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TITLE: STATUS OF MICROFINANCE IN INDIA: A STUDY OF SELF HELP GROUP Authors Name: 1-KARUNENDRA PRATAP SINGH Designation: Name of the organization: City: State: Country: E-mail id: Alternate e-mail id: Contact details: 2- CHANDAN SINGH Designation: Name of the organization: City: State: Country: E-mail id: Alternate e-mail id: Contact details: ABOUT AUTHORs: Karunendra Pratap Singh is at present Assistant Professor in Department of Business Administration , Technical Education & Research Institute, P. G. College , Ghazipur ( U P) . He is an M.Com plus MBA in Marketing and HR with interest in subjects like Accounting, Financial Management and HRM. He possesses around two years of teaching experience apart from one and a half year experience in corporate sector. He has participated in QIPs and presented papers in conferences and seminars and got his papers published in edited books and Journals. Chandan Singh is at present Assistant Professor in Department of Business Administration , Technical Education & Research Institute, P. G. College , Ghazipur ( U P) . She is an MBA (Marketing & HR), PGDCA, M. Sc-IT and also qualified UGC-NET. She has more than four years of experience in teaching subjects like Services and Retail Marketing, Supply Chain Management, E-Business & Human Resource Management. She has taken part in several QIPs, conferences / seminars and presented research papers and got her papers published in national and international journals and edited books. Assistant Professor (Department of Business Administration) Technical Education & Research Institute, Post Graduate College Ghazipur Uttar Pradesh India chand_teri@sify.com chand_teri@rediffmail.com 9450097963 Assistant Professor (Department of Business Administration) Technical Education & Research Institute, Post Graduate College Ghazipur Uttar Pradesh India karunendra.p.singh@gmail.com karunendrapratapsingh@yahoo.com 9918499370

STATUS OF MICROFINANCE IN INDIA: A STUDY OF SELF HELP GROUP

Karunendra Pratap Singh Assistant Professor, Department of Business Administration, Technical Education & Research Institute, Post Graduate College, Ghazipur-233001 (U.P.) Chandan Singh Assistant Professor, Department of Business Administration, Technical Education & Research Institute, Post Graduate College, Ghazipur-233001 (U.P.)

Abstract:
Financial Inclusion often used interchangeably with a suite of other terms, including broad-based growth, shared growth, and pro-poor growth. Rapid pace of growth is unquestionably necessary for substantial poverty reduction, but for this growth to be sustainable in the long run, it should be increasingly broad-based across sectors, and inclusive of the large part of the countrys labor force. Inclusive growth implies a direct link between the macro and micro determinants of growth and captures the importance of structural transformation for economic diversification and competition. Inclusive growth implies an equitable allocation of resources with benefits accruing to every section of society. But the allocation of resources must be focused on the indented short and long terms benefits and economic linkages at large and not just equitable mathematically on some regional and population criteria. Financial inclusion is necessary for poverty alleviation and social justification, its success depends on the degree of commitment on the part of bankers, government and voluntary organization, besides innovative delivery models. In this paper authors try to focus on operational issues related to microfinance, status of microfinance and SHGs and inclusive growth. Paper conclude to focus on extending financial services both in urban and rural areas for ensuring financial inclusion for all segments of population.

Key words: Inclusive Growth, Microfinance, SHGs Introduction

Today, eradication of poverty through microfinance has emerged as a major international policy issue. There is grooving evidence that deregulation in the financial sectors instead of improving financial inclusion for some societal group has actually alienated them on the pretext of customer segmentation; risk based pricing mechanism and so on. There are legitimate concerns that the present banking operation system tend to exclude rather attracted included those vast sections of the population. Indeed banks operating specially in developing country should be obliged to provide equitable services to all segments of the population for the sake of their own growth and development. In this scenario, an understanding of the micro financing system, which basically focuses on financial inclusion of the socially deprived segment of the population, becomes imperative. In shorts the characteristics of microfinance are generally akin to the banking needs of the community, especially the underprivileged. Though substantial progress has been made in India in recent decades in terms of increasing national income, its impact has been diluted by the rapid increases in the population. As a result, a large segment of the population continuous to be illustrate, undernourished and without access to productive assets and employment. In this scenario, reaching the poorest, whose credit requirement is very small, frequent and unpredictable, was found to be difficult. Since the beginning, the emphasis was laid on providing credit rather than the financial products and services, including saving and insurance, to the poor to meet their simple requirement. Wrong or ill informed perception, about how the poor actually use and value financial services resulted in service providers doubting their creditworthiness. Moreover the systems and procedures of banking institution with emphasis on complicated qualifying requirements, tangible collateral and margin resulting in a large section of the rural poor shying away from the formal banking sector. The commercial banks, too, experienced that a rapid expansion of branch network was not contributing to an increasing volume of business to meet high transaction costs and risk provisioning norms, which even threatened the viability of banking institutions and sustainability of their operations. At the same time, it was not possible for the prudent bankers to allow a major chunk of the population, even if poor, to remain outside the fold of its business. The search for an alternative mechanism for catering to the financial services needs of the poor thus became imperative.

