Micro Finance in India

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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 worlds 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 & childrens 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 peoples lives by
contributing to improved healthcare, childrens education & nutrition & womens
empowerment.
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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 shown to benefit the better off poor more than the truly destitute. Many early
impact studies 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 childrens 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.
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
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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
todays 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 theres 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.
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%.
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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.
Womens 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 Schools 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.
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.
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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 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
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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 worlds 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 peoples
resources. The repayment system of 50 weekly equal installments is not practical
because poor do not have a stable job and have to migrate to other places for 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 their, 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. These are persons who have successfully
came out of the vicious circle of poverty, cycle and are aspiring to grow big and still
bigger, comparatively.

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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 Womens 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.
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
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financial intermediation especially in areas where banking network was not
satisfactory. The rapid progress achieved in SHG formation, which has now turned
into an empowerment movement among women across the country, laid the
foundation for emergence of MFIs in India.
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
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outside the purview of any financial regulation. These are the institutions for which
policy and regulatory framework would need to be established.
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 Indias 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
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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 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
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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 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.

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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 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:
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(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 Worlds 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.
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.

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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 Worlds 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.
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
19

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 (microcredit) 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
financialproducts.
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 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
20

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,
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.

.

21

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 alternativeseven higher interest
rates in the informal finance sector (moneylenders, etc.) or simply no access to
creditare 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 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
22

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 poors 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
23

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 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.
24

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 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 governments 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
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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 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
developmenttofmicrofinance?
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
26

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 servicessavings, loans,
insurance, 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 times 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.
27

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 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.

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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 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:
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(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 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
30

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.
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:
Public Sector Banks;
Private Sector Banks &
Local Area Banks
(i) RBI Act 1934/
(ii) BR Act 1949
(iii) SBI Act
(iv) SBI Subsidiaries Act
(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)
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(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,
Trusts, etc.
(i) Societies Registration Act 60
(ii) Indian Trusts Act
(iii) Chapter IIIC of RBI Act 34
(iv) State Moneylenders Act.

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 &
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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. SHGs 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
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.
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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.
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
34

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.
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.

35

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 members 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.
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
36

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.
What is Unique about the SHGs and Linkage Programmed?

Decision
making
Members make decisions collectively. SHG concept offers
opportunity for participative decision making on conduct of
meetings, thrift and credit decisions. The participative process
makes the group a responsible borrower.
Financial
services
SHGs provide the needed financial services to the members at
their doorstep. The rural poor needs different types of
financial services, viz. Savings, consumption credit,
production credit, insurance, remittance facilities etc. The
platform of SHG provides the possibility to converge these
services.
Supplement
ary to
formal
banking
SHG linkage does not supplant the existing banking system,
but it supplements it thus taking full advantage of the
resources and other advantages of the banking system.
37

Cutting
costs
SHG linkage cuts costs for both banks and borrowers. In a
study sponsored by FDC, Australia, it was observed that the
reduction in costs for the bankers is around 40 % as
compared to IRDP loans. The poor have a net advantage of 85
% as compared to individual borrowing. Similar finding was
also observed in a NABARD study.
NPA Savvy The Linkage mechanism has proved that the repayments are
as high as 95% - 100 %
Peerpressue
as collateral
The SHG linkage emphasizes peer pressure within the group
as collateral substitute.
Quality
clients
The SHGs are turning out to be quality clients in view of
better credit management, mobilization of thrift, low
transaction costs and near full repayments.

Client
preparation
The members of the SHGs could over a period of time, very
selectively graduate to the stage of micro entrepreneurship
and have been prepared with requisite credit discipline.
Social
agenda
Available statistics indicate dependency of 35%-40% of rural
households on non-institutional sources for credit needs. SHG
Linkage offers a better way of dealing with the magnitude of
social agenda. Many NGOs/ Governments have recognized
the SHG as a vehicle for carrying and deepening of their
developmental agenda/ delivery of services.
Exclusive
poor focus
SHGs have exclusive focus on absolute have-nots, who have
been bypassed by the banking system. Social banking does
not have any meaning if the lowest strata and the unreachedss
are not focused.
38

No-subsidy-
dependence
syndrome
The programme does not envisage any subsidy support from
the government in the matter of credit. The issue is to build
capabilities and enterprise of the individual members,
blending with group cohesion and solidarity through training
provided by a SHPI to set the ball rolling for the SHG.

