcredit or microfinance were used in the
academic literature nor by development aid practitioners before the 1980s or
1990s, respectively, the concept of providing financial services to low income
people is much older.
While the emergence of informal financial institutions in Nigeria dates back to
the 15th century, they were first established in Europe during the 18th century
as a response to the enormous increase in poverty since the end of the
extended European wars (1618 – 1648). In 1720 the first loan fund targeting
poor people was founded in Ireland by the author Jonathan Swift. After a
special law was passed in 1823, which allowed charity institutions to become
formal financial intermediaries a loan fund board was established in 1836 and
a big boom was initiated. Their outreach peaked just before the government
introduced a cap on interest rates in 1843. At this time, they provided financial
services to almost 20% of Irish households. The credit cooperatives created in
Germany in 1847 by Friedrich Wilhelm Raiffeisen served 1.4 million people by
1910. He stated that the main objectives of these cooperatives “should be to
control the use made of money for economic improvements, and to improve
the moral and physical values of people and also, their will to act by
themselves.”
In the 1880s the British controlled government of Madras in South India, tried
to use the German experience to address poverty which resulted in more than
nine million poor Indians belonging to credit cooperatives by 1946. During this
same time the Dutch colonial administrators constructed a cooperative rural
27

28. banking system in Indonesia based on the Raiffeisen model which eventually
became Bank Rakyat Indonesia (BRI), now known as the largest MFI in the
world.
Based on the concept of “self-help,” small groups of women have formed into
groups of ten to twenty and operate a savings-first business model whereby
the member‟s savings are used to fund loans. The results from these self-help
groups (SHGs) are promising and have become a focus of intense
examination 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 2000
Phase 1: Social Phase 2: Financial Phase 3: Financial
Banking Systems Approach Inclusion
1.Nationalization of 1.Peer-pressure 1.NGO-MFIs and SHGs
private commercial gaining more legitimacy
banks
2.Expansion of rural 2.Establishment of 2.MFIs emerging as
branch network MFIs, typically of non- strategic partners to
profit origins diverse entities
interested in the low-
income segments
3.Extension of 3.Consumer finance
subsidized credit emerged as high growth
area
4.Establishment of Rural 4.Increased policy
Regional Banks regulation
5.Establishment of apex 5.Increasing
institution such as commercialization
28

29. National Bank for
Agriculture and Rural
Development and Small
Industries Development
Bank of India
Phase 1: In the 1960‟s, the credit delivery system in rural India was largely
dominated by the cooperative segment. The period between 1960 and 1990,
referred to as the “social banking” phase. This phase includes nationalization
of private commercial banks, expansion of rural branch networks, extension of
subsidized credit, establishment of Regional Rural Banks (RRBs) and the
establishment of apex institutions such as the National Bank for Agriculture
and Rural Development (NABARD) and the Small scale Industries
Development Board of India (SIDBI).
Phase 2: After 1990, India witnessed the second phase “financial system
approach” of credit delivery. In this phase NABARD initiated the Self Help
Group (SHG) - Bank Linkage Bank Linkage program, which links informal
women's groups to formal banks. This concept held great appeal for non-
government organizations (NGOs) working with the poor, prompting many of
them to collaborate with NABARD in the program. This period also witnessed
the entry of Microfinance Institutions (MFIs), largely of non-profit origins, with
existing development programs.
Phase 3: In 2000, the third phase in the development of Indian microfinance
began, marked by further changes in policies, operating formats, and
stakeholder orientations in the financial services space. This phase
emphasizes on “inclusive growth” and “financial inclusion.” This period also
saw many NGO-MFIs transform into regulated legal formats such as Non-
Banking Finance Companies (NBFCs). Commercial banks adopted innovative
ways of partnering with NGO-MFIs and other rural organizations to extend
their reach into rural markets. MFIs have emerged as strategic partners to
individuals and entities interested in reaching out to India's low income client
segments.
29

30. Policy Attention to Microfinance After 2000
1999 --- Official definition of microfinance by RBI
August 2000 --- 'Micro Credit/Rural Credit' included in the list of permitted
non-banking financial company (NBFC) activities considered for Foreign
Direct Investment (FDI)
2005 --- MFIs acknowledged for the first time in the Budget Speech by the
Finance Minister “Government intends to promote MFIs in a big way. The way
forward, I believe, is to identify MFIs, classify and rate such institutions, and
empower them to intermediate between the lending banks and the
beneficiaries.”
