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INTRODUCTION

OF

MICROFINANCE IN INDIA

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Meaning of Microfinance
Microfinance is a term used to refer to the activity of provision of financial services to clients
who are excluded from the traditional financial systems on account of their lower economic
status. These financial services will most commonly take the form of loans (see micro credit)
& savings, through some microfinance institutions will offer other services such as insurance
& payment services. The Microfinance is changing the landscape of banking across the
world. It has changed the ivies of people & revitalized communities in the world’s poorest as
well as richest countries. The microfinance is a better targeted financial help to a clientele
that is poorer & vulnerable than traditional bank clients. The broad classification of
microfinance includes rural credit through specialized banks traditional informal
microfinance like loans from friends & relatives money lenders etc.

Microfinance as a Development Tool


People living in poverty –like everyone else need access to a diverse range of financial
services, including loans, saving services, insurance & money transfers. Access to financial
services can help enable the poor to increase income & smooth consumption flows, & thus
expend their asset base & reduce their vulnerability to the external shocks that are a part of
their daily existence. The availability of financial services acts as a buffer against sudden
emergencies, business risk & seasonal slums that can push a family into destitution. More &
better financial services specifically geared towards low income groups can help poor
households to move from everyday survival to planning for the future, investing in better
nutrition, improver living condition & children’s health & education.

Microfinance has the potential to benefit poor people both indirectly, through increased
growth, & directly as they gain access to needed services. Impact studies show that in money
cases ,microfinance reduced poverty through increasing income levels. Studies also show
that microfinance improves poor people’s lives by contributing to improved healthcare,
children’s education & nutrition & women’s empowerment.

In particular, the ability to borrow, save & earn income reduced economic vulnerability for
women & their households, increased financial & food security can bring a new confidence
& hope which often translates to a greater sense of empowerment to a person.

Nonetheless, microfinance is not a panacea. Even the most innovative & participative
programmes can lead to unwanted negative impacts. Microfinance has in many cases been
has own to benefit the better off poor more than the truly destitute. Many early impact studies

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on microfinance showed increasing income levels, but more recent & better designed studies
have shown that in many cases the impact varies per income group. In most cases the better
off benefit more from micro credit, due to their higher skills level, better market contacts &
higher initial resource base. Lower income groups may be more risk-averse & benefit more
from saving & micro insurance.

Many microfinance & micro credit programmed target women in particular, largely due to
their (generally) higher repayment rates, but in many cases this is mixed blessing. If a
programmed excludes men, particularly in areas where access to financial services is limited,
the man may require his wife to get the loan for him. Others have argued that exclusive
access for women actually increases her bargaining power within the household. While
inspiring examples abound of women taking loans & then using the income from their
business to provide employment to others, feed their children’s send them to school, &
become empowered members of their community & their household, many more examples
exist of vivacious circles of debt, family violence & increased workloads.

Objectives Of the Study

The project work is done to fulfill the requirement of our M.B.A degree course. It is an
integral part of the curriculum of this program

 To study the performance of microfinance in India.


 To know about the various institutions that is doing the job of promoting
microfinance in India.
 To know the role of Microfinance in removing the poverty of the study.

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Limitation of The study

Time Constraint:- This study has been carried out in the period of 2 months, so the results
& interpretation will only be valid till said period.

Lack of resources required:- Another major constraint of the study is that the resources
that had been required for its successful completion were not available at all the time when
required.

Research Methodology

Type of Research

The type of research that is being used in this report is the descriptive one as in this
particular type of research the researcher doesn’t have any control over the present scenario
of the things that are being studied & we can only study the factors such as
HOW,WHO,WHEN,WHAT etc.

Data Collection Method

Both the primary & secondary data will be used in this study.

Type of Data Used

Secondary data and Primary data.

Source of Data Collection

Following are the major sources of data collection that have been used-

 NABARD annual reports – various issues.


 Reports issued by the government.
 Research companies & trade directories.

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 Report on trend & progress of Indian banking.
 Various issued of hand book of statistics.

Primary Data Collection


The starting point for primary data collection over the internet in this research is the use of
electronic mail. Questionnaires are mailed to the respondents at their e-mail addresses.
Provision is made in the questionnaire to complete the form online and return it to the
researcher. The following advantages are obvious:

 Greater speed of delivery.

 Higher speed of receiving responses.


 Tremendous cost savings over regular mail.

SIZE OF SAMPLE

The population of the sample would be 50 respondents.

Tools that have been used for data collection:-

 Internet.
 Newspaper.
 Magazines.
 Journals.
 Publication.

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REVIEW OF LITERATURE

How Many People Have Access to Microfinance?

The consultative group to assist the poor (CGAP) estimates that of the three billion
poor people of working age who could be making use of these services about 500 million-
one sixth currently have access to formal financial services.

If we are ever to reach the estimated three billion poor people who could use financial
services, it will require a whole range of institutions, not just traditional NGO microfinance
institutions to do it. Microfinance institutions have played a key role in

the development of microfinance & they will continue to do so. But what is really needed-to
reach both further & deeper-is a whole range of institutions that will jostle & compete with
one another to serve poor people & to innovate to reach more & more poor people.

Sustainable Microfinance

Microfinance is unique as a development tool because of its potential to be self-sustaining.


Successful microfinance institutions have proven that providing financial services to the poor
can be an effective means of poverty reduction & be a profitable business. Dozens of
institutions have proven that financial services for poor people can cover their full costs,
through adequate interest spreads, relentleless focus on efficiency & aggressive enforcement
of repayment. A large & growing proportion of today’s microfinance services are being
provided by institutions that are profitable even after adjusting for subsidies that they may
have recd.

There will never be enough aid funding available to make an appreciable client the scale of
poverty that still exists around the world. The financial viability of institutions is what will
ultimately guarantee the long term provision of financial services for poor people and today
there’s greater consensus than even before on what is needed to make microfinance
sustainable.

How Does Microfinance contribute to the Millennium Development Goals?


Evidence confirms that access to financial services significantly impacts the lives of the poor.

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Extreme Poverty & Hunger

Empirical evidence shows that among the poor, those who participated in microfinance
programmed were able to improve their living standards-both at the in individual &
household level – much better than those without access to financial services.

For example the clients of BRAC, formerly known as the Bangladesh rural advancement
committee & the largest NGO in the world, increased household expenditures by 28% &
assets by 112%. In EI Salvador, the weekly income of FICA clients increased on average by
145%.

Universal Primary Education

Impact studies show that in poor households with access to financial services. Children are
not sent to school in longer nos.-including girls-but they also stay in school longer. In
Bangladesh, almost all girls in grimacer client households had some schooling, compared to
60% of non-client house-holds.

Women’s empowerment

The Indian School of Microfinance for Women, an organization based in Ahmadabad, is a


unique initiative in the discipline of Microfinance. The School has been set up with the
purpose of addressing the huge capacity building gap that exists in the Microfinance sector.

Launched on 4th October 2003, The School’s aim is to strengthen and spread Microfinance
as a strategy for poverty alleviation through development of knowledge and skilled human
resources. It believes that microfinance is an effective tool for the alleviation of poverty and
betterment of the lives of women. It looks to bring the realities of the lives of women to
organizations and people working with microfinance to help them reach the women better in
turn. Promoted by SEWA Bank, FWWB (I), and Coady International Institute, Canada, The
School brings together the best of the indigenous knowledge and expertise from around the
world to a common platform from where it could be disseminated and made utilitarian for the
Microfinance sector.

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The Current State of Microfinance

These are interesting time for these involved in the provisioning of financial services for the
poor. The boundaries between microfinance and the formal financial sector are finally
breaking down. In some areas, microfinance is now an inherent part of the financial system.
In other areas, new & innovative financial delivery methods are being developed to
overcome the barriers of sparse, population & large distance between settlement, as well as
poor infrastructure. Technology can play an important role but we may have to accept that
for the moment, some areas truly are unbreakable.

Many microfinance institutions, many whose origins were social, are professionalizing
becoming sustainable & in some cases even profitable. Many of these institutions are have
seeking commercial funding. To attract this type of funding, they must become transparent in
their financial reporting. The microfinance Information Exchange (MIX) is an information
exchange website where more than 600 MFIs and 75 funds post information on their
organizations & their performance.

At the same time, commercial institutions are also beginning to get involved in providing
financial services to poorer clients. CGAP has identified over 200 domestic retail banks or
consumer credit companies getting involved in microfinance, often driven by competition &
technologies that promise to allow then to make small transactions more cost effectives. E-
Banking, smart cards & telephone are beginning to be used by microfinance providers to
reduce transaction costs, a key to reaching poorer clients.

Challenges Ahead

The real challenge facing the microfinance industry today is scaling up services to reach the
estimated three billion people in developing countries will still lack access to formal financial
services. Successful microfinance institutions have proven that providing financial services
to the poor can be an effective means of poverty reduction & be a profitable business. A
major bottleneck to the development of sustainable microfinance is limited institutional &
managerial capacity at the level of retail microfinance institutions, as reflected in inadequate

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man information system, poor strategic planning, & high operating costs. This is also a
marked storage of organizations that can provide safe saving facilities for the poor & that can
sustainably mobilize these domestic savings for on-lending.

Many of the necessary elements needed to scale up microfinance are already in place. A great
deal of knowledge about the requirement of sustainable microfinance already exists. High-
performing microfinance institutions have developed methodologies to extend credit, saving
& other services to the poor clients. A no. of banks & other institutions with nationwide
distribution system are beginning to take defective interest in reaching poorer clients.
Advances in information technology have the opportunity to lower the cost & risk of
providing microfinance to the poor. The challenge is to mobilize this knowledge & apply it
on a much vaster scale, creating financial systems that work for the poor & boost their
contribution to economic growth.

One approach is to tap into developed capital market through microfinance investment funds
enable individual investors & portfolio managers to allocate a part of their equity or fixed
income investment to microfinance as an asset class.

The microfinance is changing the landscape of banking across the world. It has change the
ivies of people & revitalized communities in the world’s poorest as well as richest countries.
The microfinance is a better targeted financial help to a clientele that is poorer & vulnerable
than traditional bank clients. The broad classification of microfinance includes rural credit
through specialized banks traditional informal

Microfinance like loans from friends & relatives money lenders etc. BANK-NGO partnership
based on microfinance, non NGO, non collateralized microfinance, Garmin bank type
microfinance etc. anyone who can access to saving, credit, insurance other financial services
is more resilient & better able to deal with everyday demands. Microfinance helps the poor &
low income clients deal with such basic needs, like with access to micro insurance which is a
part of microfinance, poor people can cope with sudden expenses associated with serious
illness or loss of assets. It also provides them access to formal saving accounts & thus an
incentives to save. Clients who join & stay in microfinance programmed have better
economic condition than no clients.

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FURTHERSTIC STUDY OF MICRO FINANCING IN INDIA

The micro financial institutions are today, no doubt, acquiring the status of moment in the
banking sector. Its importance can be gauged from the fact that United Nations has
designated year 2005 as the international year of micro credit. Today effective micro finance
is seen as solution to many of the existing social and emotive problems ranging from rural
employment to empowerment. The various micro finance institutions models are quite
effective in dispensing the much needed credit to the targeted clients. However, there exists
certain weakness in existing micro finance institution models. There is enough space of more
efficiency and better results in credit disbursement through micro finance institutions.

