MICROFINANCING

THE BACKBONE OF INDIAN ECONOMY

A Seminar Report

Submitted by

CHANISHA

MBA- 1 SEC- D

Roll No. 5836

in partial fulfillment for the award of the degree of

MBA

At

School of Management Studies

Punjabi University
 ACKNOWLEDGEMENT

I avail this opportunity to express my heartfelt gratification to Mrs. Ratinder Kaur

for giving me such a prestigious opportunity to undergo a study on the topic of
“ Microfinancing- Backbone of Indian economy”

I wish to express my sense of obligation to the management of School of

Management Studies, Punjabi University Patiala.

I am sincerely thankful to the faculty of the department for their great support
and guidance in making my project successful through their lessons.

This acknowledgement would be incomplete if I don’t thank all those who have
made this report accomplished through their direct or indirect supervision.

Thus, I hereby incorporate my report to the best of my ability and skill.

Any mistake may be kindly forgiven.

 TABLE OF CONTENTS

1. Abstract

2. Objectives of study

3. introduction

4. Microfinance-

Definition

History

The Challenge

Need for Micro financing- why did it arise?

Boundaries and Principles

5. Concepts and features of microfinance

6. Types of organizations & composition of the sector

7. Micro finance in India

Steps taken by India to promote micro financing

Debates at the boundaries

Growth of linked SHG's in the regions

Growth of linked SHG's in 13 Priority States

Agency wise share of SHGs financed

Sources of funds for microfinance operations

MFIs as a beneficial business strategy:-

 Operating Expense Ratio of Indian MFIs by loan size

8. Financial needs of poor people

9. Ways in which poor people manage their money

10. Reasons for focus on poor women

11. Current scenario of Micro financing in India

Key concerns

Looking Ahead

12. List of top 10 companies in India

13. A Primer on Micro financing in India

14. Efficiency with the growth of MFIs

15. Micro-financings institutions in Punjab

Conclusion

Review of literature

References
 ABSTRACT

MFIs could play a significant role in facilitating inclusion, as they are uniquely
positioned in reaching out to the rural poor. Many of them operate in a limited
geographical area, have a greater understanding of the issues specific to the rural
poor, enjoy greater acceptability amongst the rural poor and have flexibility in
operations providing a level of comfort to their clientele.

According to RBI :-

“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.”
The mostly used service of MFIs is the micro-credit to begin, establish, sustain, or
expand very small, self-supporting businesses. The main aim of the micro-finance is
to improve the condition of the poor. In micro-credit the main focus remain on
women where groups of women in which every member of the group guaranteed the
repayment of all members is give a sum of money as a loan. The Government of India
has classified the MFIs as NBFCs (Non Banking Financial Company).

OBJECTIVES OF STUDY

• To know about Micro financing.

• To reflect the status of micro financing in India.

• To collect information about the formal and non-formal MFIs in India i.e. the
composition of micro financing sector.

• To know about the various NGOs and SHGs which are operating at the
national level.

• To know about the various types of MFIs in Punjab.

• It also collects information regarding how micro financing has helped in the
growth of Indian economy by bringing the rural sector into limelight.
INTRODUCTION
To define, Microfinance is the provision of financial services to low-
income clients, including consumers and the self-employed, who traditionally lack access
to banking and related services. Microcredit is a financial innovation. It is the extension
of very small loans (microloans) to those in poverty designed to spur entrepreneurship.
These individuals lack collateral, steady employment and a verifiable credit history and
therefore cannot meet even the most minimal qualifications to gain access to traditional
credit. Microcredit is a part of microfinance, which is the provision of a wider range of
financial services to the very poor.

Microcredit or microfinance is based on a separate set of principles, which

are distinguished from general financing or credit. Microcredit emphasizes building
capacity of a micro-entrepreneur, employment generation, trust building, and help to the
micro-entrepreneur on initiation and during difficult times. Microcredit is a tool for
socioeconomic development.

Microcredit is increasingly gaining credibility in the mainstream finance

industry, and many traditional large finance organizations are contemplating microcredit
projects as a source of future growth, even though almost everyone in larger development
organizations discounted the likelihood of success of microcredit when it was begun.