Emergence of microfinance The financial service needs of the poor are simple, but their satisfaction can be life enhancing. A broad conception of microfinance embraces deposits, remittances, and payments, micro-insurance and pensions, aside from credit. The poor need access to convenient, liquid and safe deposit services which are protected against inflation by positive real rates of interest. With savings in reserve the poor are able to smooth their consumption expenditures in the face of uncertain income streams. Savings give households a shield against catastrophic events, whether affecting individuals or entire communities. Misfortunes such as illness or bereavement, or destruction due to natural disasters, might otherwise force the vulnerable to divest productive assets, tipping them over the divide between meager sufficiency and poverty. Microfinance is being practiced as a tool to attack poverty the world over. The term Microfinance could be defined as provision of thrift, credit and other financial services and products of very small amounts to the poor in rural, semi urban or urban areas, for enabling them to raise their income levels and improve living standards (NABARD 99). Microfinance Institutions (MFIs) are those, which provide thrift, credit and other financial services and products of very small amounts mainly to the poor in rural, semi-urban or urban areas for enabling them to raise their income level and improve living standards. Lately, the potential of MFIs as promising institutions to meet the consumption and micro-enterprise demands of the poor has been realized.

Table 1: Emergence of various concepts regarding Microfinance

Starters 1 2 3 4 5 6 7 8 9 10 11 12 Bank to the poor The price of a dream The poor and Their Money Sanghamitra: A MFI with a difference We are poor but so many-story of SEWA Beyond Microcredit: Putting development back into microfinance Pathway out of poverty Triangle of Microfinance The microfinance revolution Commercialization of Microfinance Sustainable banking with the poor Economics of Microfinance Md. Yunus David Bornsteein Stuart Rutherford Aloysius Fernandes Ela Bhatt Fisher Thomas and M S Sriram Sam Daley Harris Manfred Zeller & Richard Meyer Marguerite Robinson Deborah Drake and Rhyne Elisabeth Joanna Ledgerwood Jonathan Morduch

Reference: http://www.nabard.org/nabardrolefunct/nabardrole&functions.asp

Operating model in India

Table 2: Operating Model of Microfinance in India

Operating Unit Self help group (SHG) Grameen Model Joint Liability Group Individual lending

Percentage of contribution 65% 20% 08% 07%

Reference: report 2009-10 NABARD committed to rural prosperity

8% 20%

7% Self help group (SHG) Grameen Model 65% Joint Liability Group Individual lending

A self-help group (SHG) is a village-based financial intermediary usually composed of between 10-20 local women. Most self-help groups are located in India, though SHGs can also be found in other countries, especially in South Asia and Southeast Asia. Members make small regular savings contributions over a few months until there is enough capital in the group to begin lending. Funds may then be lent back to the members or to others in the village for any purpose. In India, many SHGs are 'linked' to banks for the delivery of microcredit. SHGs are member-based microfinance intermediaries inspired by external technical support that lie between informal financial market actors like moneylenders, collectors, and ROSCAs on the one hand, and formal actors like microfinance institutions and banks on the other. Other organizations in this transitional zone in financial market development include CVECAs and ASCAs. The Grameen model is microfinance organization almost cover 20% and that makes small loans (known as microcredit or "grameencredit") to the impoverished without requiring collateral. The word "Grameen" is derived from the word "gram" and means "rural" or "village". The system of this bank is based on the idea that the poor have skills that are under-utilized. A group-based credit approach is applied which utilizes the peer-pressure within the group to ensure the borrowers follow through and use caution in conducting their financial affairs with strict