If we look back, it is found that Garmin Bank type micro finance institution model is one of
the most successful models in micro finance. The bank has successfully served the rural
people in Bangladesh with on physical collateral relying on group responsibility to replace
the collateral requirements. This model, like other model, has also some weaknesses. It
involves too much of external subsidy which is not replicable. Garmin Bank has not oriented
itself towards mobilizing people’s resources. The repayment system of 50 weekly equal
installments is not practical because poor do not have a stable job and have to migrate to
other places for job. The communities are agrarian during lean seasons it becomes
responsible for them to repay the loan. Pressure for high repayment drives members to
money lenders.

Most of the existing micro finance institutions are facing problems regarding skilled labor,
which is not available for local level accounting. Drop out of the trained staff is very high.
Also most of the models do not lend for agriculture.

The four pillars of micro finance credit systems are

 Supply of credit
 Demand for finance
 Intermediation by individuals or authorities.
 Regulation by statutory bodies.
The end goal of any such basic model is accessibility of finance to poor.

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The new model calls for exploiting the latent rural human resource by talent
spotting and training them as per there, for example, the graduates can be trained in
accounting or as Self Help Group leaders. The awareness campaign regarding various rights,
subsidies, and incentives given by various micro finance schemes may be disseminated by
involving local rural youth, which may very well connect to the local based on similarity in
dialect, living ways and culture.

It envisages the CENTRE as the hub of all activities. It is a place where all funding,
responsibility and accountability, is concentrated. This will ensure efficiency, better control
and reduced cost of interfacing between dispenser and taker of credit. The CENTRE will
also do a grading systems-A,B,C,D, Effect under which grading system would be based on
number of years client has been attached with any of the micro finance institutions and its
positive track in repaying the loans, including the condition that at least one amount of the
loan was greater than rupees 5000.

The criteria for grading are:

A>=12 years attached with any MFI, subject to the conditions above.

B>=10 years attached with any MFI, subject to the condition above.

C>=7 years attached with any MFI, subject to the condition above.

D>=5 years attached with any MFI, subject to the condition above.

E>=3 years attached with any MFI, subject to the condition above.

The client of A, B and Consumption can take loan directly from the CENTRE, other
conditions for eligibility being the same.

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Micro Finance (MF) Institutions

Introduction

A range of institutions in public sector as well as private sector offers the microfinance
services in India. They can be broadly categorized in to two categories namely, formal
institutions and informal institutions. The former category comprises of Apex Development
Financial Institutions, Commercial Banks, Regional Rural Banks, and Cooperative Banks
that provide micro finance services in addition to their general banking activities and are
referred to as micro finance service providers. On the other hand, the informal institutions
that undertake micro finance services as their main activity are generally referred to as micro
Finance Institutions (MFIs). While both private and public ownership are found in the case of
formal financial institutions offering micro finance services, the MFIs are mainly in the
private sector.

Micro Finance Service Providers

The micro finance service providers include apex institutions like National Bank for
Agriculture and Rural Development (NABARD), Small Industries Development Bank of
India (SIDBI), and, Rashtriya Mahila Kosh (RMK). At the retail level, Commercial Banks,
Regional Rural Banks, and, Cooperative banks provide micro finance services. Today, there
are about 60,000 retail credit outlets of the formal banking sector in the rural areas
comprising 12,000 branches of district level cooperative banks, over 14,000 branches of the
Regional Rural Banks (RRBs) and over 30,000 rural and semi-urban branches of commercial
banks besides almost 90,000 cooperatives credit societies at the village level. On an average,
there is at least one retail credit outlet for about 5,000 rural people. This physical reaching
out to the far-flung areas of the country to provide savings, credit and other banking services
to the rural society is an unparalleled achievement of the Indian banking systems.

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The Emergence of Private Micro finance Industry

The micro finance initiative in private sector can be traced to the initiative undertaken by
Ms.Ela Bhat for providing banking services to the poor women employed in the unorganized
sector in Ahmedabad City of Gujarat State. Shri Mahila SEWA (Self Employed Women’s
Association) Sahakari Bank was set up in 1974 by registering it as a Urban Cooperative
Bank. Since then, the bank is providing banking services to the poor self-employed women
working as hawkers, vendors, domestic servant etc. As on March 2003, the MFI had a
membership of 30,000, seventy per cent of whom are from urban area. The deposit and loan
portfolio stood at Rs 623.9 million ($ 13.86 million) and Rs133.6 million ($2.97 million)
respectively. Though the MFI is making profit, yet the SEWA bank model of MFI has not
been replicated elsewhere in the country.

In the midst of the apparent inadequacies of the formal financial system to cater to the
financial needs of the rural poor, NABARD sponsored an action research project in 1987
through an NGO called MYRADA. For this purpose a grant of Rs. 1 million ($22,222) was
provided to MYRADA for an R&D programme related to credit groups. Encouraged by the
results of field level experiments in group based approach for lending to the poor, NABARD
launched a Pilot Project in 1991-92 in partnership with Non-governmental Organizations
(NGOs) for promoting and grooming self help groups (SHGs) of homogeneous members and
making savings from existing banks and within the existing legal framework. Steady
progress of the pilot project led to the

mainstreaming of the SHG-Bank Linkage Programme in 1996 as a normal banking activity


of the banks with widespread acceptance. The RBI set the right policy environment by
allowing savings bank accounts of informal groups to be opened by the formal banking
system. Launched at a time when regulated interest rates were in vogue, the banks were
expected to lend to SHGs at the prescribed rates, but the RBI advised the banks not to
interfere with the management of affairs of SHGs, particularly on the terms and conditions
on which the SHGs disbursed loans to their members.

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The uniqueness of the micro finance through SHG is that it is a partnership based approach
and encouraged NGOs to undertake not only social engineering but also financial
intermediation especially in areas where banking network was not satisfactory.

MFIs and Legal Forms

With the current phase of expansion of the SHG – Bank linkage programme and other mF
initiatives in the country, the informal micro finance sector in India is now beginning to
evolve. The MFIs in India can be broadly sub-divided into three categories of organizational
forms as given in Table 1. While there is no published data on private MFIs operating in the
country, the number of MFIs is estimated to be around 800. However, not more than 10 MFIs
are reported to have an outreach of 100,000 micro finance clients. An overwhelming majority
of MFIs are operating on a smaller scale with clients ranging between 500 to 1500 per MFI.
The geographical distribution of MFIs is very much lopsided with concentration in the
southern India where the rural branch network of formal banks is excellent. It is estimated
that the share of MFIs in the total micro credit portfolio of formal & informal institutions is
about 8 percent.

MFIs: There are a large number of NGOs that have undertaken the task of financial
intermediation. Majority of these NGOs are registered as Trust or Society. Many NGOs have
also helped SHGs to organize themselves into federations and these federations are registered
as Trusts or Societies. Many of these federations are performing non-financial and financial
functions like social and capacity building activities, facilitate training of SHGs, undertake
internal audit, promote new groups, and some of these federations are engaged in financial
intermediation. The NGO MFIs vary significantly in their size, philosophy and approach.
Therefore these NGOs are structurally not the right type of institutions for undertaking
financial intermediation activities, as the byelaws of these institutions are generally
restrictive in allowing any commercial operations. These organizations by their charter are
non-profit organizations and as a result face several problems in borrowing funds from
higher financial institutions. The NGO MFIs, which are large in number, are still outside the
purview of any financial regulation. These are the institutions for which policy and
regulatory framework would need to be established.

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Non-Profit Companies as MFIs: Many NGOs felt that combining financial
intermediation with their core competency activity of social intermediation is not the right
path. It was felt that a financial institution including a company set up for this purpose better
does banking function. Further, if MFIs are to demonstrate that banking with the poor is
indeed profitable and sustainable, it has to function as a distinct institution so that cross
subsidization can be avoided. On account of these factors, NGO MFIs are of late setting up a
separate Non-Profit Companies for their micro finance operations. The mFI is prohibited
from paying any dividend to its members. In terms of Reserve Bank of India’s Notification
dated 13 January 2011, relevant provisions of RBI Act, 1934 as applicable to NBFCs will not
apply for NBFCs (i) licensed under Section 25 of Companies Act, 1956, (ii) providing credit
not exceeding Rs. 50,000 ($1112) for a business enterprise and Rs. 1, 25,000 ($2778) for
meeting the cost of a dwelling unit to any poor person, and, (iii) not accepting public
deposits.

Mutual Benefit MFIs: The State Cooperative Acts did not provide for an enabling
framework for emergence of business enterprises owned, managed and controlled by the
members for their own development. Several State Governments therefore enacted the
Mutually Aided Co-operative Societies (MACS) Act for enabling promotion of self-reliant
and vibrant co-operative Societies based on thrift and self-help. MACS enjoy the advantages
of operational freedom and virtually no interference from government because of the
provision in the Act that societies under the Act cannot accept share capital or loan from the
State Government. Many of the SHG federations, promoted by NGOs and development
agencies of the State Government, have been registered as MACS. Reserve Bank of India,
even though they may be providing financial service to its members, does not regulate
MACS.

For-Profit MFIs: Non-Banking Financial Companies (NBFC) are companies registered


under Companies Act, 1956 and regulated by Reserve Bank of India. Earlier, NBFCs were
not regulated by RBI but in 1997 it was made obligatory for NBFCs to apply to RBI for a
certificate of registration and for this certificate NBFCs were to have minimum Net Owned
funds of Rs 25 lakhs and this amount has been gradually increased. RBI introduced a new
regulatory framework for those NBFCs who want to accept public deposits. All the NBFCs
accepting public deposits are subjected to capital adequacy requirements and prudential
norms. There are only a few MFIs in the country that are registered as NBFCs. Many MFIs
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view NBFCs more preferred legal form and are aspiring to be NBFCs but they are finding it
difficult to meet the requirements stipulated by RBI. The number of NBFCs having exclusive
focus on mF is negligible.

Capital Requirements

NGO-MFIs, non-profit companies MFIs, and mutual benefit MFIs are regulated by the
specific act in which they are registered and not by the Reserve Bank of India. These are
therefore not subjected to minimum capital requirements, prudential norms etc. NGO MFIs
to become NBFCs are required to have a minimum entry capital requirement of Rs. 20
million ($ 0.5 million). As regards prudential norms, NBFCs are required to achieve capital
adequacy of 12% and to maintain liquid assets of 15% on public deposits.

Foreign Investment

Foreign investment by way of equity is permitted in NBFC MFIs subject to a minimum


investment of $500,000. In view of the minimum level of investment, only two NBFCs are
reported to have been able to raise the foreign investment. However, a large number of
NGOs in the development - empowerment are receiving foreign fund by way of grants. At
present, over Rs.40, 000 million ($ 889 million) every year flows into India to NGOs for a
whole range of activities including micro finance. In a way, foreign donors have facilitated
the entry of NGOs into micro finance operations through their grant assistance.

Deposit Mobilization

Not for profit MFIs are barred, by the Reserve Bank of India, from mobilizing any type of
savings. Mutual benefit MFIs can accept savings from their members. Only rated NBFC
MFIs rated by approved credit rating agencies are permitted to accept deposits. The quantum
of deposits that could be raised is linked to their net owned fund.