Due to the success of microcredit, many in the traditional banking industry have
begun to realize that these microcredit borrowers should more correctly be categorized as pre-
bankable.

MFIs could play a significant role in facilitating inclusion, as they are uniquely
positioned in reaching out to the rural poor. Many of them operate in a limited
geographical area, have a greater understanding of the issues specific to the rural poor,
enjoy greater acceptability amongst the rural poor and have flexibility in operations
providing a level of comfort to their clientele.

There are several legal forms of MFIs. However, firm data regarding the number of MFIs
operating under different forms is not available. It is roughly estimated that there are
about 1,000 NGO-MFIs and more than 20 Company MFIs. Further, in Andhra Pradesh,
nearly 30,000 cooperative organizations are engaged in MF activities. However, the
company MFIs are major players accounting for over80% of the microfinance loan
portfolio. An attempt is made in the following table to capture the various forms of MFIs:
Microfinance-

Definition

Microfinance is the provision of financial services to low-income clients,

including consumers and the self-employed, who traditionally lack access to banking and
related services. More broadly, it is a movement whose object is "a world in which as
many poor and near-poor households as possible have permanent access to an appropriate
range of high quality financial services, including not just credit but also savings,
insurance, and fund transfers." Those who promote microfinance generally believe that
such access will help poor people out of poverty.

As defined by the Asian Development Bank (ADB), it is - A provision of a

broad range of financial services such as deposits, loans, payment services, money
transfers, and insurance to poor and low-income households and their micro-enterprises.
In the late 90s, numerous agencies involved in micro-financing operations in India started
adding other financial services, including micro-insurance to its micro-finance
operations.

Microcredit, a part of microfinance, 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.

History

Ideas relating to microcredit can be found at various times in modern history.

Individualist anarchist Lysander Spooner wrote about the benefits of numerous small

loans for entrepreneurial activities to the poor as a way to alleviate poverty. Ideas relating
to microcredit were mentioned in portions of the Marshall Plan at the end of World War
II.

Microcredit is a financial innovation. The origins of microcredit in its current

practical incarnation, with attention paid by economists and politicians worldwide, can be
linked to several organizations founded in Bangladesh, especially the Grameen Bank in
the 1970s and onward, for which its founder Muhammad Yunus was awarded the Nobel
Peace Prize in 2006. In this country, it has successfully enabled extremely impoverished
people to engage in self-employment projects that allow them to generate an income and,
in many cases, begin to build wealth and exit poverty.
The Challenge

Traditionally, banks have not provided financial services to clients with

little or no cash income. Banks must incur substantial costs to manage a client account,
regardless of how small the sums of money involved. For example, the total profit from
delivering one hundred loans worth $1,000 each will not differ greatly from the revenue
that results from delivering one loan of $100,000. But the fixed cost of processing loans
of any size is considerable: assessment of potential borrowers, their repayment prospects
and security; administration of outstanding loans, collecting from delinquent borrowers
and so on. There is a break-even point in providing loans or deposits below which banks
lose money on each transaction they make. Poor people usually fall below it.

In addition, most poor people have few assets that can be secured by a bank as collateral.

Seen from a broader perspective, it has long been accepted that the development of a
healthy national financial system is an important goal and catalyst for the broader goal of
national economic development. However, the efforts of national planners and experts to
develop financial services for their nations' majorities have often failed since World War
II. Because of certain difficulties, when poor people borrow they often rely on relatives
or a local moneylender, whose interest rates can be very high. Hopes of quickly putting
them out of business have proven unrealistic, even in places where microfinance
institutions are very active.

While the success of Grameen Bank (which now serves over seven million poor
Bangladeshi women) has inspired the world, it has proved difficult to replicate this
success in practice. In nations with lower population densities, meeting the operating
costs of a retail branch by serving nearby customers has proven considerably more
challenging.

Need for Micro financing: why did it arise?

Since the 1950s, various governments in India have experimented with a large number of
grant and subsidy based poverty alleviation programmes. Studies show that these
mandatory and dedicated subsidised financial programmes, implemented through
banking institutions, have not been fully successful in meeting their social and economic
objectives:

The common features of these programmes were :

i. target orientation

ii. based on grant/subsidy, and

iii. credit linkage through commercial banks.