discipline, ensuring repayment eventually and allowing the borrowers to develop good credit standing. The bank also accepts deposits, provides other services, and runs several development-oriented businesses including fabric, telephone and energy companies. In Joint Liability Group, The borrowers make a group among themselves and the microfinance institutions give loan to that group. One person in that group is appointed as leader of the group and each person is responsible for the loan taken by any member of the group. If any one person in the group defaults then other group members will have to pay for that. This Group concept is helpful because everyone is being monitored by other people in the group and the borrower utilizes his money properly. If anyone defaults, other group members will make all possible efforts to take money back and he will not find any place in any group next time. So, he will not be able to take loan in future. This thing motivates the borrowers to maintain discipline while asking for loan and utilizing it appropriately. Though sometimes the groups also default however it is uncommon. Reducing the default risk and at the same time inculcate the habit of disciplined management of finance among the poor. As microfinance institutions mature, they need to modify their credit methodologies. This is necessary to broaden the range of services offered, to reduce the cost and to control credit risks for larger loans as the effectiveness of group-based joint liability decreases. In order to achieve these objectives, MFIs have started thinking beyond group lending as the only credit delivery methodology to individual lending systems indeed this is a clearly defined global trend in microfinance. This toolkit specifically targets Credit Officers: At most institutions, Credit Officers must be everything and do everything. SHG bank linkage programmes 2009-10 Table 3: (Highlight Physical) SHG bank linkage programmes 2009-10

Physical Structure of SHGs Total number of SHGs savings linked with banks Out of total [of which] exclusive Women SHGs Out of total [of which] -SGSY SHGs Total number of SHGs credit linked during 2009-10 Out of total [of which] exclusive Women SHGs credit linked Out of total [of which]-SGSY SHGs credit linked Total number of SHGs having loans outstanding as on 31 March 2010 Of which exclusive Women SHGs Of which-SGSY SHGs Estimated number of families covered upto 31 March 2010
Reference: www.nabard.org

69.53 lakh 53.10 lakh 16.94 lakh 15.87 lakh 12.94 lakh 2.67 lakh 48.51 lakh 38.98 lakh 12.45 lakh 97 million

Table 3: (Highlight Financial) SHG bank linkage programmes 2009-10

Financial Structure of SHGs (rupees) Total savings amount of SHGs with banks as 6198.71 crore on 31 March 2010 Out of total savings of exclusive Women SHGs 4498.66 crore Out of total savings of SGSY SHGs 1292.62 crore Total amount of loans disbursed to SHGs 14453.30 crore during 2009-10 Out of total loans disbursed to Women SHGs 12429.37 crore Out of total loans disbursed to SGSY SHGs 2198.00 crore 28038.28 crore Total amount of loans outstanding against SHGs as on 31 March 2010 Out of total loans o/s against Women SHGs Out of total loans o/s against SGSY SHGs Average loan amount outstanding per SHG as on March 2010 Average loan amount outstanding per member as on 31 March 2010
Reference: www.nabard.org

23030.36 crore 6251.00 57797 4128

Table 4: (Highlight) Grant Assistance to SHP is for Promotion of SHGs

Grant Assistance to SHPis for Promotion of sHGs (rupees) Grant assistance sanctioned during 2009-10 28.78 crore Cumulative sanctions upto 31 March 2010 107.66 crore Cumulative sanctions upto 31 March 2010 15.83 lakh

Microfinance sector has traversed a long journey from micro savings to micro credit and then to micro enterprises and now entered the field of micro insurance, micro remittance and micro pension. This gradual and evolutionary growth process has given a great opportunity to the rural poor in India to attain reasonable economic, social and cultural empowerment, leading to better living standard and quality of life for participating households. Financial institutions in the country continued to play a leading role in the microfinance programme for nearly two decades now. They have joined hands proactively with informal delivery channels to give microfinance sector the necessary momentum. During the current year too, microfinance has registered an impressive expansion at the grass root level. This booklet aims to provide a snapshot of the progress in the microfinance sector. Since 2006-07, NABARD has been compiling and analyzing the data on progress made in microfinance sector, based on the returns furnished by Commercial Banks (CBs), Regional Rural Banks (RRBs) and Cooperative Banks operating in the country. The banks operating, presently, in the formal financial system comprise Public Sector CBs (27), Private Sector CBs (22), RRBs (82), State Cooperative Banks (31) and District Central Cooperative Banks (370). Most of the banks