January 2006 --- Announcement of the business correspondent model
February 2006 --- Budget Speech by the Finance Minister promises a formal
statutory framework for the promotion, development and regulation of the
microfinance sector
March 2006 --- Comprehensive guidelines by RBI on loan securitization
July 2006 --- RBI master circular allows NGOs involved in microfinance to
access External Commercial Borrowings (ECB) up to USD 5 million (INR
20.25 crores) during a year.
March 2007 --- Finance Minister introduces the “Micro Finance Sector
Development and Regulation Bill 2007” in LokSabha
Microfinance Today:-
In the 1970s a paradigm shift started to take place. The failure of subsidized
government or donor driven institutions to meet the demand for financial
services in developing countries let to several new approaches. Some of the
most prominent ones are presented below.
Bank Dagan Bali (BDB) was established in September 1970 to serve low
income people in Indonesia without any subsidies and is now “well-known as
30

31. the earliest bank to institute commercial microfinance”. In 1973 ACCION
International, a United States of America (USA) based non-governmental
organization (NGO) disbursed its first loan in Brazil and in 1974 Professor
Muhammad Yunus started what later became known as the Grameen Bank
by 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 poor
women in India. Although the latter examples still were subsidized projects,
they used a more business oriented approach and showed the world that poor
people can be good credit risks with repayment rates exceeding 95%, even if
the interest rate charged is higher than that of traditional banks. Another
milestone was the transformation of BRI starting in 1984. Once a loss making
institution channeling government subsidized credits to inhabitants of rural
Indonesia it is now the largest MFI in the world, being profitable even during
the Asian financial crisis of 1997 – 1998.
In February 1997 more than 2,900 policymakers, microfinance practitioners
and representatives of various educational institutions and donor agencies
from 137 different countries gathered in Washington D.C. for the first Micro
Credit Summit. This was the start of a nine yearlong campaign to reach 100
million of the world poorest households with credit for self-employment by
2005. According to the Microcredit Summit Campaign Report 67,606,080
clients have been reached through 2527 MFIs by the end of 2002, with
41,594,778 of them being amongst the poorest before they took their first
loan. Since the campaign started the average annual growth rate in reaching
clients has been almost 40 percent. If it has continued at that speed more
than 100 million people will have access to microcredit by now and by the end
of 2005 the goal of the microcredit summit campaign would be reached. As
the president of the World Bank James Wolfensohn has pointed out, providing
financial services to 100 million of the poorest households means helping as
many as 500 – 600 million poor people.
Strategic Policy Initiatives:-
Some of the most recent strategic policy initiatives in the area of Microfinance
taken 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- RBI
Activities 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 in
Bangladesh with promise of providing credit to the poor without collateral ,
alleviating poverty and unleashing human creativity and endeavor of the poor
people. 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 Rural
Banks Act, and the Cooperative Societies Acts of the respective state
governments for cooperative banks.
NBFCs are registered under the Companies Act, 1956 and are governed
under the RBI Act. There is no specific law catering to NGOs although they
can be registered under the Societies Registration Act, 1860, the Indian Trust
Act, 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 deposits
from clients who also borrow. This tendency is a concern due to enforcement
problems that tend to arise with self-regulatory organizations. In January
2000, the RBI essentially created a new legal form for providing microfinance
services for NBFCs registered under the Companies Act so that they are not
subject to any capital or liquidity requirements if they do not go into the
deposit taking business. Absence of liquidity requirements is concern to the
safety of the sector.
33

34. Development Process through Micro Finance
Donors and Banks Micro-Finance Government and
Banks
Implementing Organizations
Individual Awareness/Promotional Work Individual
Promotion and Formation of
SHGs
Micro 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 Projects
Institutions
Implementing
Organizations
Resource/Supp Indirectly
ort engaged in
Organizations 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 in
the new economy. In India, micro-Finance scene is dominated by Self Help
Groups (SHGs) - Banks linkage Program, aimed at providing a cost effective
mechanism for providing financial services to the 'unreached poor'. In the
Indian 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 evolved
lately, which emphasizes the combined delivery of financial services along
with technical assistance, and agricultural business development services.
When compared to the wider SHG bank linkage movement in India, private
MFIs have had limited outreach. However, we have seen a recent trend of
larger microfinance institutions transforming into Non-Bank Financial
Institutions (NBFCs). This changing face of microfinance in India appears to
be positive in terms of the ability of microfinance to attract more funds and
therefore increase outreach.
Demand for Micro-Credit or Micro-Finance:-
In terms of demand for micro-credit or micro-finance, there are three
segments, 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 is
possible. Right now the problem is that, it is SHGs' which are doing this and
efforts should be made so that the big financial institutions also turn up and
start supplying funds to these people. This will lead to a better India and will
definitely 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 is
often easy to get more. The great difficulty is to get that little.”Adams
Smith.