These programmes

a. were often not sustainable

b. perpetuated the dependent status of the beneficiaries

c. depended ultimately on government employees for delivery

d. led to misuse of both credit and subsidy and

e. were treated at best as poverty alleviation interventions.

Banks too never really looked on them as a profitable and commercial activity.

According to a 1995 World Bank estimate, in most developing countries the formal
financial system reaches only the top 25% of the economically active population - the
bottom 75% have no access to financial services apart from moneylenders -

In India too the formal financial institutions have not been able to reach the poor
households, and particularly women, in the unorganised sector. Structural rigidities and
overheads lead to high cost of making small loans. Organisational philosophy has not
been oriented towards recognising the poor as credit worthy. The problem has been
compounded by low level of influence of the poor, either about their credit worthiness or
their demand for savings services. Micro-finance programmes have often been
implemented by large banks at government behest. Low levels of recovery have been
further eroded due to loan waiver programmes leading to institutional disenchantment
with lending to small borrowers.

All this gave rise to the concept of micro-credit for the poorest segment along with a new
set of credit delivery techniques. With the support of NGOs an informal sector
comprising small Self Help Groups (SHGs) started mobilizing savings of their members
and lending these resources among the members on a micro scale. The potential of these
SHGs to develop as local financial intermediaries to reach the poor has gained
recognition due to their community based participatory approach and sustainability -
recovery rates have been significantly higher than those achieved by commercial banks
inspite of loans going to poor, unorganised individuals without security or collateral.

Success stories in neighbouring countries, like Grameen Bank in Bangladesh, Bank

Rakiat in Indonesia, Commercial & Industrial Bank in Phillipines, etc., gave further boost
to the concept in India in the 1980s.

The Global Summit on Micro Finance held in Washington in Feb ‘97 set a global target
of covering 100 million poor families with credit by 2005 - it was expected that 25-30
million of these could be in India alone.

The poor in India define the micro-finance market. The Planning Commission estimate of
1993-94 says 36% of the population or 320 million people live below the poverty line -
there would be 140-150 million women alone living below the poverty line. Assuming
that only 30% of the country’s poor women are ready to adopt micro-finance as a method
of poverty alleviation, it is estimated that 40-45 million poor women would need credit.

As against this, it is estimated that all agencies in India engaged in the provision of
micro-finance services, would have together covered barely 1 million poor people by the
close of 1998-99.
The most prominent national level micro-finance apex organisation providing micro-
finance services for women in India is the National Credit Fund for Women or the
Rashtriya Mahila Kosh (RMK).

Boundaries and Principles

Theoretically, microfinance may encompass any efforts to increase access to, or improve
the quality of, financial services poor people currently use or could benefit from using.
For example, poor people borrow from informal moneylenders and save with informal
collectors. They receive loans and grants from charities. They buy insurance from state-
owned companies. They receive funds transfers through remittance networks (like
Hawala).

There are not many bright lines that can sharply distinguish microfinance from similar
activities. Claims could be made that a government that orders state banks to open
deposit accounts for poor consumers, or a moneylender that engages in usury, or a charity
that runs a heifer pool are engaged in microfinance. Furthermore, correcting the problem
of access is best done by expanding the number of financial institutions available to them,
as well as the capacity of those institutions. In recent years there has been increasing
emphasis on expanding the diversity of those institutions as well, since different
institutions serve different needs.

Some principles that summarize a century and a half of development practice were
encapsulated in 2004 by Consultative Group to Assist the Poor (CGAP) and endorsed by
the Group of Eight leaders at the G8 Summit on June 10, 2004.

1. Poor people need not just loans but also savings, insurance and money transfer

services.
 2. Microfinance must be useful to poor households: helping them raise income, build

up assets and/or cushion themselves against external shocks.

3. "Microfinance can pay for itself." Subsidies from donors and government are
scarce and uncertain, and so to reach large numbers of poor people, microfinance
must pay for itself.

4. Microfinance means building permanent local institutions.

5. Microfinance also means integrating the financial needs of poor people into a
country's mainstream financial system.

6. "The job of government is to enable financial services, not to provide them."

7. "Donor funds should complement private capital, not compete with it."

8. "The key bottleneck is the shortage of strong institutions and managers." Donors

should focus on capacity building.