Borrowings

Initially, bulk of the funds required by MFIs for on lending to their clients were met by apex
institutions like National Bank for Agriculture and Rural Development, Small Industries
Development Bank Of India, and, Rashtiya Mahila Kosh. In order to widen the range of

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lending institutions to MFIs, the Reserve Bank of India has roped in Commercial Banks and
Regional Rural Banks to extend credit facilities to MFIs since February 2011. Both public
and private banks in the commercial sector have extended sizeable loans to MFIs at interest
rate ranging from 8 to 11 per cent per annum. Banks have been given operational freedom to
prescribe their own lending norms keeping in view the ground realities. The intention is to
augment flow of micro credit through the conduit of MFIs. In regard to external commercial
borrowings (ECB) by MFIs, not-for-profit MFIs are not permitted to raise ECB. The current
policy effective from 31 January 2004, allows only corporate registered under the Companies
Act to access ECB for permitted end use in order to enable them to become globally
competitive players.

Interest Rates

The interest rates are deregulated not only for private MFIs but also for formal banking
sector. In the context of softening of interest rates in the formal banking sector, the
comparatively higher interest rate (12 to 24 per cent per annum) charged by the MFIs has
become a contentious issue. The high interest rate collected by the MFIs from their poor
clients is perceived as exploitative. It is argued that raising interest rates too high could
undermine the social and economic impact on poor clients. Since most MFIs have lower
business volumes, their transaction costs are far higher than that of the formal banking
channels. The high cost structure of MFIs would affect their sustainability in the long run.

Collateral requirement

All the legal forms of MFIs have the freedom to waive physical collateral requirements
from their clients. The credit policy guidelines of the RBI allow even the formal banks not to
insist on any type of collateral and margin requirement for loans up to Rs 50,000 ($1100).

Regulation & Supervision

India has a large number of MFIs varying significantly in size, outreach and credit
delivery methodologies. Presently, there is no regulatory mechanism in place for MFIs
except for those that are registered as NBFCs. As a result, MFIs are not required to follow
standard rule and it has allowed many MFIs to be innovative in its approach particularly in
designing new products and processes. But the flip side is that the management and
governance of MFIs generally remains weak, as there is no compulsion to adopt widely
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accepted systems, procedures and standards. Because the sector is unregulated, not much is
known about their internal health. Following Committees have examined the road map for
regulation and supervision of MFIs.

Task Force (appointed by NABARD) Report on Regulatory and Supervision.

Framework for MFIs, 1999. (Kindly see publications Section for a complete report

Working Group (constituted by Government of India) on Legal & Regulation of MFIs, 2002

Informal Groups (appointed by RBI) on Micro Finance which studied issues relating to (i)
Structure & Sustainability, ii) Funding (iii) Regulations and (iv) Capacity Building, 2003

Advisory Committee (appointed by RBI) on flow of credit to agriculture and related


activities from the Banking System, 2004

To address the issue of need for a differential regulatory framework, the latest committee
sought answers to the following questions and concerns facing private MFIs in the Country:

(i) Is non-existence of a separate differential regulatory framework a critical bottleneck


hindering the growth of the sector?

(ii) Will MFIs be sustainable in medium term? If so, will they continue to focus on the poor?

(iii) Is access to public / member deposit the key issue for their sustainability?

(iv)Can MFIs finance loans for income generation at interest rates, which are sustainable by
the rural poor?

(v) Is it possible to evolve commonly agreed standards for MFI sector covering performance,
accounting and governance issues,which can open up possibilities of self-regulation?

(vi) Has the sector reached a critical mass where regulation becomes important?

An Effective Poverty Reduction Strategy

Microfinance is often considered one of the most effective and flexible strategies in the fight
against global poverty. It is sustainable and can be implemented on the massive scale
necessary to respond to the urgent needs of those living on less than $1 a day, the World’s
poorest.
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Microfinance consists of making small loans, usually less than $200, to individuals, usually
women, to establish or expand a small, self-sustaining business. For example, a woman may
borrow $50 to buy chickens so she can sell eggs. As the chickens multiply, she will have
more eggs to sell. Soon she can sell the chicks. Each expansion pulls her further from the
devastation of poverty.

Microfinance, the Garmin way, includes several support systems that contribute greatly to its
success. Microfinance institutions offer business advice and counseling, while clients provide
peer support for each other through solidarity circles. For example, if a client falls ill, her
circle helps with her business until she is well. If a client gets discouraged, the support group
pulls her through. This contributes substantially to the extremely high repayment rate of
loans made to microfinance entrepreneurs.

An equally important part of microfinance is the recycling of funds. As loans are repaid,
usually in six months to a year, they are re-loaned. This continual reinvestment multiplies the
impact of each dollar loaned.

Microfinance has a positive impact far beyond the individual client. The vast majority of the
loans go to women because studies have shown that women are more likely to reinvest their
earnings in the business and in their families. As families cross the poverty line and micro-
businesses expand, their communities benefit. Jobs are created, knowledge is shared, civic
participation increases, and women are recognized as valuable members of their families and
communities.

Microfinance is often considered one of the most effective and flexible strategies in the fight
against global poverty. It is sustainable and can be implemented on the massive scale
necessary to respond to the urgent needs of those living on less than $1 a day, the World’s
poorest.

Microfinance consists of making small loans, usually less than $200, to individuals, usually
women, to establish or expand a small, self-sustaining business. For example, a woman may
borrow $50 to buy chickens so she can sell eggs. As the chickens multiply, she will have
more eggs to sell. Soon she can sell the chicks. Each expansion pulls her further from the
devastation of poverty.

19
Microfinance, the Garmin way, includes several support systems that contribute greatly to its
success. Microfinance institutions offer business advice and counseling, while clients provide
peer support for each other through solidarity circles. For example, if a client falls ill, her
circle helps with her business until she is well. If a client gets discouraged, the support group
pulls her through. This contributes substantially to the extremely high repayment rate of
loans made to microfinance entrepreneurs. An equally important part of microfinance is the
recycling of funds. As loans are repaid, usually in six months to a year, they are re-loaned.
This continual reinvestment multiplies the impact of each dollar loaned.

Microfinance has a positive impact far beyond the individual client. The vast majority of the
loans go to women because studies have shown that women are more likely to reinvest their
earnings in the business and in their families. As families cross the poverty line and micro-
businesses expand, their communities benefit. Jobs are created, knowledge is shared, civic
participation increases, and women are recognized as valuable members of their families and
communities.

What is microfinance?

To most, microfinance means providing very poor families with very small loans (micro
credit) to help them engage in productive activities or grow their tiny businesses. Over time,
microfinance has come to include a broader range of services (credit, savings, insurance, etc.)
as we have come to realize that the poor and the very poor who lack access to traditional
formal financial institutions require a variety of financial products.
Microcredit came to prominence in the 1980s, although early experiments date back 30 years
in Bangladesh, Brazil and a few other countries. The important difference of microcredit was
that it avoided the pitfalls of an earlier generation of targeted development lending, by
insisting on repayment, by charging interest rates that could cover the costs of credit delivery,
and by focusing on client groups whose alternative source of credit was the informal sector.
Emphasis shifted from rapid disbursement of subsidized loans to prop up targeted sectors
towards the building up of local, sustainable institutions to serve the poor. Microcredit has
largely been a private (non-profit) sector initiative that avoided becoming overtly political,
and as a consequence, has outperformed virtually all other forms of development lending.
Traditionally, microfinance was focused on providing a very standardized credit product. The
poor, just like anyone else, need a diverse range of financial instruments to be able to build

20
assets, stabilize consumption and protect themselves against risks. Thus, we see a broadening
of the concept of microfinance--our current challenge is to find efficient and reliable ways of
providing a richer menu of microfinance products.

Who are the clients of microfinance?

The typical microfinance clients are low-income persons that do not have access to formal
financial institutions. Microfinance 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, microfinance activities are more diverse and include shopkeepers, service
providers, artisans, street vendors, etc. Microfinance clients are poor and vulnerable non-poor
who have a relatively stable source of income.

Access to conventional formal financial institutions, for many reasons, is directly related to
income: the poorer you are, the less likely that you have access. On the other hand, the
chances are that, the poorer you are, the more expensive or onerous informal financial
arrangements. Moreover, informal arrangements may not suitably meet certain financial
service needs or may exclude you anyway. Individuals in this excluded and under-served
market segment are the clients of microfinance. As we broaden the notion of the types of
services microfinance encompasses, the potential market of microfinance clients also
expands. For instance, microcredit 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.

How does microfinance help the poor?

Experience shows that microfinance can help the poor to increase income, build viable
businesses, and reduce their vulnerability to external shocks. It can also be a powerful
instrument for self-empowerment by enabling the poor, especially women, to become
economic agents of change. Poverty is multi-dimensional. By providing access to financial
services, microfinance plays an important role in the fight against the many aspects of
poverty. For instance, income generation from a business helps not only the business activity
expand but also contributes to household income and its attendant benefits on food security,
21
children's education, etc. Moreover, for women, who, in many contexts, are secluded from
public space, transacting with formal institutions can also build confidence and
empowerment.

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

Providing financial services to poor people is quite expensive, especially in relation to the
size of the transactions involved. This is one of the most important reasons why banks don't
make small loans. A $100 dollar loan, for example, requires the same personnel and
resources as a $2,000 one thus increasing per unit transaction costs. Loan officers must visit
the client's home or place of work, evaluate creditworthiness on the basis of interviews with
the client's family and references, and in many cases,

follow through with visits to reinforce the repayment culture. It can easily cost US$25 to
make a microloan. While that might not seem unreasonable in absolute terms, it might
represent 25% of the value of the loan amount, and force the institution to charge a “high”
rate of interest to cover its cost of loan administration. The microfinance institution could
subsidize the loans to make the credit more "affordable" to the poor. Many do. However, the
institution then depends on permanent subsidy. Subsidy-dependent programs are always
fighting to maintain their levels of activity against budget cuts, and seldom grow
significantly.

Evidence shows that clients willingly pay the higher interest rates necessary to assure long
term access to credit. They recognize that their alternatives—even higher interest rates in the
informal finance sector (moneylenders, etc.) or simply no access to credit—are much less
attractive for them. Interest rates in the informal sector can be as high as 20 percent per day
among some urban market vendors. Many of the economic activities in which the poor
engage are relatively low return on labor, and access to liquidity and capital can enable the
poor to obtain higher returns, or to take advantage of economic opportunities. The return
received on such investments may well be many times greater than the interest rate charged.

Aren't the poor too poor to save?

The poor already save in ways that we may not consider as "normal" savings--- investing in
assets, for example, that can be easily exchanged to cash in the future (gold jewelry, domestic
22
animals, building materials, etc.). After all, they face the same series of sudden demands for
cash we all face: illness, school fees, need to expand the dwelling-burial-weddings.
These informal ways that people save are not without their problems. It is hard to cut off one
leg of a goat that represents a family's savings mechanism when the sudden need for a small
amount of cash arises. Or, if a poor woman has loaned her "saved" funds to a family member
in order to keep them safe from theft (since the alternative would be to keep the funds stored
under her mattress), these may not be readily available when the woman needs them. The
poor need savings that are both safe and liquid. They care less about the interest rates that
they can earn on the savings, since they are not used to saving in financial instruments and
they place such a high premium on having savings readily available to meet emergency needs
and accumulate-assets. These savings services must be adapted to meet the poor’s particular
demand and their cash flow cycle. Most often, the poor not only have low income, but also
irregular income flows. Thus, to maximize the savings propensity of the poor, institutions
must provide flexible opportunities--- both in terms of amounts deposited and the frequency
of pay ins and pay outs. This represents an important challenge for the microfinance industry
that has not yet made a concerted attempt to profitably capture deposits.