Today India is facing major problem in reducing poverty. About 25 million
people in India are under below poverty line. With low per capita income,
heavy population pressure, prevalence of massive unemployment and
underemployment, low rate of capital formation, misdistribution of wealth and
assets, prevalence of low technology and poor economics organization and
instability of output of agriculture production and related sectors have made
India one of the poor countries of the world.
37

38. Present Scenario of India
India falls under low income class according to World Bank. It is second
populated country in the world and around 70 % of its population lives in rural
area. 60% of people depend on agriculture, as a result there is chronic
underemployment and per capital income is only $ 3262. This is not enough
to provide food to more than one individual. The obvious result is abject
poverty, low rate of education, low sex ratio and exploitation. The major factor
account for high incidence of rural poverty is the low asset base. According to
Reserve Bank of India, about 51 % of people house possess only 10% of the
total asset of India .This has resulted low production capacity both in
agriculture (which contribute around 22-25% of GDP) and Manufacturing
sector. Rural people have very low access to institutionalized credit (from
commercial bank).
Poverty alleviation programs and conceptualizations of Microfinance:-
There have been continuous efforts of planners of India in addressing the
poverty. They have come up with development programs like Integrated Rural
Development program (IRDP), National Rural Employment Program (NREP),
Rural Labor Employment Guarantee Program (RLEGP) etc. But these
programs have not been able to create massive impact in poverty alleviation.
The production oriented approach of planning without altering the mode of
production could not but result of the gains of development by owners of
instrument of production. The mode of production does remain same as the
owners of the instrument have low access to credit which is the major factor of
production. Thus in Nineties National bank for agriculture and rural
development (NABARD) launches pilot projects of Microfinance to bridge the
gap between demand and supply of funds in the lower rungs of rural
economy. Micro finance the buzzing word of this decade was meant to cure
the illness of rural economy. With this concept of Self Reliance, Self
Sufficiency and Self Help gained momentum. The Indian microfinance is
dominated by Self Help Groups (SHGs) and their linkage to Banks.
38

39. Deprived of the basic banking facilities, the rural and semi urban Indian
masses are still relying on informal financing intermediaries like money
lenders, family members, friends etc.
Distribution of Indebted Rural Households: Agency wise
Credit Agency Percentage of Rural Households
Government 6.1
Cooperative Societies 21.6
Commercial banks and RRBs 33.7
Insurance 0.3
Provident Fund 0.7
Other Institutional Sources 1.6
All Institutional Agencies 64.0
Landlord 4.0
Agricultural Moneylenders 7.0
Professional Moneylenders 10.5
Relatives and Friends 5.5
Others 9.0
All Non Institutional Agencies 36.0
All Agencies 100.0
Source: Debt and Investment Survey, GoI 1992
39

40. Key Players in the Micro Finance System
The 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 other
economic activities in rural areas in India. NABARD was established in 1982
as a Development Bank, in terms of the Preamble of the Act, “for providing
and regulating credit and other facilities for the promotion and development of
agriculture, small scale industries, cottage and village industries, handicrafts
and other rural crafts and other allied economic activities in rural areas with a
view to promoting integrated rural development and securing prosperity of
rural areas and for matters connected therewith or incidental thereto”. The
corporate mission set by NABARD for making available microfinance services
to the very poor envisages coverage of one third of the rural poor through one
million SHGs by the year 2006-07. The propose targets are given in the
following table:
Target of SHG and Bank
No. of New Cumulative Bank Loan Cumulative
SHGs to be No. of SHGs requirement Bank Credit
Year 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 ** 18,172
2002-03
1,10,000 6,95,000 14,172 32,884
2003-04
1,05,000 8,00,000 28,184 61,068
2004-05
1,00,000 9,00,000 41,256 1,02,234
2005-06
1,00,000 10,00,000 49,588 1,51,912
2006-07
Source: NABARD
40

41. In November 1998 a high-powered Task Force on supportive Policy and
regulatory framework for Micro finance (henceforth referred to as the Task
Force) was set up by NABARD at the instance of RBI. The objective of the
Task Force were among others, to come up with suggestions for a regulatory
framework that brings the operations of the Microfinance Institutions into the
mainstream, to access the possible role of self-regulatory organizations and to
explore 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 and
credit policy of RBI was in former RBI President Dr. Bimal Jalan‟s Monetary
and Credit Policy Statement of April 1999. The policy attached importance to
the work of NABARD and public sector banks in the area of micro credit. The
banks were urged to make all out efforts for provision of micro credit,
especially forging linkages with SHGs, either at their own initiative or by
enlisting support of Non- Government Organization (NGOs). The micro credit
extended by the banks is reckoned as part of their priority sector lending, and
they are free to device appropriation loan and saving products in this regard
considerable 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 in
consultation with the RBI. In 1994, the RBI constituted a working group on
SHGs. On the recommendation of the SHGs would be reckoned as part of
their lending to weaker sections and such lending should be reviewed by
banks and also at the State Level Bankers‟ Committee (SLBC) level, at
regular 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 in
1975. The establishment of SHGs can be traced to the existence of one or
more problem areas around which the consciousness of rural poor is built and
the process of group formation initiated. Since SHGs have been able to
mobilize savings from persons or groups who were not normally expected to
have any „saving‟ and also to recycle effectively the pooled resources
41

42. amongst the members, their activities have attracted attention as a supportive
mechanism 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 the
micro finance services in India. Based on asset sizes, MFIs can be divided
into 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 and
are therefore unregulated. They secure micro finance clients with varying
quality and using different operating models.