participating in the process of microfinance have reported the progress made under the programme. The data presented in this booklet covers information relating to savings of Self Help Groups (SHGs) with banks as on 31 March 2010, loans disbursed by banks to SHGs during the year 2009-10, loans outstanding of the banking system against the SHGs and the details of Non-Performing Assets (NPAs) and recovery percentage in respect of bank loans provided to SHGs as on 31 March 2010. The data have been compiled region-wise, Statewise and agencywise. The booklet also provides details relating to SHGs coming under Swarnjayanti Gram Swarojgar Yojna (SGSY) and exclusive women groups. In addition, the information relating to bulk lending provided by Banks and Financial Institutions to Micro Finance Institutions (MFIs) for on lending to groups and individuals have also been provided. Based on these data and information, this booklet attempts an assessment of progress on varied dimensions of the microfinance sector. NABARD has been instrumental in facilitating various activities under microfinance sector, involving all possible partners at the ground level in the field. NABARD has been encouraging voluntary agencies, bankers, socially spirited individuals, other formal and informal entities and also government functionaries to promote and nurture SHGs. The focus in this direction has been on training and capacity building of partners, promotional grant assistance to Self Help Promoting Institutions (SHPIs), Revolving Fund Assistance (RFA) to MFIs, equity/ capital support to MFIs to supplement their financial resources and provision of 100 per cent refinance against bank loans provided by various banks for microfinance activities. Different models of microfinance In this section, the data for the year 2009-10 along with a few preceding years have been presented and reviewed under two models of microfinance involving credit linkage with banks: (i) SHG - Bank Linkage Model: This model involves the SHGs financed directly by the banks viz., CBs (Public Sector and Private Sector), RRBs and Cooperative Banks. (ii) MFI - Bank Linkage Model: This model covers financing of Micro Finance Institutions (MFIs) by banking agencies for on-lending to SHGs and other small borrowers. Status of Micro-finance The overall progress under these two models is depicted in Table 5: Table 5: Overall Progress under Micro-finance during the last three years

Reference: report 2009-10 NABARD committed to rural prosperity

Financial needs of poor people In developing economies and particularly in the rural areas, many activities that would be classified in the developed world as financial are not monetized: that is, money is not used to carry them out. Almost by definition, poor people have very little money. But circumstances often arise in their lives in which they need money or the things money can buy. In Stuart Rutherfords recent book The Poor and Their Money, he cites several types of needs:

Lifecycle Needs: such as weddings, funerals, childbirth, education, homebuilding, widowhood, old age. Personal Emergencies: such as sickness, injury, unemployment, theft, harassment or death. Disasters: such as fires, floods, cyclones and man-made events like war or bulldozing of dwellings. Investment Opportunities: expanding a business, buying land or equipment, improving housing, securing a job (which often requires paying a large bribe), etc.

Why does financial inclusion matter? A well-functioning financial system is a crucial part of development, promoting economic growth and reducing poverty. Financial institutions and markets mobilize savings, provide payment services, allocate resources and transform risk by pooling and repackaging it. When a financial market functions well, funds will likely be allocated to the most productive users, which will contribute to economic growth and poverty reduction. However, when the market does not function properly, it loses growth opportunities. A financial system becomes more efficient and functions better when it is more inclusive. As a financial system becomes more inclusive, it provides more growth opportunities to more individuals and entrepreneurs. However, when the financial system serves only limited segment of the population, the society is likely to lose opportunities to grow. Improving access to finance for the poor is also emphasized as an effective tool for achieving the Millennium Development Goals (MDGs). The way in which access to financial services can help achieve the MDGs is explained below. Goal 1: Eradicate extreme hunger and poverty With access to financial services such as savings accounts, loans and insurance, the poor can build financial security, diversify income sources, and reduce their vulnerability to economic shocks. In addition, improving access to finance is likely to reduce inequality and poverty. Goal 2: Achieve universal primary education When households have access to microfinance, they are more likely to send their children to school, and the children are more likely to stay in school for a longer period of time. Also, with access to credit, savings and insurance, households are less likely to rely on their childrens labor. Goal 3: Promote gender equality and empowering women MFIs have been targeting women as their main clients in an effort to enhance the status of poor women in their homes and the community by giving them ownership of assets. Goals 4, 5, and 6: child mortality, improve maternal health and combat HIV/AIDs, malaria and other diseases Many MFIs provide health education along with microloans to their clients. These programs help clients become more aware of health issues and take preventive actions such as immunizing their children. Also, many MFIs provide health insurance products so that the poor clients receive timely treatment.

Goal 7: Ensure environmental sustainability MFIs have been supporting the purchase of sustainable energy products such as solar powered lamps. Given that a large portion of microcredit is used for agricultural businesses, MFIs can promote environmentally sustainable practices in agriculture.