What is a Microfinance Institution (MFI)?

Quite simply, a microfinance institution is an organization that offers financial services to


low income populations. Almost all of these offer microcredit and only take back small
amounts of savings from their own borrowers, not from the general public. Within the
microfinance industry, the term microfinance institution has come to refer to a wide range of
organizations dedicated to providing these services: NGOs, credit unions, cooperatives,
private commercial banks and non-bank financial institutions (some that have transformed
from NGOs into regulated institutions) and parts of state-owned banks, for example-The
image most of us have when we refer to MFIs is of a “financial NGO”, an NGO that is fully
and virtually exclusively dedicated to offering financial services; in most cases microcredit
NGOs are not allowed to capture savings deposits from the general public. This group of a
few hundred NGOs have led the development of microcredit, and subsequently microfinance,
the world over. Most of these constitute a group that is commonly referred to as "best
practice" organizations, ones that employ the newest lending techniques to generate efficient
outreach that permit them to reach down far into poor sectors of the economy on a
sustainable basis. A great many NGOs that offer microcredit, perhaps even a majority, do
23
many other non-financial development activities and would bristle at the suggestion that they
are essentially financial institutions. Yet, from an industry perspective, since they are
engaged in supplying financial services to the poor, we call them MFIs. The same sort of
situation exists with a small number of commercial banks that offer microfinance services.
For our purposes, we refer to them as MFIs, even though only a small portion of their assets
may actually be tied up in financial services for the poor. In both cases, when people in the
industry refer to MFIs, they are referring only to that part of the institution that offer
microfinance. There are other institutions, however, that consider themselves to be in the
business of microfinance and that will certainly play a role in a reshaped and deepened
financial sector. These are community-based financial intermediaries. Some are membership
based such as credit unions and cooperative housing societies. Others are owned and
managed by local entrepreneurs or municipalities. These institutions tend to have a broader
client base than the financial NGOs and already consider themselves to be part of the formal
financial sector. It varies from country to country, but many poor people do have some
access to these types of institutions, although they tend not to reach down market as far as the
financial NGOs.

Can microfinance be profitable?


Yes it can. Data from the Micro-Banking Bulletin reports that 63 of the world's top MFIs had
an average rate of return, after adjusting for inflation and after taking out subsidies programs
might have received, of about 2.5% of total assets. This compares favorably with returns in
the commercial banking sector and gives credence to the hope of many that microfinance can
be sufficiently attractive to mainstream into the retail banking sector. Many feel that once
microfinance becomes mainstreamed, massive growth in the numbers of clients can be
achieved.
Others worry that an excessive concern about profit in microfinance will lead MFIs up-
market, to serve better off clients who can absorb larger loan amounts. This is the “crowding
out” effect. This may happen; after all, there are a great number of very poor, poor, and
vulnerable non-poor who are not reached by the banking sector.
It is interesting to note that while the programs that reach out to the poorest clients perform
less well as a group than those who reach out to a somewhat better-off client segment, their
performance is improving rapidly and at the same pace as the programs serving a broad-
based client group did some years ago. More and more MFI managers have come to
24
understand that sustainability is a precursor to reaching exponentially greater numbers of
clients. Given this, managers of leading MFIs are seeking ways to dramatically increase
operational efficiency. In short, we have every reason to expect that programs that reach out
to the very poorest micro-clients can be sustainable once they have matured, and if they
commit to that path.

Are commercial banks involved in microfinance?

Yes. Increasingly, formal financial institutions are recognizing the benefits of serving poorer
clients. For more information, see the following documents in the Microfinance Gateway
Library:

CGAP: 227 Formal Financial Institutions


http://microfinancegateway.org/content/article/detail/18156

Thirty Global Examples of Commercial Banks and Formal Financial Institutions (FFIs) with
Established Microfinance Service
http://microfinancegateway.org/content/article/detail/21504

What is the government’s role in supporting microfinance?

Governments have a complicated role when it comes to microfinance. Until recently,


governments generally felt that it was their responsibility to generate development finance',
including credit programs for the disadvantaged. Twenty years of insightful critique of rural
credit programs revealed that governments do a very bad job of lending to the poor. Short
term political gain is just too tempting for politically controlled lending organizations; they
disburse too quickly (and thoughtlessly) and they collect too sporadically (unwillingness to
be tough on defaulters). In urban areas, governments never really got into the act, and
subsidized microenterprise credit is still relatively rare when compared to its rural
counterpart.
Now that microfinance has become quite popular, governments are tempted to use savings
banks, development banks, postal savings banks, and agricultural banks to move microcredit.
This is not generally a good idea, unless the government has a clear acceptance of the need to
avoid the pitfalls of the past and a clear means to do so. Many governments have set up apex
facilities that channel funds from multilateral agencies to MFIs. Apex facilities can be quite
complicated and there are few successful examples in microfinance. Successful apex
25
organizations in microfinance tend to be built on the backs of successful MFIs, not the other
way around. Finally, governments can also get involved in microfinance by concerning
themselves with the regulatory framework that impinges on the ability of a wide range of
financial actors to offer financial services to the very poor. This topic is treated below.

What is the role of the financial regulator in supporting the development to


microfinance?
Many feel that the most important role of a financial regulator in supporting the development
of microfinance is to create an alternative institutional type that allows sound financial
NGOs, credit unions, and other community-based intermediaries to obtain a license to offer
deposit services to the general public and obtain funds through apex organizations. In a few
countries, this may be an appropriate strategy. In most countries, however, the general level
of development of the microfinance industry does not yet warrant the licensing of a separate
class of financial institutions to serve the poor. And, in most countries, budgetary restrictions
faced by bank regulators make it very unlikely that they will be able to supervise a whole
host of small institutions; these institutions' total assets may make up a tiny percent of the
total financial system, but the cost of adequate supervision could eat up between 25 and 50%
of the total budget of the agency. Rather, regulators can work with the nascent microfinance
industries of most countries on issues such as modifying usury limits as stated in the
commercial code to allow appropriate levels of interest, generating credit information
clearinghouses to share information on defaulting borrowers to limit their ability to go from
one MFI to another, working with civil authorities to ensure that private loan contracts can be
recognized by courts in those transition economies that lack even basic legislative
infrastructure, and reporting requirements that will prepare MFIs to eventually become
regulated. Regulators can also examine the laws, executive decrees, and internal regulations
that limit the ability of traditional banking institutions to do microfinance. These regulations
include limits on the percent of a loan portfolio that can be lent on an unsecured basis, limits
on group guarantee mechanisms, reporting requirements, limits on branch office operations
(scheduling and security), and requirements for the contents of loan files.

When is microfinance not an appropriate tool?

Microfinance increasingly refers to a host of financial services—savings, loans, insurance,


26
remittances from abroad, and other products. It is hard to imagine that there would be any
family in the world today for which some type of formal financial service couldn't be
designed and made useful. But the fact of the matter is, that in most people's mind,
"microfinance" still refers to microcredit.
Microcredit is only useful in certain situations, and with certain types of clients. As we
are finding out, a great number of poor, and especially extremely poor, clients Often time’s
governments and aid agencies wish to use microfinance as a tool to compensate for some
other social problem such as flooding, relocation of refugees from civil strife, recent
graduates from vocational training, and redundant workers who have been laid off. Since
microcredit has been sold as a poverty reduction tool, it is often expected to respond to these
situations where whole classes of individuals have been “made poor”. Microcredit programs
directed at these types of situations rarely work. Credit requires a 98% “hit” rate to be
successful. This means that 98% of recent vocational school graduates or returning refugees
would need to be successful in establishing a microenterprise for repayment rates to be high
enough to allow for a program's overall sustainability. This is simply unrealistic. Running a
program with substantial default rates undermines the very notion of credit and destroys
credit discipline among those who could repay promptly but who look foolish given that
many do not. Microcredit serves best those who have identified an economic opportunity and
who are in a position to capitalize on that opportunity if they are provided with a small
amount of ready cash. Thus, those poor who work in stable or growing economies, who have
demonstrated an ability to undertake the proposed activities in an entrepreneurial manner,
and who have demonstrated a commitment to repay their debts (instead of feeling that the
credit represents some form of social re-vindication), are the best candidates for microcredit.
What is Micro Credit?

Micro Credit is defined as provision of thrift, credit and other financial services and products
of very small amount to the poor in rural, semi-urban and urban areas for enabling them to
raise their income levels and improve living standards. Micro Credit Institutions are those
which provide these facilities.

What are the interest rates applicable?

The reform of the interest rate regime has constituted an integral part of the financial sector
reforms initiated in our country in 1991. In consonance with this reform process, interest

27
rates applicable to loans given by banks to micro credit organizations or by the micro credit
organizations to Self-Help Groups/member-beneficiaries has been left to their discretion. The
interest rate ceiling applicable to direct small loans given by banks to individual borrowers,
however, continues to remain in force.

What are the terms & conditions for accessing micro credit?

Banks have been given freedom to formulate their own lending norms keeping in view
ground realities. They have been asked to devise appropriate loan and savings products and
the related terms and conditions including size of the loan, unit cost, unit size, maturity
period, grace period, margins, etc. Such credit covers not only consumption and production
loans for various farm and non-farm activities of the poor but also include their other credit
needs such as housing and shelter improvements.

What is the difference between microfinance and microcredit?


Microfinance refers to loans, savings, insurance, transfer services and other financial
products targeted at low-income clients. Micro credit refers to a small loan to a client made
by a bank or other institution. Micro credit can be offered, often without collateral, to an
individual or through group lending.

What role does a Non-Governmental Organization (NGO) play in


provision of Micro Credit?

A Non-Governmental Organization (NGO) is a voluntary organization established to


undertake social intermediation like organizing SHGs of micro entrepreneurs and entrusting
them to banks for credit linkage or financial intermediation like borrowing bulk funds from
banks for on-lending to SHGs.

What are the latest Micro Credit disbursement indicators?

With a view to facilitating smoother and more meaningful banking with the poor, A pilot
project for purveying micro credit by linking Self-Help Groups (SHGs) with banks was
launched by NABARD in 1991-92 with a view to facilitating smoother and more meaningful
banking with the poor. RBI had then advised commercial banks to actively participate in this
linkage programmed. The scheme has since been extended to RRBs and co-operative banks.
The number of SHGs linked to banks aggregated 4,61,478 as on March 31, 2002. This
28
translates into an estimated 7.87 million very poor families brought within the fold of formal
banking services as on March 31, 2002. More than 90 per cent of the groups linked with
banks are exclusive women groups. Cumulative disbursement of bank loans to these SHGs
stood at Rs. 1026.34 crores as on March 31, 2002 with an average loan of Rs. 22,240=00 per
SHG and Rs. 1,316=00 per family. As regards model-wise linkage, while Model I, viz.
directly to SHGs without intervention/facilitation of any NGO now accounts for 16%, Model
II, viz. directly to SHGs with facilitation by NGOs and other formal agencies amounts to
75% and Model III, viz. through NGO as facilitator and financing agency represents 09% of
the total linkage. While 488 districts in all the states/UTs have been covered

under this programmed, 444 banks including 44 commercial banks (including 17 in the
private sector), 191 RRBs and 209 co-operative banks along with 2,155 NGOs are now
associated with the SHG-bank linkage programmed.