v) Non Government Organizations (NGOs):-
The Non Government Organizations involved in promoting SHGs and linking
them with the Formal Financial Agencies (FFAs) perform the following
functions:
- Organizing the poor people into groups
- Training and helping them in the organizational, managerial and financial
matters
- 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 for
economic development
42

43. Self Help Groups (SHGs)
Self- help groups (SHGs) play today a major role in poverty alleviation in rural
India. A growing number of poor people (mostly women) in various parts of
India are members of SHGs and actively engage in savings and credit (S/C),
as well as in other activities (income generation, natural resources
management, literacy, child care and nutrition, etc.). The S/C focus in the
SHG is the most prominent element and offers a chance to create some
control over capital, albeit in very small amounts. The SHG system has
proven to be very relevant and effective in offering women the possibility to
break gradually away from exploitation and isolation.
How self-help groups work:-
NABARD (1997) defines SHGs as "small, economically homogenous affinity
groups of rural poor, voluntarily formed to save and mutually contribute to a
common 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, or
only women, or only youth, or a mix of these. As women's SHGs or sangha
have been promoted by a wide range of government and non- governmental
agencies, they now make up 90% of all SHGs.
The rules and regulations of SHGs vary according to the preferences of the
members and those facilitating their formation. A common characteristic of the
groups is that they meet regularly (typically once per week or once per
fortnight) 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 communal
business, etc.), and to mitigate any conflicts that might arise. Most SHGs have
an elected chairperson, a deputy, a treasurer, and sometimes other office
holders.
Most SHGs start without any external financial capital by saving regular
contributions by the members. These contributions can be very small (e.g. 10
Rs 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 loans
for micro enterprise activities and consumption. Only those SHGs that have
utilized their own funds well are assisted with external funds through linkages
with banks and other financial intermediaries.
However, it is generally accepted that SHGs often do not include the poorest
of the poor, for reasons such as:
(a) Social factors (the poorest are often those who are socially marginalized
because of caste affiliation and those who are most skeptical of the potential
benefits of collective action).
(b) Economic factors (the poorest often do not have the financial resources
to contribute to the savings and pay membership fees; they are often the ones
who migrate during the lean season, thus making group membership difficult).
(c) Intrinsic biases of the implementing organizations (as the poorest of
the poor are the most difficult to reach and motivate, implementing agencies
tend 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 have
access to financial capital and markets for their products and services. While
the groups initially generate their own savings through thrift (whereby thrift
implies savings created by postponing almost necessary consumption, while
savings imply the existence of surplus wealth), their aim is often to link up with
financial institutions in order to obtain further loans for investments in rural
enterprises. NGOs and banks are giving loans to SHGs either as "matching
44

45. loans" (whereas the loan amount is proportionate to the group's savings) or as
fixed amounts, depending on the group's 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-lend
these funds to one another, usually at apparently high rates of interest which
reflect the members‟ understanding of the high returns they can earn on the
small sums invested in their micro-enterprises, and the even higher cost of
funds from money lenders. If they do not wish to use the money, they may
deposit it in a bank. If the members‟ need for funds exceeds the group‟s
accumulated savings, they may borrow from a bank or other organization,
such as a micro-finance non-government organization, to augment their own
fund.
The system is very flexible. The group aggregates the small individual saving
and borrowing requirements of its members, and the bank needs only to
maintain one account for the group as a single entity. The banker must
assess the competence and integrity of the group as a micro-bank, but once
he has done this he need not concern himself with the individual loans made
by the group to its members, or the uses to which these loans are put. He can
treat the group as a single customer, whose total business and transactions
are 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 of
such accounts, without having to change its methods of operation.