9. Interest rate ceilings hurt poor people by preventing microfinance institutions from
covering their costs, which chokes off the supply of credit.

10. Microfinance institutions should measure and disclose their performance – both
financially and socially.

Microfinance can also be distinguished from charity. It is better to provide grants to

families who are destitute, or so poor they are unlikely to be able to generate the cash
flow required to repay a loan. This situation can occur for example, in a war zone or after
a natural disaster.

CONCEPT AND FEATURES OF MICRO-FINANCE

Micro-finance, as is being practiced by the National Credit Fund for Women or the
Rashtriya Mahila Kosh (RMK), could be defined as a set of services comprising the
following activities :

a) Micro- Small loans; primarily for income generation activities, but also for
credit: consumption and contingency needs.

b) Micro- thrift or small savings from borrowers’own resources.

savings:

The main features of the micro-finance services being provided are :

1. It is a tool for empowerment of the poorest; the higher the income and better the
asset position of the borrower, the lower the incremental benefit from further equal
doses of micro-credit is likely to be.

2. Delivery is normally through Self Help Groups (SHGs).

3. It is essentially for promoting self-employment; the opportunities of wage

employment are limited in developing countries - micro finance increases the
productivity of self-employment in the informal sector of the economy - generally
used for (a) direct income generation (b) rearrangement of assets and liabilities for
the household to participate in future opportunities and (c) consumption
smoothing.

4. It is not just a financing system, but a tool for social change, specially for women -
it does not spring from market forces alone - it is potentially welfare enhancing -
there is a public interest in promoting the growth of micro finance - this is what
makes it acceptable as a valid goal for public policy.

5. Because micro credit is aimed at the poorest, micro-finance lending technology

needs to mimic the informal lenders rather than the formal sector lending. It has
 to : a) provide for seasonality (b) allow repayment flexibility (c) eschew
bureaucratic and legal formalities (d) fix a ceiling on loan sizes.

Microfinance approach is based on certain proven truths which are not always
recognised. These are :

• That the poor are bankable; successful initiatives in micro finance demonstrate that
there need not be a trade off between reaching the poor and profitability - micro
finance constitutes a statement that the borrowers are not ‘weaker sections’ in need
of charity, but can be treated as responsible people on business terms for mutual
profit.

• That almost all poor households need to save, have the inherent capacity to save
small amounts regularly and are willing to save provided they are motivated and
facilitated to do so .

• That easy access to credit is more important than cheap subsidised credit which
involves lengthy bureaucratic procedures - (some institutions in India are already
lending to groups or SHGs at higher rates - this may prevent the groups from
enjoying a sufficient margin and rapidly accumulating their own funds, but
members continue to borrow at these high rates, even those who can borrow
individually from banks).

• 'Peer pressure' in groups helps in improving recoveries.

Types of Organizations and Composition of the Sector

Microfinance providers in India can be classified under three broad categories: formal,
semiformal, and informal.

Formal Sector
The formal sector comprises of the banks such as NABARD, SIDBI and other regional
rural banks (RRBs).

They primarily provide credit for assistance in agriculture and micro-enterprise

development and primarily target the poor. Their deposits at around Rs. 350billion and
of that, around Rs. 250billion has been given as advances. They charge an interest of 12-
13.5% but if we include the transaction costs (number of visits to banks, compulsory
savings and costs incurred for payments to animators/staff/local leaders etc) they come
out to be as high as 21-24%.

Semi - formal Sector

The majority of institutional microfinance providers in India are semi-formal

organizations broadly referred to as MFIs. Registered under a variety of legal acts, these
organizations greatly differ in philosophy, size, and capacity. There are over 500 non-
government organizations (NGOs) registered as societies, public trusts, or non-profit
companies.

Informal Sector

In addition to friends and family, moneylenders, landlords, and traders constitute the
informal sector. While estimates of their importance vary significantly, it is undeniable
that they continue to play a significant role in the financial lives of the poor.