While the SHG-bank linkage programmed has surely emerged as the dominant micro finance
dispensation model in India, other models too have evolved as significant micro finance
purveying channels.

The other successful models that have emerged are:

(a) An Intermediate Model that works on banking principles with focus on both savings and
credit activities and where banking services are provided to the clients either directly or
through SHGs;

(b) There is also a Wholesale banking Model where the clients comprise NGOs, MFIs and
SHG Federations. This Model involves a unique package of providing both loans and
capacity building support to its partners; and

(c) Further, there is an Individual Banking-based Model that has its clients as individuals or
joint liability groups. While programmed management and client appraisal in this Model may
be a challenge, it is best suited to lending to enterprises.

Keeping these validated models for delivery of credit to the poor and the unorganized sector
in view, RBI is moving towards a systems perspective for providing effective policy support
not only because a number of different institutions, viz. banks, MFIs, NGOs & SHGs are
involved, but also because these institutions have very different institutional goals. With this
in view, a series of initiatives is being planned in the coming months for putting in place a
29
more vibrant micro finance dispensation environment in the country where complementary
and competitive models of micro finance delivery would be encouraged to co-exist.

Is Foreign Investment allowed in Micro Credit projects?

Govt. of India vide their notification dated August 29, 2011 have included ‘Micro
Credit/Rural Credit’ in the list of permitted non-banking financial company (NBFC)
Activities for being considered for Foreign Direct Investment (FDI)/Overseas Corporate
Bodies (OCB)/Non-Resident Indians (NRI) investment to encourage foreign participation in
micro credit projects. This covers credit facility at micro level for providing finance to small
producers and small micro enterprises in rural and urban areas.
What is the Micro Finance Development Fund?

There is an urgent need for micro credit providers to shift from a minimalist approach – that
is offering only financial intermediation – to an integrated approach to poverty alleviation
taking a more holistic view of the client including provision of enterprise development
services like marketing infrastructure, introduction of technology and design development. In
this context, the setting up of the Micro Finance Development Fund marks an important step.
Pursuant to the announcement of Union Finance Minister in his budget speech for the year
2011-01, this Rs. 100 crore Fund has been created in NABARD to support broadly the
following activities: (a) giving training and exposure to self-help group (SHG) members,
partner NGOs, banks and govt. agencies; (b) providing start-up funds to micro finance
institutions and meeting their initial operational deficits; (c) meeting the cost of formation
and nurturing of SHGs; (d) designing new delivery mechanisms; and (e) promoting research,
action research, management information systems and dissemination of best practices in
micro finance. This Fund is thus expected to address institutional and delivery issues like
institutional growth and transformation, governance, accessing new sources of funding,
building institutional capacity and increasing volumes. RBI and NABARD have contributed
Rs. 40 crore each to this Fund. The balance Rs. 20 crore were contributed by 11 public sector
banks.

30
How many types of micro credit providers are there in India and what is
the present legal framework governing them?
The position is as under:

Categories of Providers Legal Framework governing their activities

(a) Domestic Commercial Banks: (i) RBI Act 1934/


Public Sector Banks; (ii) BR Act 1949
(iii) SBI Act
Private Sector Banks &
(iv) SBI Subsidiaries Act
Local Area Banks (v) Acquisition & Transfer of Undertakings Act
1970 & 1980
(b) Regional Rural Banks RRB Act 1976

RBI Act 1934

BR Act 1949

(c) Co-operative Banks Co-operative Societies Act

BR Act 1949 (AACS)

RBI Act 1934 (for sch. banks)

(d) Co-operative Societies (i) State legislation like MACS

(e) Registered NBFCs (i) RBI Act 1934


(ii) Companies Act 1956

(f) Unregistered NBFCs (i) NBFCs carrying on the business of a FI prior to


the coming into force of RBI Amendment Act 1997
whose application for CoR has not yet been rejected
by the Bank
(ii) Sec. 25 of Companies Act

(g) Other providers like Societies, (i) Societies Registration Act ’60
Trusts, etc. (ii) Indian Trusts Act
(iii) Chapter IIIC of RBI Act ’34
(iv) State Moneylenders Act.

31
ASSESSING A SELF HELP GROUP

What is Self-Help Group (SHG)?

A Self-Help Group (SHG) is a registered or unregistered group of micro entrepreneurs


having homogenous social and economic background voluntarily, coming together to save
small amounts regularly, to mutually agree to contribute to a common fund and to meet their
emergency needs on mutual help basis. The group members use collective wisdom and peer
pressure to ensure proper end-use of credit and timely repayment thereof. In fact, peer
pressure has been recognized as an effective substitute for collaterals.

What are the advantages of financing through SHGs?

An economically poor individual gain strength as part of a group. Besides, financing through
SHGs reduces transaction costs for both lenders and borrowers. While lenders have to handle
only a single SHG account instead of a large number of small-sized individual accounts,
borrowers as part of a SHG cut down expenses on travel (to & from the branch and other
places) for completing paper work and on the loss of workdays in canvassing for loans.

The norms for SHGs in a particular place may have to be developed keeping in view the
local conditions. The above pattern is only a model and indicative one and could be used as
the basis for developing suitable norms for financing SHGs be it banks or any other financing
institution. A few proactive commercial banks, Regional Rural Banks and Cooperative Banks
have already introduced their own norms and the same is being followed by the financing
units.
This note may be read with NABARD circular letter dated February 2011, which also shares
different formats for appraising a SHG for finance.
For any financing institution, appraisal is very important for ensuring the utility of the loan
and repayment of the loan. Bankers generally appraise the project and the borrower. In case
of SHG financing, most of the project appraisal norms like assessing the cost benefit and
profits will not be workable due to the peculiarities of SHG financing. For considering a loan
application for financing the Financer has to evaluate the capacity and character of the
prospective borrower. SHG’s also being customers have to be appraised before extending
credit facilities. But then assessment of creditworthiness of a SHG is very different from that
of an individual. SHGs are not to be assessed in terms of their ability to provide collateral or

32
guarantees of net worth. The SHGs have to be assessed in terms of Group dynamics like
cohesion, vibrancy, goal-oriented action, participation of members, democratic decision and
collective leadership. The appraiser has to see whether the group is functioning, actually as a
group, why the members have come together, whether it is for obtaining loan from bank or
the group sees other purposes, what is the group discipline and whether it is sustainable.
The basic principles on which the SHGs function are:

 The members of the groups should be residents of the same area and must have an
affinity. Homogeneity of relationship could be in terms of caste/occupation/gender or
economic status (which is critical).
 Savings first, credit thereafter SHGs should hold regular meetings
 SHGs should maintain record of financial and other transactions
 They should have norms regarding membership, meetings etc.
 Group leaders should be elected by members and rotated periodically.
 Transparency in operations of the group and participatory decision making.
 Rates of interest on loans should be decided by the group
 Group liability and peer pressure to act as substitutes for traditional collateral.
For assessing a Self Help Group the important aspects that a financer should look into
include.

Norms for functioning:

The SHG should have developed some kind of norms for its functioning the norms should be
covering major areas of its functioning as well as the decision making processes, leadership
etc., Norms generally relate to-

Membership
Meetings - time, periodicity
Savings - amount, periodicity, rate of interest (return)
Credit - procedure for sanction, ceiling amount, purposes, rate of interest to be charged,
repayment period etc.
Fines - in case of default in attending meetings, savings and credit repayment. Group may
also levy fines for any deviant behavior etc
Leadership - election or nomination of leaders, rotation of leaders etc.

33
Personal/Social improvement - minimum literacy level to be achieved, social work to be
done etc.
The above norms may be written or oral. They may be decided in the initial meetings or they
may evolve over a period of time depending upon the need of the group. The important
aspect to be looked into are:
 How norms evolved, whether by the consensus of the whole group.
 Whether the members are aware of the norms (even if they are oral) and understand
them.
 Whether the norms are implemented.
Meetings
The group decides the periodicity of the meetings i.e., weekly, fortnightly or monthly. They
also decide on the time of the meeting. Decision on time and periodicity helps in regular
conduct of meetings. The regularity in the holding of the meeting and the attendance during
meeting gives an indication bout groups functioning. Therefore a Financer should see
whether.
 The meetings have been held regularly.
 The attendance in the meetings.
 The members are punctual and stay till the end of the meeting.
 Are there any sanctions for the delinquent members ?
The Financier can use his observations during the meetings and the meeting register to get
data on this appraisal aspect.

Maintenance of Books

Whether group is maintaining the basic books that will give details of its functioning and
accounts of the group is an important criterion to be judged. The books should give the
details of number of meetings held, decisions taken in the meetings, amount of savings of the
members and credit availed, the total savings of the group and repayments. Who maintains
these books is another important criteria for judging the group. Do members maintain it, if
not are they making efforts to achieve basic numeracy or literacy so that they can start doing
it themselves.

34
Financer has to verify:

Whether details of meetings, proceedings, and attendance are maintained.

Whether member-wise record of saving and credit are maintained.Whether the records are up
to date. Whether all members are kept informed of their savings and credit balances from
time to time.In case of illiterate groups whether what is the system followed, does the group
verify the books maintained by NGO/outsider.

Whether systems have been developed to ensure safe custody of cash.

Leadership

Two or three group members are elected as leaders/ book-writers. Initially the opinion
leaders may be the leaders and over a period of time they are expected to be take turns. The
group leaders are expected to a) regularly convene and conduct the meetings, b) help the
group members in taking decisions, c) resolve conflicts, d) maintain books of account and e)
approach bank branch for operation of accounts.The aspects that are to be seen are :

Whether the leaders have been elected and rotated.

Whether they help in democratic functioning of the group.

Whether there is a conscious attempt to groom other members to take up leadership

Are they marginalizing the benefits (especially loans)

Participation and Awareness of Group Members

Are the Members aware of the purpose of group formation, the operations and activities of
the group viz. The savings and the credit of the group as well as the individual member’s
savings and credit details.

 Do they participate in group discussions and decision making?


 Do they help solve the problem that are raised in the meetings?
 Do they work cohesively and have transparent dealings?
The democratic character of the group may be judged by attending one or two meetings and
talking to individual members. The awareness level of members helps in healthy functioning
of the group and resolution of conflicts within the group.
35
Savings :
The group decides on the amount of savings as also its periodicity. It has to be seen whether
the saving, as decided upon, is regularly made, how the defaults are dealt with and whether
the system is modified as per the requirements of the members.
Credit:
The following aspects to be looked into while assessing the credit function of group:
 The decision making process of selecting loanees
 The system followed in assessing credit requirement of individual members and the
amount to be sanctioned.
 The system of monitoring the credit.
 The repayment performance of members and incidence of defaults besides the
effectiveness to deal with such defaults; whether the concept of `peer pressure’ is
working.
Self-Reliance of the Group

Can the group function on its own without the support of the NGO is an important criterion
for assessment? The level of dependency on the NGO/promoter of the group and impact of
withdrawal of NGO/promoter on the group is to be assessed.