Unlike many customers, demand from SHGs is not price-sensitive. Illiterate
village women are sometimes better bankers than some with more
professional qualifications. They know that rapid access to funds is more
important than their cost, and they also know, even though they might not be
able to calculate the figures, that the typical micro-enterprise earns well over
500% return on the small sum invested in it. The groups thus charge
themselves high rates of interest; they are happy to take advantage of the
generous 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-lend
funds from SIDBI at 15%, or from „new generation‟ institutions such as Basix
Finance 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 Models
1. 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 the
Government of India in the early 1990s. Pursuant to the program, banks,
which are primarily public sector regional rural banks, are encouraged to
partner with SHGs to provide them with funding support, which is often
subsidized.
A self help group, or SHG, is a group of 10 to 20 poor women in a village who
come together to contribute regular savings to a common fund to deposit with
a bank as collateral for future loans. The group has collective decision making
power and obtains loans from the partner bank. The SHG then loans these
funds to its members at terms decided by the group. Members of the group
meet on a monthly basis to conduct transactions and group leaders are
responsible for maintaining their own records, often with the help of NGOs or
government agency staff.
NABARD is presently operating three models of linkage of banks with SHGs
and NGOs:
Model – 1: In this model, the bank itself acts as a Self Help Group
Promoting Institution (SHPI). It takes initiatives in forming the groups,
nurtures them over a period of time and then provides credit to them after
satisfying itself about their maturity to absorb credit. About 16% of SHGs and
13% 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 these
agencies. The bank then provides credit directly to the SHGs, after observing
their operations and maturity to absorb credit. While the bank provides loans
to the groups directly, the facilitating agencies continue their interactions with
the SHGs. Most linkage experiences begin with this model with NGOs playing
a major role. This model has also been popular and more acceptable to
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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 position
to even finance SHGs promoted and nurtured by other agencies. In such
cases, the NGOs act as both facilitators and micro- finance
intermediaries. First, they promote the groups, nurture and train them and
then approach banks for bulk loans for on-lending to the SHGs. About 9% of
SHGs 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 the
program? 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 ways
for credit delivery
Since 2000, commercial banks including Regional Rural Banks have been
providing funds to MFIs for on lending to poor clients. Though initially, only a
handful of NGOs were “into” financial intermediation using a variety of delivery
methods, their numbers have increased considerably today. While there is no
published data on private MFIs operating in the country, the number of MFIs
is estimated to be around 800.
Legal Forms of MFIs in India:
Types of MFIs Estimated Legal Acts under which
Number* Registered
1. Not for Profit MFIs 400 to 500 Societies Registration Act, 1860 or
similar Provincial Acts
a.) NGO - MFIs
Indian Trust Act, 1882
b.) Non-profit Companies 10 Section 25 of the Companies Act,
1956
2. Mutual Benefit MFIs 200 to 250 Mutually Aided Cooperative
a.) Mutually Aided Societies Act enacted by State
Cooperative Societies Government
(MACS) and similarly set up
institutions
3. For Profit MFIs 6 Indian Companies Act, 1956
a.) Non-Banking Financial Reserve Bank of India Act, 1934
Companies (NBFCs)
Total 700 - 800
The estimated number includes only those MFIs, which are actually
undertaking lending activity. Adapted from www.nabard.org
49

50. Structures of a Microfinance Institution:-
Microfinance institutions broadly operate under a wide range of legal
structures. 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-deposit
taking NBFC and is regulated by the RBI
3. Bank Partnership Model:-
This model is an innovative way of financing MFIs. The bank is the lender and
the MFI acts as an agent for handling items of work relating to credit
monitoring, supervision and recovery. In other words, the MFI acts as an
agent and takes care of all relationships with the client, from first contact to
final 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 the
MFI enlarged funding access.
4. Banking Correspondents:-
The proposal of “banking correspondents” could take this model a step further
extending it to savings. It would allow MFIs to collect savings deposits from
the poor on behalf of the bank. It would use the ability of the MFI to get close
to poor clients while relying on the financial strength of the bank to safeguard
the deposits. This regulation evolved at a time when there were genuine fears
that fly-by-night agents purporting to act on behalf of banks in which the
people have confidence could mobilize savings of gullible public and then
vanish with them.
5. Service Company Model:-
Under this model, the bank forms its own MFI, perhaps as an NBFC, and then
works hand in hand with that MFI to extend loans and other services. On
paper, the model is similar to the partnership model: the MFI originates the
loans and the bank books them. But in fact, this model has two very different
and interesting operational features:
(a) The MFI uses the branch network of the bank as its outlets to reach
clients. This allows the client to be reached at lower cost than in the case of a
stand–alone MFI. In case of banks which have large branch networks, it also
allows rapid scale up.