Poor people find creative and often collaborative ways to meet these needs, primarily through creating and exchanging different forms of non-cash value. Common substitutes for cash vary from country to country but typically include livestock, grains, jewelry and precious metals. As Marguerite Robinson describes in The Microfinance Revolution, the 1980s demonstrated that "microfinance could provide large-scale outreach profitably," and in the 1990s, "microfinance began to develop as an industry" (2001, p. 54). In the 2000s, the microfinance industry's objective is to satisfy the unmet demand on a much larger scale, and to play a role in reducing poverty. While much progress has been made in developing a viable, commercial microfinance sector in the last few decades, several issues remain that need to be addressed before the industry will be able to satisfy massive worldwide demand. The obstacles or challenges to building a sound commercial microfinance industry include:

Inappropriate donor subsidies Poor regulation and supervision of deposit-taking MFIs Few MFIs that meet the needs for savings, remittances or insurance Limited management capacity in MFIs Institutional inefficiencies

Operational Issues Like any other poverty alleviation program, micro financing also suffers from certain constraints of implications. Therefore appropriate attention need to be focused on operational issues, both institutional and non institutional. Institutional Issue: Commercial banks, for the last two decades, have aimed at target-oriented approach to attain the statutory stipulation for alleviation of poverty. However institutional mission is required for banking with the poor by linking, financing and capacity building of SHGs rather than targeted approaches of financing through government sponsored self employment programs. Due to reform of banking industry and restructuring of financial institutions, commercial banks are required to integrated microfinance within a larger bank culture and structure to gear toward a high volume and small loan size business. The financial strategies to reach the poor and retain low income clients who required small amounts of capital needed to be understood by most branch managers and micro financing should not be considered as a second class activity. Banks are required to compete in open market and cover operating costs, risk and opportunity cost of capital in view of interest rate ceiling on small loans and targeted credit schemes. Collaboration among banks, non-government organizations and organizations and government agencies should be effective and efficient, because the role of the latter is waning and there are inherent failures in the mechanism to direct, monitor and lead the groups towards common goal. Insistence on collateral securities for loans by banks and on minimum balance for opening of saving bank accounts is to be resolved while linking with the SHGs. And As consequences of directed credit programs and the declining volume of agricultural credit, there is shift from farm credit to microfinance. This shift should not lead to negligence of the specific financial demands and requirement of small farmers for farm credit. Non- Institutional Issue: Often, rating norms for SHGs are not followed. These groups are to be rated as per the laid-down procedure and efforts are required to rectify their weak areas. Sometime, haste leads to wrong selection of activities for beneficiaries. Usually, there are large numbers of heterogeneous women group with regard to age and literacy level. Yet, on the other hand, increasing number of cast based homogenous groups need to be discourage. Effort should be made to link the revolution fund assistant as per the lending norms as presently no uniformity exists on release of this assistance. The credit limit are to be assessed based on credit absorption by the group and proposed activity should be linked to the skills of the group members.

Conclusion: This has been an inordinately long post, but an eye-opening one. Most microfinance literature has seen credit expansion as an end in itself, with productivity benefits magically accruing from such expansion. This discussion, however, debunks that belief without denying the importance of microcredit. However, microcredit must be part of micro-banking, which must be seen as a viable and important business within the financial sector. Contrary to popular belief, the reach of microfinance in India remains limited. Both market and policy reforms are necessary in order to correct this, expand microcredit, and sustain it through deposit growth. The resulting industry and policy moves may prove important for other countries on a similar trajectory. In a country like India, it is necessary to focus on extending

financial services both in urban and rural areas for ensuring financial inclusion for all segments of population. References 1. report 2009-10 NABARD committed to rural prosperity 2. 2007 the ICFAI University Press. (FIM: B K Swain) strategy 3. http://www.nabard.org/nabardrolefunct/nabardrole&functions.asp 4. www.nabard.org 5. The publication Finance for all - Policies and pitfalls in expanding access, at http://econ.worldbank.org/external/default/main?menuPK=478071&pagePK=64168176&piPK=6416 8140&theSitePK=478060 6. http://econ.worldbank.org/WBSITE/EXTERNAL/EXTDEC/EXTRESEARCH/EXTPROGRAMS/E XTFINRES/0,,contentMDK:20290566~menuPK:478067~pagePK:64168182~piPK:64168060~theSit ePK:478060