India Advisory Council

Vikram Gandhi, Chair

Vikram Gandhi is Head of the Global Financial Institutions Group (FIG) at Credit Suisse. In
addition to significant client responsibilities, Mr. Gandhi is responsible for the coordination
and integration of CSFB’s financial institutions capabilities across a wide range of advisory
and financing products, including derivatives and structure products.

Before joining CSFB, Mr. Gandhi spent 16 years at Morgan Stanley where he held various
positions including the Co-Head of the Financial Institutions Practice; Head of Institutional
Strategy and Business Development; Chief Operating Officer for the Firm’s E-Commerce
Steering Committee; and President, Morgan Stanley India.

Mr. Gandhi has a wealth of experience in being involved in various Financial Institutions
high-profile M&A transactions and financings across the globe; such as Bank of America’s

36
acquisition of Fleet, the sale of National Processing Company to Bank of America, merger of
Chase Manhattan and Chemical Bank, the sale of First Fidelity to First Union, and Bank of
Boston’s acquisition to Bay Bank.

Mr. Gandhi received his B. Com from the University of Bombay and an MBA from the
Harvard Business School, where he was designed a Baker Scholar. He is also a qualified
Chartered Accountant.

Susan Davis, Member

Susan serves as the Vice President and Director of Global Academy for Social
Entrepreneurship. She oversees expansion to the Middle East and Central Asia region. Susan
also acts as an advisor to the International Labor Organization and Environmental Defense.
In 1997, she helped to found and now chairs the board of the Grameen Foundation. She also
serves on the boards of Project Enterprise and Aid to Artisans. Susan is a member of the
Positive Futures Network and serves on the Human Rights Advisory Council of the Ethical
Globalization Initiative. Susan lived in Bangladesh from 1987-1991 where she worked for
the Ford Foundation and was responsible for the organizing the donor consortia to scale up
Grameen Bank, BRAC and Proshika. She also started Ashoka's program in Bangladesh and
was its first volunteer representative. She was educated at Georgetown, Harvard and Oxford
universities.

RobertEichfeld,Member
During a 33-year career with Citigroup, Mr. Eichfeld managed many of Citibank's
country and regional activities in postings throughout the Caribbean, Brazil, India, Indonesia,
New Zealand, Pakistan and Saudi Arabia. While abroad, he also served on the boards of
several business and community affairs organizations including chairing various school
boards. Since 2011, he has continued to use the unique business and cultural awareness skills
that arise from having lived in or traveled to over 100 countries. He has advised a de-novo
venture capital fund in Dubai, and with other investors, helped to set up a new Islamic bank
in Bahrain. He advised Harvard Business School when it established its executive training
program for the Middle East and he is currently a member of the Global Advisory Council at
his alma mater, the Garvin School of International Management at Thunderbird. He also
remains active in Rotary, particularly with Rotary’s international microfinance and other
social development programs and is a member of the International Executive Services Corps

37
and the Financial Services Volunteer Corps. . Bob’s other interests include international
current affairs, tennis, hiking, rafting, extensive travel.
Jim Greenberg, Member

Chairman and CEO of DevCorp International, Greenberg developed and managed


two large joint venture companies in Saudi Arabia as General Manager. In 1995 he became
the founding partner of DevCorp International E.C., a GCC based venture development and
investment company with active projects spanning shrimp farming, petrochemicals, light
manufacturing, and telecoms/IT. Jim is a 1968 Graduate of West Point and holds advanced
degrees from Harvard Business School, the University of Southern California, and the
Industrial College of the Armed Forces.

Elke Ward-Smith, Member

Elke Ward-Smith, a multilingual German citizen, started her 20 year banking career
at Citibank NY with assignments in Latin America, Europe and Asia. These
assignments typically involved building new structured finance business and taking US
financial expertise to “emerging” markets and helping multinationals raise liquidity in an
environment of debt crises and strict capital controls. Elke later joined Chase Manhattan
Asia, Ltd in Hong Kong to set up an Asian Structured Finance Unit, then moved onto UBS in
Zurich and London to add her international tax expertise to Project and Leveraged Finance.
Most recently Elke structured and closed tax efficient cross border transactions for the
German HypoVereinsbank working out of its London, Munich and New York offices.

38
COMPANY PROFILE
Company Profile

SKS Microfinance Ltd is the largest MFI in India in terms of total value of loans outstanding,
number of borrowers, who we call members, and number of branches. The company is a non-
banking finance company, or NBFC, registered with and regulated by the Reserve Bank of
India, or RBI. They are engaged in providing microfinance services to women in the lower
income segment predominantly located in rural areas in India. The company's core business is
providing small loans exclusively to poor women predominantly located in rural areas in India.
These loans are provided to such members essentially for use in their small businesses or other
income generating activities and not for personal consumption.

The company has designed and deployed a web-based Business Intelligence portal using state-
of-art technology and a highly flexible and scalable platform to support the business growth and
operations. They have also built an integrated and encrypted MPLS communication network
encompassing a world class Data Centre delivering mission critical services and enhancing
collaboration across the organisation, thus ensuring superior service quality to their customers.
SKS Microfinance Ltd was incorporated on September 22, 2003 as a private limited company
with the name as SKS Microfinance Pvt Ltd. In January 20, 2005, the company obtained a
certificate of registration from the RBI to commence the business of a non-banking financial
institution without accepting public deposits.

In September 1, 2005, the company transferred all assets and properties, pursuant to a MoU
including the existing loans and receivables in relation to micro finance activities from SKS
Society. SKS Society was earlier engaged in microfinance. In May 2, 2009, the company was
converted into a public limited company and the name was changed to SKS Microfinance Ltd.

In January 18, 2010, the company entered into an agreement with HDFC Technology license
and service usage for undertaking housing finance activities. In February 3, 2010, the company
made a tie up with State Bank of India, State Bank of Hyderabad and State Bank of Mysore for
online integration of 585 branch bank accounts of the company through CMS. In February 10,
2010, they entered into an MoU with Future Group for purchase of supplies by kirana stores on
a wholesale basis located in and around New Delhi.

39
SKS Microfinance Limited (SKS) is a micro finance institution (MFI). SKS is a non-deposit
accepting non-banking financial company (NBFC-ND) engaged in providing microfinance
services to women in the rural areas of India. It classifies Members with outstanding loans as its
Borrowers. As of March 31, 2012, the Company offered certain loan products to borrower-
members. Its products include Income Generation Loans (IGL) - Aarambh, Mid-Term Loan
(MTL) - Vriddhi. It has two programmes: Mobile Phone Loans and Sangam Store Loans.

The Company has extended its Mobile Phone Loans initiative to 11 states in India. It has also
undertaken a pilot project, including a business-to-business loan programme with Metro to fund
the working capital requirements of the borrower-members and certain non-borrower-members,
who own and operate kirana or Sangam Stores. As of March 31, 2012, the Company had
approximately 54 lakh Members, including 43 lakh Borrowers across 1,461 branches in 18
states in India.

SKS Microfinance Limited (SKS) is a micro finance institution (MFI). SKS is a non-deposit
accepting non-banking financial company (NBFC-ND) engaged in providing microfinance
services to women in the rural areas of India. It classifies Members with outstanding loans as its
Borrowers. As of March 31, 2012, the Company offered certain loan products to borrower-
members. Its products include Income Generation Loans (IGL) - Aarambh, Mid-Term Loan
(MTL) - Vriddhi. It has two programmes: Mobile Phone Loans and Sangam Store Loans. The
Company has extended its Mobile Phone Loans initiative to 11 states in India.

It has also undertaken a pilot project, including a business-to-business loan programme with
Metro to fund the working capital requirements of the borrower-members and certain non-
borrower-members, who own and operate kirana or Sangam Stores. As of March 31, 2012, the
CThe Company was incorporated as `SKS Microfinance Private Limited', on September 22,
2003 under the Companies Act, 1956. The Registered Office of the Company is situated at
Ashoka Raghupathi Chambers, D No. 1-10-60 to 62, Opposite to Shoppers Stop, Begumpet,
Hyderabad 500 016, Andhra Pradesh. The Company had obtained a certificate of registration
from the RBI on January 20, 2005 to commence the business of a non-banking financial
institution without accepting public deposits. With effect from September 1, 2005, the
Company acquired business operations, assets and loan portfolio from SKS Society that was
structured as a NGO and was engaged in microfinance.

40
The name of the Company was changed from `SKS Microfinance Private Limited' to `SKS
Microfinance Limited' pursuant to a resolution of our shareholders passed at an EGM held on
May 2, 2009 and fresh certificate of incorporation bearing CIN number
U65999AP2003PLC041732 was issued on May 20, 2009. Subsequently, a fresh certificate of
registration dated June 3, 2009 was obtained from RBI for carrying on the business of non-
banking financial institution without accepting public deposits. The Company is the largest MFI
in India in terms of total value of loans outstanding, number of borrowers and number of
branches, according to the October 2009 CRISIL report titled India Top 50 Microfinance
Institutions, or the CRISIL Report. The Company is engaged in providing microfinance
services to women in the lower income segment predominantly located in rural areas in India.

Key Events and Milestones

Date Details

September 22, 2003 Incorporation of SKS Microfinance Private Limited

January 20, 2005 Registration with RBI in the name of SKS Microfinance Private Limited to
carry on the business as a non-banking financial institution without accepting deposits

September 1, 2005 Transfer of all assets and properties, pursuant to a MoU including the
existing loans and receivables in relation to micro finance activities, to the Company from SKS
Society. January 31, 2006 Entered into a Subscription cum Shareholders Agreement dated
January 31, 2006 with SIDBI for allotment of 1,000,000 Equity Shares.

March 24, 2006 Issue of Equity Shares pursuant to equity investments by the following: (i)
Unitus Equity Fund LLP - 2,099,040 Equity Shares; (ii) Mr. Vinod Khosla - 2,099,040 Equity
Shares; and (iii) The Ravi and Pratibha Reddy Foundation - 1,033,920Equity Shares.

February 28, 2007 The membership of the Company crosses 500,000 in more than 250
branches across 11 states.

March 29, 2007 Issue of Equity Shares pursuant to equity investments by the following: (i)
MUC - 1,319,069 Equity Shares; (ii) Mr. Vinod Khosla - 1,319,069 Equity Shares; (iii) Kismet
Microfinance - 1,319,069 Equity Shares; (iv) Odyssey Capital Private Limited - 894,064 Equity
Shares; and (v) SCI II - 5,430,468 Equity Shares.

41
September 30, 2007 The membership of the Company crosses 1,000,000 in more than 500
branches across 15 states.

December 14, 2007 Social and Corporate Governance Award issued by BSE and Nasscom
Foundation for Best Corporate Social Responsibility Practice

December 27, 2007 Issue of Equity Shares pursuant to equity investments by the following: (i)
SIDBI - 807,461 Equity Shares; (ii) Yatish Trading - 962,050 Equity Shares; (iii) Infocom
Ventures - 283,020 Equity Shares; (iv) Mr. Vinod Khosla - 820,757 Equity Shares; (v) MUC -
2,274,020 Equity Shares; (vi) SCI II - 2,847,013 Equity Shares; (vii) Kismet Microfinance -
3,678,027 Equity Shares; (viii) Columbia Pacific Opportunity - 275,944 Equity Shares; (ix)
SCIGI I - 2,996,396; (x) SVB India Capital Partners I, L.P - 275,944 Equity Shares; and (xi)
Tejas Ventures - 1,760,552 Equity Shares.