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 CSFBs 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
Firms 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 Americas 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 Bostons 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.
39

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 Rotarys international microfinance
and other social development programs and is a member of the International
Executive Services Corps and the Financial Services Volunteer Corps. . Bobs 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
40

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.
Deepak Amin, Member
Deepak is the co-founder and CEO of Covelix, Inc, a Seattle and India based software
consulting company. Prior to Covelix, Deepak was the Senior Vice-President at
Streamserve, heading its next generation web services products division. Prior to
Streamserve, Deepak was the founder and CEO of vJungle, Inc, a web services
integration and deployment platform company. Deepak also worked at Microsoft for
many years as a technical lead in Microsoft Works and Windows95 Networking
teams and was a senior engineer in the original Internet Explorer team at Microsoft,
Redmond-USA.
Micro Finance - NABARD's Vision and Mission
Vision
Empowerment of rural poor by improving their access to the formal credit system
through various mF innovations in a cost effective and sustainable manner.

41

Mission
To extend financial services to one third of India's unreached and underserved rural
poor numbering nearly 100 million through one million SHGs with focus on women
during a ten year period through various microFinance interventions
Micro Finance- NABARD's Strategy
Overall Strategy
Forming and nurturing small, homogeneous and participatory self help groups (SHGs)
of the poor has today emerged as a potent tool for human development. This process
enables the poor, especially the women from the poor households, to collectively
identify and analyse the problems they face in the perspective of their social and
economic environment. It helps them to pool their meagre resources, human and
financial, and prioritise their use for solving their own problems.
The emphasis on regular thrift collection and its use to solve immediate problems of
consumption and production not only helps to meet their most urgent needs, but trains
them to handle larger financial resources more skillfully, prudently and with a more
lasting impact.
The SHGs have also become a forum for many social sector interventions.
SHG-Bank Linkage Programmed
The availability of bank loan to the group helps fulfill their needs further. SHG-Bank
Linkage Programmed has proved to be the major supplementary credit delivery
system with wide acceptance by banks, NGOs and various government departments.
Region-specific Initiatives
NABARD has intensified its efforts in identifying potential districts in the Southern
Region and for enlarging its partner spread.
Priority has been assigned to awareness- building and for identification of NGOs and
other partners in Eastern and North Eastern Regions.
42

Capacity Building Initiatives
Sensitisation of senior executives of commercial banks and Chairmen of RRBs have
been taken up by NABARD.
Under the direct training programme for staff of banks/ NGOs, over 25,000 field level
functionaries have already been trained by NABARD.
NABARD provides training inputs on SHG financing to training establishments of
participating banks, to help them to internalise the training requirements at their level.
NABARD gives technical support to banks to evolve suitable intermediate structures
like Farmers' Clubs (Vikas Volunteer Vahini Programmed of the National Bank) to
increase the outreach of their branches in promotion and linking SHGs
NABARD supports and helps banking institutions (especially RRBs) to take on the
role of Self Help Promoting Institutions (SHPIs).
Support to Governments
Necessary assistance is provided to the governments by NABARD for dovetailing mF
practices with the poverty alleviation programmed.
NABARD also encourages the association of Panchayati Raj Institutions ( PRIs ) in
adopting group processes for maximization of empowerment.
Support to NGO Partners
Several steps have been taken by NABARD for capacity building of NGOs which
partner in promotion and nurturing of SHGs. The emphasis is on involving a large
number of NGOs. Special focus is on those NGOs participating in watershed
development, health, literacy and women development, to encourage them to take up
promotion, nurturing and linkage of SHGs as an 'add-on' activity.
NABARD has a scheme of part-financing the cost of promotion of groups by NGOs.