(b) The Partnership model uses both the financial and infrastructure strength
of the bank to create lower cost and faster growth. The Service Company
Model has the potential to take the burden of overseeing microfinance
operations off the management of the bank and put it in the hands of MFI
managers who are focused on microfinance to introduce additional products,
such as individual loans for SHG graduates, remittances and so on without
disrupting bank operations and provide a more advantageous cost structure
for microfinance.
51

52. Role, Functions and Working Mechanism of Financial
Institutions
A. ICICI Bank:-
“ICICI Bank is one bank that has developed a very clear strategy to expand
the provision of financial products and services to the poor in India as a
profitable 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 to
1.8 million clients through its partner microfinance institutions, and its
outstanding portfolio has increased from Rs. 0.20 billion (US$4.5 million) to
Rs. 9.98 billion (US$227 million).
There is an increasing shift in the microfinance sector from grant-giving to
investment in the form of debt or equity, and ICICI believes grant money
should be limited to the creation of facilitative infrastructure. “We need to stop
sending government and funding agencies the signal that microfinance is not
a commercially viable system”, says Nachiket Mor, Executive Director of
ICICI 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 ICICI
Bank’s major MFI partners, Spandana.
Bank Led Model
The bank led model was derived from the SHG-Bank linkage program of
NABARD. 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 SHG
program. However, rather than spending time in developing rural
infrastructure of its own, in 2000, ICICI Bank announced merger of Bank of
Madura (BoM), which had significant presence in the rural areas of South
India, especially Tamil Nadu, with a customer base of 1.9 million and 87
branches.
Bank of Madura's SHG development program was initiated in 1995. Through
this program, it had formed, trained and initiated small groups of women to
undertake financial activities like banking, saving and lending. By 2000, it had
created around 1200 SHGs across Tamil Nadu and provided credit to them.
Partnership Models
A model of microfinance has emerged in recent years in which a microfinance
institution (MFI) borrows from banks and on-lends to clients; few MFIs have
been able to grow beyond a certain point. Under this model, MFIs are unable
to provide risk capital in large quantities, which limits the advances from
banks. In addition, the risk is being entirely borne by the MFI, which limits its
risk-taking.
This model aimed at synergizing the comparative advantages and financial
strength of the bank with social intermediation, mobilization power and
infrastructure of MFIs and NGOs. Through this model, ICICI Bank could save
on the initial costs of developing rural infrastructure and micro credit
distribution channels and could take advantage of the expertise of these
institutions in rural areas. Initially, ICICI Bank started off by lending to MFIs
and NGOs in order to provide the necessary financial support to their
activities. Later, ICICI Bank came up with a plan where the NGO/MFI
continued to promote their microfinance schemes, while the bank met the
financial requirements of the borrowers.
Other Microfinance Initiatives
As a part of microfinance initiatives in the agriculture sector, ICICI Bank
developed Farmer Service Centers (FSC). An FSC was managed by an
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54. agricultural input supply company which supplied inputs like seeds and
technical knowhow to the farmers.
FSCs were also managed by an extension service organization which
provided inputs, credit and technology or by an NGO that provided all the
services that farmers needed for their agricultural needs. Working in close
association with farmers, FSCs provided them with services like advice on
seeds, sowing techniques, pest control, weed control, usage and dosage of
herbicides, pesticides and fertilizers and other services associated with
agriculture. The FSCs also provided crop-related information and services to
farmers, apart from facilitating the sale of agricultural produce. The FSCs
arranged to procure the produce through agents and sold it in organized
agricultural markets thus getting better realization.
The Future
These agents contact several borrowers, thus expanding the reach of ICICI
Bank at a low cost. Taking the FSC initiative further, ICICI Bank plans to
provide farmers credit from sugar companies, seed companies, dairy
companies, NGOs, micro-credit institutions and food processing industries.
SIG has been involved in a project in the southern state of Tamil Nadu to find
out how wireless technology can be applied in the development of low cost
models of banking. Another plan to increase the reach in rural areas is to
launch mobile ATM services. ICICI Bank branded trucks have started carrying
ATMs through a number of villages
Some Articles of News Paper:
1. ICICI Bank to offer micro-finance to sex-workers
Mumbai, March 14: In a novel way to help sex-workers to live more
meaningfully, country's largest private sector bank, ICICI Bank is planning to
offer financial assistance to them though the micro-finance route.
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55. For starters, the bank plans to launch the programme in Kolkata by entering
into a tie-up with Durbar Mahila Samwanaya Samitee, an NGO working for
the welfare of around 65,000 sex-workers in and around the city.