May 6, 2008 Certification bearing number 17998/08/S received from IQ Net that the quality
management system of the Company is in compliance with the standard ISO 9001:2000 in
relation to the conducting of internal audits as per the policies and applicable standards.

July 31, 2008 The membership of the Company crosses 2,500,000 in more than 1,100 branches
across 15 states.

October 20, 2008 Issue of Equity Shares pursuant to equity investments by the following: (i)
SIP I - 2,085,448 Equity Shares and 6,256,344 Preference Shares (ii) Kismet SKS II - 885,044
Equity Shares and 2,655,131 Preference Shares (iii) ICP Holdings I - 81,383 Equity Shares and
244,150 Preference Shares

February 27, 2009 Issue of 2,500 10.5% secured redeemable NCD of face value of Rs. 100,000
each aggregating to Rs. 250 million to Yes Bank Limited on a private placement basis.

April 23, 2009 Issue of 750 10.0% secured redeemable NCD of face value of Rs. 1,000,000
each aggregating to Rs. 750 million to Standard Chartered Bank on a private placement basis.
The said debentures have been listed on BSE pursuant to the listing agreement dated April 24,
2009.

April 30, 2009 The membership of the Company crosses 4,000,000 in more than 1,400
branches across 18 states.

42
May 20, 2009 Fresh certificate of incorporation consequent to the change of the name on
conversion to a public limited company pursuant to a resolution of its shareholders dated May
2, 2009

June 3, 2009 Registration with the RBI in the name of SKS Microfinance Limited to carry on
the business of non-banking financial institutions without accepting deposits pursuant to the
change in the name of the Company on conversion to a public limited company.

August 31, 2009 The membership of the Company crosses 5,000,000 in more than 1,600
branches across 19 states. November 24, 2009 Religare Asset Management Company Limited
has subscribed to commercial papers issued by the Company for value of Rs. 250 million
having a discount rate of 8.10% per annum

November 10, 2009 Yes Bank Limited has subscribed to commercial papers issued by the
Company for value of Rs. 1,000 million having a discount rate of 8.00% per annum

December 9, 2009 Issue of 500 NCD of Rs. 1,000,000 each aggregating to Rs. 500 million to
BALICL at a coupon rate of 9.25% per annum

December 23, 2009 Issue of 500 NCD of Rs. 1,000,000 each aggregating to Rs. 500 million to
Yes Bank Limited at a coupon rate of 8.30% per annum. The said debentures have been listed
on BSE pursuant to the listing agreement dated December 29, 2009.

December 30, 2009 Tata Capital Limited has subscribed to commercial papers issued by the
Company for value of Rs. 200 million having a discount rate of 8.10% per annum

January 11, 2010 Sanction by State Bank of India of Rs. 350 million towards term loans and Rs.
650 million towards cash credit for on lending purpose.

January 12, 2010 Availing of microfinance corporate loan facility from HDFC for Rs. 100
million to provide financial assistance for undertaking housing finance activities

January 18, 2010 Agreement with HDFC on Technology license and service usage for
undertaking housing finance activities.

January 19, 2010 Issue of 937,770 Equity Shares pursuant to equity investments by Catamaran

February 3, 2010 Tie up with State Bank of India, State Bank of Hyderabad and State Bank of
Mysore for online integration of 585 branch bank accounts of the Company through CMS
43
February 4, 2010 Religare Asset Management Company Limited subscribed to commercial
papers issued by the Company for value of Rs. 250 million having a discount rate of 6.6% per
annum.

February 10, 2010 MOU with FAL for purchase of supplies by kirana stores on a wholesale
basis located in and around New Delhi

March 8, 2010 Sanction of Tier-II unsecured subordinated debt of Rs. 1,000 million by SIDBI
for a tenure of eight years

July 2, 2010 CRSIL has assigned MFI grading of `mfR1' to the Company indicating the ability
of a microfinance institution to conduct its operations in a scalable and sustainable manner. The
grading is assigned on an eight point scale, with `mfR1' being the highest grading and `mfR8',
the lowest.

44
REVIEW OF LITERATURE
These literatures include books written on the subject by experts and also journals, manuals
etc. In fact, there are very few literatures available, regarding socio-economic, political and
entrepreneurial development of women. Philanthropic views and ideas of great people also
reviewed. Most of the studies are more general in nature and some are more scientifical.
“The habit of looking upon marriage as the soul economic refuge for women will have to go
before women can have any freedom. Freedom depends on economic conditions, even more
than political, and even if women is not economically free and self earning she will have to
depend on the husband or someone else, and dependents are never free” (Jawaharlal
Nehru).Dr.C.Rangarajan (2006) in his topic ‘Microfinance and its future directions’ in the
introductory part of the book, outline the evolution of SHG through microfinance evolve
through in three stages. First, to meet survival requirement need, in the second stage is to
meet the subsistence level through investing in tradition activities and in the final stage by
setting up of enterprises for sustainable income generation. Robert

Peck Christen (2006) in his paper “Microfinance and Sustainable International Experience
and lesson for India”, he articulates the changing general perception of bankers, that SHGs
are profitable clients or bank. Lanmdau Mayoux’s study (1998) on Participatory Learning for
Women’s Empowerment in Micro Finance Programs (IDS Bulletin, Vol. 29 No.4, 1998)
proposes a participatory approach for integrating women’s empowerment concerns into
ongoing programs learning, which itself would be a contribution to empowerment. Micro
finance programs for women are currently
promoted not only as a strategy for poverty alleviation but also for women’s empowerment.
The current literature on micro finance is also dominated by the positive linkages between
micro finance and achievement of Millennium Development Goals (MDGs). Micro Credit
Summit Campaign’s 2005 report argues that the campaigns offers much needed hope for
achieving the Millennium Development Goals especially relating to poverty reduction. IFAD
along with Food and Agriculture Organization (FAO) and the World Food Programmed
(WFP) declared that it will be possible to achieve the eight MDGs by the established
deadline of 2015 “if the developing and industrialized countries take action immediately” by
implementing plans and projects, in which micro credit could play a major role (Alok
Mishra,2006).
45
BANCOSOL: THE CHALLENGE OF GROWTH FOR
MICROFINANCE ORGANIZATIONS

BancoSol shows outstanding success in terms of breadth, depth, and quality of outreach and
in terms of sustainability. It is the microfinance organization with the largest number of
clients in Latin America and it reaches poor clients who could never expect to gain access to
conventional financial institutions. The paper discusses the incentive structure associated
with a lending technology that has resulted in low loan arrears and the cost- effective supply
of small loans. Success is explained by a strong concern with financial viability, development
of a lending technology appropriate for the market niche, a long learning period, and
upgrading into a formal intermediary. As it grew, BancoSol had to face a reduction of
revenues as a proportion of productive assets and an increase in the average cost of funds,
which combined reduced its operating margin by 13 percentage points. This challenge was
fully met by reducing operating expenses as a proportion of productive assets.

Mark Schreiner (2003)

A Cost-Effectiveness Analysis of the Garmin Bank of Bangladesh.

Reports of the success of the Garmin Bank of Bangladesh have led to rapid growth in
funding for microfinance. But has the Garmin Bank been cost-effective? This article
compares output with subsidy for the bank in a present-value framework. For the timeframe
1983–97, subsidy per person-year of membership in Garmin was about $20, and subsidy per
dollar-year borrowed was about $0.22. The Garmin Bank — if not necessarily other micro
lenders — was probably a worthwhile social investment.

David Hulme

This paper reviews the methodological options for the impact assessment (IA) of
microfinance. Following a discussion of the varying objectives of IA it examines the choice
of conceptual frameworks and presents three paradigms of impact assessment: the scientific
method, the humanities tradition and participatory learning and action (PLA). Key issues and
lessons in the practice of microfinance IAs are then explored and it is argued that the central

46
issue in IA design is how to combine different methodological approaches so that a “fit” is
achieved between IA objectives, program context and the constraints of IA costs, human
resources and timing.

Jonathan Morduch

Leading advocates for microfinance have put forward an enticing “win-win” proposition:
microfinance institutions that follow the principles of good banking will also be those that
alleviate the most poverty. This vision forms the core of widely-circulated “best practices,”
but as a general proposition the vision is fully supported neither by logic nor by the available
empirical evidence. Recognizing the limits to the win-win proposition is an important step
toward reaching a more constructive dialogue between microfinance advocates that privilege
financial development and those that privilege social impacts

GARY M. WOLLER

Although the word of finance in the term of microfinance in core value & the core element of
microfinance are those of the finance discipline has yet to break into the mainstream &
entrepreneur finance literature. The purpose of this article is to introduce the finance
academic community to the discipline of microfinance & microfinance institutions.

Models of Microfinance

Microfinance Institutions & Poverty Elimination

A MFI is an organization that provides the financial service targeted to the poor. Its clients
are generally poor & low income people. They may be female head of household, pensioner,
artisans or small farmers. It obtains finance from banks & in turn provides small scale credit
& other financial services to low income household & other informal business. The
microfinance works around the concept of group lending where it allows a no. of individuals
to provide collateral or guarantee a loan through a group repayment pledges. The incentives
to repay are based on peer pressure if on person in the group default; the other group
members make the payment. It is powerful tool to reducing poverty as it makes capital
available to the unbaked poor at reasonable rates. A survey by ABN AMRO bank clients has
shown that 58% of those who have used microfinance for four years experience a significant
reduction in poverty & 41% have come right out of it. The microfinance institutions aim
47
primarily to empower people to manage their resources on their own & build sustainable
livelihoods. Development of local indigenous skills & vocational training to foster
employment opportunities are integral part of the objectives, with the ultimate goal to
alleviate poverty.

Existing Models of Microfinance Institutions

Presently the microfinance institutions are operating with diverse methods & means with
common end results to provide affordable financial services to the poor & low income
people. With access to range of financial tools such families can invest according to their
own priorities viz. school fees, health care, business nutrition having etc.

The microfinance was not popular before seventies. It was in late eighties & early nineties
that it started showing exemplary results in the field of poverty alleviation. The pioneering
effort in this direction was done by Muhammad Yunus of Bangladesh. Today Garmin Bank
has over 1000 branches a branch covers around 25-30 villages with 12 lakh borrows with
over 90% women. The most important feature of the recovery rate of the loans, which is as
high as 98% yet another interesting feature of this bank is advancing credit without any
collateral security.