43

Alternate Micro Finance Practices
The NGOs and other local bodies at village, block and district levels in the North
Eastern States are encouraged to take up alternative micro-credit delivery mechanisms
through direct funding. Formation and operation of SHG Federations is supported
and encouraged by NABARD. Similarly, networking of NGOs is also encouraged.
Policy and Regulatory Initiatives
The recommendations of the Task Force on microfinance are being followed up and
implemented, to spawn a supportive and conducive policy mechanism for sustained
growth of mF initiatives in India. These steps include facilitating emergence of
standards for Micro Finance in India, Supporting graduation of Micro Finance -
NGOs to pure Micro Finance Institutions, etc..

44

LITERATURE
REVIEW

45

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 Mayouxs study (1998)
on Participatory Learning for Womens Empowerment in Micro Finance Programs
(IDS Bulletin, Vol. 29 No.4, 1998) proposes a participatory approach for integrating
womens 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 womens
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 Campaigns 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).
46

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 198397, 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
47

and it is argued that the central 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.

48

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 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
49

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 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.
50

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.
4) To promote small & short loans & other benefits to its members.
Savings and housing are closely related and the first step was to take care of the
members basic need of housing. The fund instituted a systematic, regular and
easy saving system and tapped new groups of savers who could not be reached by
the commercial banks and became a major source of funds for developing the
economy. Thus, PAG IBGI helps every Filipino to have his own house by pooling
the savings of its members and channeling them for the long term financing
requirement of housing.
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.
For the purpose of actual implementation of the low cost housing projects, HDFC
collaborates with the organization, both government and non-government. Such
organization act as coordinating agencies for the projects involving a collective of
individuals belonging to economically weaker sections.

51

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.

52

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.

53

RESEARCH
METHODOLOGY

54

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 doesnt 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.
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.

55

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.

56

DATA ANALYSIS
&
INTERPRETATION

57

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.
58

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

Interpretation
74%
26%
0%
0%
S. No. Result No. of respondent Percentage
1 Yes 65 74
2 No 23 26
59

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.

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

S. No. Purpose No. of
respondent
Percentage

1
Small business 25 28.41

2
Tiny/cottage industry or
service activity
15 17.04

3
Artisan activity 12 13.63

4
Agricultural & Allied activity 20 22.73
5 Transport sector activity 16 18.18
60

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.

Small Businees
Tiny/cottage industry or
service activity
Artisan activity
Agricultural & Allied activity
Transport sector activity
61

Q4-How much loan you have taken?
a)Less then
50000
50000 or more
but less then
75000
75000 and above
but less then
100000
More then
100000
25
15 12 48

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

Less then 50000
50000 or more but less then
75000
75000 and above but less
then 100000
More then 100000
62

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

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.

Yes
No
S. No. Result No. of respondent Percentage
1 Yes 75 85.23
2 No 13 14.77
63

Q6- Do you have easily access to the Microfinances services?

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.

Yes
No
S. No. Result No. of Respondent Percentage
1 Yes 77 87.50
2 No 11 12.5
64

Q7- Have you ever heard about SHG?

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

Yes
No
1 Yes 89 89
2 No 11 11
65

Q8- Are you a member of SHG?

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.

Yes
No
1 Yes 82 82
2 No 18 18
66

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

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.

1st Qtr
2nd Qtr
1 Yes 70 85.37
2 No 12 14.63
67

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.

68

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.

69

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.
, it is equally necessary to identify efficient and innovative experiments in order to
better 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 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.

70

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between growth and poverty alleviation, World Development, 26(5): 783-790.
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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 womens changing
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Tsai, K. S. (2004), Imperfect Substitutes: The Local Political Economy of Informal
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1487-1507.

71

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

72

APPENDIX

73

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.
74

e) Transport sector activities.

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 Microfinances 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

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