Source: (Press Trust of India) Posted online: Wednesday, March 14, 2007 at
20:54 hours IST
2. ICICI Bank launches new initiative in micro-finance
ICICI Bank has taken a stake of under 20 per cent in Financial Information
Network and Operations Private Ltd (FINO), which was launched on
Thursday, July 13, 2001.
FINO would provide technological solutions as well as services to finance
providers to reach the underserved in the country. ICICI Bank is the lead
facilitator.
According to Mr Nachiket Mor, Deputy Managing Director, ICICI Bank, FINO
is an independent entity. "We would reduce our stake in the company when
required," he said.
ICICI Bank expects to target 200 micro-finance institutions (MFIs) by March
2007, he said, speaking on the sidelines of the press conference to launch
FINO. At present, the bank has tie-ups with 100 MFIs.
FINO is an initiative in the micro-finance sector. It would target 300-400 million
people who do not have access to basic financial services, said Mr Manish
Khera, CEO, FINO. The company has an authorised capital of Rs 50 crore.
MFIs, NBFCs, RRBs, co-operative banks, etc would directly or indirectly tie up
with FINO to use its services, he said. FINO would charge Rs 25-30 per
account every year.
Core banking products
FINO has partnered with IBM and I-flex to offer core banking products. It
would also provide credit bureau services, which includes individual customer
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56. credit rating and analytics based on transaction history. It also launched
biometric cards for customers, which would be a proof of identity and give
collateral to them. The card would also offer multiple products including
savings, loans, insurance, recurring deposits, fixed deposits and remittances.
The company would also build-up customer database, thus bringing them into
mainstream banking.
"There was a need for automated structured data system like FINO" said Mr
Mor. "Essential pieces of infrastructure are missing in India. We lack credit-
tracking mechanism; therefore there was a need for an intervention like
FINO."
The company expects to reach 25 million customers in five years and two
million customers by the end of 2007.
FINO aims bringing scale to "micro" business leading to lowering of costs for
the local financial institutions (LFIs) and act as an internal technology
department 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 is
interacting with Nabard, SIDBI and other banks to give shape to what FINO
does, said Mr Khera.
3. ICICI Bank's thrust on micro-finance:-
CHENNAI, MARCH 9. ICICI Bank has entered into partnerships with various
microfinance institutions (MFI) and non-Government organizations (NGOs) to
scale up its micro lending business. Addressing presspersons here, today,
Nachiket Mor, Executive Director, ICICI Bank, said, the partnership model
would provide assured source of funding to NGOs and MFIs. The bank had
extended 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 by
the erstwhile Bank of Madura after its merger with ICICI Bank. Since then the
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57. SHG program had grown substantially and 10,175 groups had been promoted
reaching out to 2.03 lakh women spread across 2,398 villages, the Executive
Director said.
One of the micro finance institutions, `Microcredit Foundation of India',
established by K. M. Thiagarajan, former Chairman of Bank of Madura in
2002, had initiated a program for microcredit through self-help groups.
ICICI Bank has entered into a memorandum of understanding with Microcredit
Foundation to outsource SHG development, maintenance of groups, credit
linkage and recovery of loans.
The MFI as Collection Agent
To address these constraints, ICICI Bank initiated a partnership model in
2002 in which the MFI acts as a collection agent instead of a financial
intermediary. This model is unique in that it combines debt as mezzanine
finance to the MFI (Mezzanine finance combines debt and equity financing: it
is debt that can be converted by the lender into equity in the event of a
default.
This source of financing is advantageous for MFIs because it is treated like
equity in the balance-sheet and enables it to raise money without additional
equity, which is an expensive financing source.).The loans are contracted
directly between the bank and the borrower, so that the risk for the MFI is
separated from the risk inherent in the portfolio. This model is therefore likely
to have very high leveraging capacity, as the MFI has an assured source of
funds for expanding and deepening credit. ICICI chose this model because it
expands the retail operations of the bank by leveraging comparative
advantages of MFIs, while avoiding costs associated with entering the market
directly.