Garmin Bank Model

The bank lending system is simple but effective to obtain loans, potential borrower must
form a group of five, gather once a week for loan repayment meeting to start with learning
the bond rules & “16 decisions” which they chant at the start of their weekly sessions. These
decisions incorporate code of conduct that members are encouraged to follow in their daily
life. Ex. Production of fruits & housing& education for children, safe drinking water better
health etc. No. of groups in the same village is combined into a centre. The organization of
members in groups & centers serves a no. of purposes. It gives individuals a measure of
personal security credit. Loans are initially made to two individuals in a group, who are then
under pressure from the rest of the numbers to repay in good time. If the borrowers default,
the owner of the group may forfeit their chance of loan. The loan repayment is in weekly
installments spread over a year & simpler interest of 20% is charged once at the year end.
Factor behind the success of GRAMMEN BANK are participatory process in every aspect of
lending mechanism, peer pressure of group members on each other, lending for activities

48
which generate regular income, weekly collections of loans in small amount, intense
interaction with borrowers through weekly meetings, strong central management, dedicated
field staff, extensive staff training, willingness to innovate, committed pragmatic leadership
& decentralized as well as participatory style of working.

PAG IBIG FUND (PHILIPPINES) MODEL

PAG IBIG FUND, is one of the most financially stable government owned and controlled
corporation in Philippines today. It has a total of 1.2 million members with a fund base of US
800 million dollars. The fund is a provident saving fund and a housing credit system for the
wage earners. Its objectives are:

1) To promote self reliance and self determination among the workers though the
memberships in an integrated nation-wide saving system.

2) To invest provident saving of its members taking into account the provident benefits
upon the termination of their membership in fund.

3) To promote home ownership through the establishment of an affordable and adequate


housing credit system for its members.

HDFC MODEL

HDFC has been making continuous and sustained efforts to reach the lower income
groups of the society especially the economically weaker sections, thus

enabling then to realize their dreams of possessing the house of their own. Its response to
the need for better housing & living environment for the poor, both the urban & rural
sectors materialized in its collaboration with kreditanstalt fur wiederaufbau (KFW), a
German development bank. KFW sanctioned DM 55 million to HDFC for low cost
housing projects in India.

49
DATA ANALYSIS & INTERPRETATION
Q1- Are you aware about Microfinance.

S.No. Result No. of respondent Percentage

1 Yes 88 88

2 No 12 12

Interpretation

From the above graph, we interpretative that 88% people aware about the microfinance &
12% people who unaware about the microfinance.

50
Q2- If yes, does Microfinance provides the better service than traditional bank
service?

S. No. Result No. of respondent Percentage

1 Yes 65 74

2 No 23 26

0% 0%

26%

74%

Interpretation

From the above graph, we interpretative that 73.86% people consider that microfinance
provides the better service & 26.14% people consider the traditional system of bank service
is better.

51
Q3- Mostly for what purpose loan is taken through Microfinance?

S. No. Purpose No. of Percentage


respondent

Small business 25 28.41


1

Tiny/cottage industry or 15 17.04


2 service activity

Artisan activity 12 13.63


3

Agricultural & Allied activity 20 22.73


4

5 Transport sector activity 16 18.18

Small Businees

Tiny/cottage industry or
service activity
Artisan activity

Agricultural & Allied activity

Transport sector activity

Interpretation

From the above graph, we interpretation that 18% people take the loan for the purpose of
transport sector activity, 23% people take the loan for the agricultural & allied activity, 14%
people take the loan for the artisan activity, 17% people take the loan for the tiny/cottage
industry & 28% people take the loan for the purpose of small business.

52
Q4-How much loan you have taken?

a)Less then 50000 or more 75000 and above More then


50000 but less then but less then 100000
75000 100000

25 15 12 48

Less then 50000

50000 or more but less then


75000

75000 and above but less


then 100000

More then 100000

Interpretation

From above graph we can easily interpreted that mostly people take the loan more then
100000.

53
Q5- Do you feel that you become more self dependent after taking the loan
through Microfinance?

S. No. Result No. of respondent Percentage

1 Yes 75 85.23

2 No 13 14.77

Yes
No

Interpretation

From the above graph, we interpretation that 85% people consider that microfinance become
the people more self dependent while 15% people consider that microfinance does not
helpful to become the people more self dependent.

54
Q6- Do you have easily access to the Microfinance’s services?

S. No. Result No. of Respondent Percentage

1 Yes 77 87.50

2 No 11 12.5

Yes
No

Interpretation

From the above graph, we interpretative that 87% people consider that services of
microfinance are easily accessible while 13% people consider that services of microfinance
are not easily accessible.

55
Q7- Have you ever heard about SHG?

S. No. Result No. of Respondent Percentage

1 Yes 89 89

2 No 11 11

Yes
No

Interpretation

From the above graph, we interpretation that 89% people are aware about the SHGs while
11% people are unaware about the SHGs.

56
Q8- Are you a member of SHG?

S. No. Result No. of Respondent Percentage

1 Yes 82 82

2 No 18 18

Yes
No

Interpretation

From the above graph, we interpretative that 82% people who are the member of SHG while
18% people who are not member of SHG.

57
Q9- Does the SHGs have provided any training for effective use of loan?

S. No. Result No. of Respondent Percentage

1 Yes 70 85.37

2 No 12 14.63

1st Qtr
2nd Qtr

Interpretation

From the above graph, we interpretation that 85% people consider that SHGs provide
training for effective use of loan while 15% people consider that SHGs do not provide
training for effective use of loan.

58
FINDINGS

• Ability to save and access loans.

• Opportunity to undertake an economic activity.

• Mobility-Opportunity to visit nearby towns.

• Awareness- local issues, MFI procedures, banking transactions.

• Skills for income generation.

• Decision making within the household.

• Group mobilization in support of individual clients- action on

social issues.

• Role in community development activities.

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SUGGESTION

The microfinance should be -

1) Designing financially sustainable models.


2) Aim for community participation & ownership.
3) Increase outreach and scale up operations.
4) Demonstrate that banking with the poor is viable.
5) Build professional systems and processes.
6) Ensure transparency and enhance credibility through disclosures.
7) Provide support for capacity building initiatives.

60
CONCLUSION

The legitimacy of microfinance is beyond doubt. In a context of growing financialisation, the


poor more than anybody else need microfinance services. In the same vein, in a context
where democracy remains mainly formal and inaccessible to the poorest, the collective
approach (which is at the core of Indian microfinance through the Self-help-group concept)
undeniably represents a tool for democratic practices and therefore for grass roots
development, especially for women.

In practice, however, real effects are much more limited than what is usually presented. How
far and under what conditions can microfinance combat poverty and contribute to grass roots
development? The question is all the more acute in India, where microfinance has grown
very fast and intensively over the last decade. After a first cycle of growth where the number
of clients went from a few thousand to several millions, microfinance is nowadays at the core
of many agendas, be they public or private. Indian microfinance, both in terms of the number
of clients and the volume of credit disbursed, is not anecdotal any more. Because of the
socio-economic, political, even cultural questions it raises, microfinance becomes a societal
challenge. If it is indeed urgent not to let oneself be blinded by the surrounding optimism
and not to under-estimate the present weaknesses of microfinance, it is equally necessary to
identify efficient and innovative experiments in order to better reflect on the future of
microfinance.

This is why this communication aims to shed light at the process of microfinancialization in
particular at the spatial dimension and dynamics. Findings on the spatial variation and
changes in the development of the microfinance sector can enhance our understanding of the
complex processes of current regional development in India and can contribute to the
formulation of innovative regional development policies.

61
References

Daley-Harris, S. (2005), State of the Microcredit Summit Campaign Report 2005,

Washington: Microcredit Summit Campaign.

Dasgupta, R. (2005), ‘Microfinance in India. Empirical Evidence, Alternative Models and


Policy Imperatives’, Economic and Political Weekly, 60(12): 1229-1237.

Fisher, T. and Sriram, M.S. (2002), Beyond micro-credit: Putting development back into
micro-finance, New-Delhi: Vistaar Publications.

Guerin, I. and Palier, J. (2005), Microfinance challenges: Empowerment or disempowerment


of the poor?, Pondicherry: French Institute of Pondicherry.

Herman, J. (2002) [1897], A Classified Collection of Tamil Proverbs, London: Routledge.

Hulme, D. (2011), ‘Is Micro debt Good for Poor People? A note on the Dark Side of

Microfinance’, Small Enterprise Development, 11(1): 26-28.

Littlefield, E. and Rosenberg, R. (2004), ‘Microfinance and the Poor: Breaking down walls
between microfinance and formal finance’, Finance and Development, 41(2): 38-40.

Montgomery, R. (1996), ‘Disciplining or protecting the poor: avoiding the social costs of
peer pressure in microcredit schemes’, Journal of International Development, 8(2): 289-305.

Mosley, P. and Hulme, D. (1998), ‘Microentreprise finance: Is there a conflict between


growth and poverty alleviation’, World Development, 26(5): 783-790.

Rao, S. (2005), ‘Women’s Self-Help Groups and Credit for the Poor: A Case Study from
Andhra Pradesh’, in V. K. Ramnachandran and M. Swaminathan (eds.), Financial
Liberalization and Rural Credit in India, New-Delhi: Tulika Books (204-237).

Sidney, R., Hashemi, S.M. and Riley, A. (1997), ‘The influence of women’s changing roles
and status in Bangladesh’s fertility transition: Evidence from a study of credit programmes
and contraceptive use’, World Development, 25 (4): 563-575.

Tsai, K. S. (2004), ‘Imperfect Substitutes: The Local Political Economy of Informal Finance
and Microfinance in Rural China and India’, World Development, 32(9): 1487-1507.

62
Websites:

 http://www.indiastat.com/
 http://www.manfromindia.com/search/label/Microfinance
 www.final-yearproject.com

Magazines and News Papers:


 Efficiency with Growth: The emerging face of Indian Microfinance By Sanjay Singh
M.D. Micro Credit Rating International Limited.
 Paper 02-17, Department of Massachusetts Institute of Technology.
 “Financial Intermediaries”, Economic and political weekly, Vol. XLII, no 13

63
QUESTIONNAIRE

Dear respondent,

I am a student of MBA at IMS, DEHRADUN, affiliated to UTTARAKHAND


TECHNICAL UNIVERSITY .As a part of my course, I am working on the project
“Microfinance of India” kindly spare few minutes to fill this questionnaire.

NAME: _____________________________________________

Contact No.: _____________________________________________

AGE: 18-25 25-40 40 & above

SEX: Male Female

QUALIFICATION:

OCCUPATION:

ANNUAL SALARY/INCOME:

Q1- Are you aware about Microfinance?

a)Yes  b) No 

Q2- If yes, does Microfinance provides the better service than traditional bank
service.

a) Yes  b) No

Q3- Mostly for what purpose loan is taken through Microfinance.

a)Small Business.  b)Tiny/Cottage industry or service activity. 

c) Artisan Activities.  d)Agriculture & Allied activity. 

e) Transport sector activities. 

64
Q4- How much loan have you taken?

a)Less then 50000 b) 50000 or more but less then 75000

c)75000 and above but less then 100000 d) More then 100000

Q5- What rate of interest is to be given at the loan.

a)0-3 % b) 3-6% c) 6-9% d) 9% and above

Q6- Do you feel that you become more self dependent after taking the loan through
Microfinance.

a)Yes  b) No 

Q7- Do you have easily access to the Microfinance’s services.

a)Yes  b) No 

Q8- Have you ever heard about SHG.

a)Yes  b) No 

Q9- Are you a member of SHG.

a)Yes  b)No 

Q10- Does the Microfinance Institute have provided any training for effective use of
loan.

a) Yes  b)No

65

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