Securitization
Another way to enter into partnership with MFIs is to securitize microfinance
portfolios. In 2004, the largest ever securitization deal in microfinance was
signed between ICICI Bank and SHARE Microfinance Ltd, a large MFI
operating in rural areas of the state of Andhra Pradesh. Technical assistance
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58. and the collateral deposit of US$325,000 (93% of the guarantee required by
ICICI) were supplied by Grameen Foundation USA. Under this agreement,
ICICI purchased a part of SHARE‟s microfinance portfolio against a
consideration calculated by computing the Net Present Value of receivables
amounting to Rs. 215 million (US$4.9 million) at an agreed discount rate. The
interest paid by SHARE is almost 4% less than the rate paid in commercial
loans. Partial credit provision was provided by SHARE in the form of a
guarantee amounting to 8% of the receivables under the portfolio, by way of a
lien on fixed deposit. This deal frees up equity capital, allowing SHARE to
scale up its lending. On the other hand, it allows ICICI Bank to reach new
markets. And by trading this high quality asset in capital markets, the bank
can hedge its own risks.
Beyond Microcredit
Microfinance does not only mean microcredit, and ICICI does not limit itself to
lending. ICICI‟s Social Initiative Group, along with the World Bank and ICICI
Lombard, the insurance company set up by ICICI and Canada Lombard, have
developed India‟s first index-based insurance product. This insurance policy
compensates the insured against the likelihood of diminished agricultural
output/yield resulting from a shortfall in the anticipated normal rainfall within
the district, subject to a maximum of the sum insured. The insurance policy is
linked to a rainfall index.
Technology
One of the main challenges to the growth of the microfinance sector is
accessibility. The Indian context, in which 70% of the population lives in rural
areas, requires new, inventive channels of delivery. The use of technologies
such as kiosks and smart cards will considerably reduce transaction costs
while improving access. The ICICI Bank technology team is developing a
series of innovative products that can help reduce transaction costs
considerably. For example, it is piloting the usage of smart cards with Sewa
Bank in Ahmadabad. To maximize the benefits of these innovations, the
development of a high quality shared banking technology platform which can
be used by MFIs as well as by cooperatives banks and regional rural banks is
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59. needed. ICICI is strongly encouraging such an effort to take place. Wipro and
Infosys, I-Flex, 3iInfotech, some of the best Indian information technology
companies specialized in financial services, and others, are in the process of
developing exactly such a platform. At a recent technology workshop at the
Institute for Financial Management Research in Chennai, the ICICI Bank
Alternate Channels Team presented the benefits of investing in a common
technology platform similar to those used in mainstream banking to some of
the most promising MFIs.
The Centre for Micro finance Research (CMFR)
ICICI bank has created the Centre for Microfinance Research (CMFR) at the
Institute for
Financial Management Research (IFMR) in Chennai. Through research,
research-based advocacy, high level training and strategy building, it aims to
systematically establish the links between increased access to financial
services and the participation of poor people in the larger economy. The
CMFR Research Unit supports initiatives aimed at understanding and
analyzing the following issues: impact of access to financial services; contract
and product designs; constraints to household productivity; combination of
microfinance and other development interventions; evidence of credit
constraints; costs and profitability of microfinance organizations; impact of
MFI policies and strategies; people‟s behavior and psychology with respect to
financial services; economics of micro-enterprises; and the effect of
regulations.
Finally, the CMFR recognizes that while MFIs aim to meet the credit needs of
poor households, there are other missing markets and constraints facing
households, such as healthcare, infrastructure, and gaps in knowledge. These
have implications in terms of the scale and profitability of client enterprises
and efficiency of household budget allocation, which in turn impacts
household well-being. The CMFR Microfinance Strategy Unit will address
these issues through a series of workshops which will bring together MFI
practitioners and sectoral experts (in energy, water, roads, health, etc). The
latter will bring to the table knowledge of best practices in their specific areas,
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60. and each consultation workshop will result in long-term collaboration between
with 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 and
women empowerment. It started as a Capacity Building Institution (CBI) in
November 2000 under the leadership of Mr. Chandra Shekhar Ghosh. During
such time, it was giving capacity building support to local microfinance
institutions working in West Bengal.
Bandhan opened its first microfinance branch at Bagnan in Howrah district of
West 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 412
branches across 6 states of the country! The organization had recorded a
growth rate of 500% in the year 2003-04 and 611% in the year 2004-05. Till
date, it has disbursed a total of Rs. 587 crores among almost 7 lakh poor
women. Loan outstanding stands at Rs. 221 crores. The repayment rate is
recorded at 99.99%. Bandhan has staff strength of more than 2130
employees.
As on July 2008
Column1 Column2
No. of states :8
No. of branches : 528
No. of members : 1,182,741
No. of staff : 3,191
Cumulative loan disbursed : Rs.1,249 crores
Loan outstanding : Rs. 417 crores
Operational Methodology
Bandhan follows a group formation, individual lending approach. A group of
10-25 members are formed. The clients have to attend the group meetings for
2 successive weeks. 2 weeks hence, they are entitled to receive loans. The
loans are disbursed individually and directly to the members.
60