Micro-finance in India:-

In India there is much need of tools of poverty eradication like micro-finance and self
help group. Since India has one of the largest numbers of poor in the world. More than
27% or 30 crore people in India live below poverty line (earn less than $1 per day). And
about 87 percent of the poorest households do not have access to easy credit. The demand
for microcredit has been estimated at up to $30 billion but the supply for the same is less
than $2.2 billion combined by all involved in the sector. Hence to alleviate them from the
crutches of poverty and to reduce the number of poor to the half of the current level as
envisaged in the Millennium Development Goal setup by the UN which is to be achieved
till the year 2015 the Government has taken several steps but they are not sufficient. The
Government has also directed the banks for priority sector lending. Though the concept
of micro-finance is not new for India since Ela Bhatt in the year 1974 established the
Self-Employed Women's Association (SEWA). India is still an agriculture-based country
and this sector contributes substantially to the GDP of India. Around seventy percent of
the Indian population still depends on agriculture and allied areas for livelihood. And
most of the farmers don’t have access to the basic financial services. Also this sector has
a large growth opportunity. This is why most of the companies are now focussing on this
sector and making their business strategy keeping in mind this segment of consumers.
The impact of this sector can be easily seen in the case where most of the FMCG (Fast
Moving Consumer Goods) companies are coming with the smaller and value for money
pack and with introductory prices for their products. But still this sector has not been able
to get access to all the financial services. Following are some details about the rural
economy in India :-

• A target of Rs 225,000 crores for farm credit has been set for the financial year
2007-2008.
• 50 lakh new farmers have been brought under the banking system.
• Agricultural Insurance to facilitate agricultural loans to the farmer.
• Allocation for the Rural Infrastructure Development Fund to be increased
substantially.
• In the financial year 2006-07, 35 projects were successfully completed.
• Additional irrigation of 900,000 hectares has been targeted in the financial year
2007 - 2008.
• For better farm yields modern farming techniques has been set up.
 • Direct disbursement of subsidy to rural Indian farmers has been arranged through
a pilot program.
• Rs. 78000 crore farm loan has been waived by the Government in the year 2008-
09 budget.
• The MSP (Minimum Support Price) for most of the crops have been increased,
hence there will be more supply of money in the rural market.

As the economy of any country develops, the share of agriculture sector in the GDP
(Gross Domestic Product) decreases, with the number of people working in this sector. In
Indian economy also the contribution of agriculture sector in GDP has decreased from
40% to 25% between the years 1980 to 2000 but there has not been any substantial
decrease in the number of the people employed in this sector which is now approximately
58% from 60% in the same period. So we can say that the agriculture sector still employs
the major part of workforce in the country. This shows that the productivity n this sector
has not improved as it should be. This might be due to the lack of the resources which
can be provided by the micro-financing. Not only agriculture but the rural economy can
grow with the help of other allied services like the demand for milk, meat eggs are
increasing which can be catered through the rural economy and in this way the other
micro-finance activity of micro insurance (cattle, crop etc.) can also be developed. The
other rural businesses are the handicraft and wood business which also need economic
help. Rural people have very low access to institutionalized credit (from commercial
bank). Because of the following reasons :-

• Bankers feel that it is full of risks and uncertainties.

• High transaction costs involved, hence percentage of transaction cost involved in
the small loans which is not a beneficial business for banks.
• Unfavourable policies like caps on interest rates which effectively limits the
viability of serving the poor.
• While MFIs have shown that serving the poor is not an unviable proposition there
are issues that have constrained MFIs while scaling up. These include
• Lack of an appropriate legal vehicle.
 • Limited access to equity.
• Difficulty in accessing low cost on-lending funds (as of now they are unable to
offer savings services in a legitimate.
• About 56 % of the poor still borrow from informal sources.
• 70 % of the rural poor do not have a deposit account.
• 87 % have no access to credit from formal sources.
• Less than 15 % of the households have any kind of insurance.
• Negligible numbers have access to health insurance.

Steps taken by India to promote micro-financing

It set up development banks, such as SIDBI, NABARD which focused on rural credit and
micro-financing. NGOs and SHGs were encouraged to become the government’s arm in
extending micro-credit to the poor. They were provided supplementary credit needed to
fund the credit, paper work was reduced between them and the banks. Also, the
government assisted in mobilizing funds from formal financial institutions to meet the
larger credit needs of these organizations. 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.

Debates at the boundaries

There are several key debates at the boundaries of microfinance.

Practitioners and donors from the charitable side of microfinance frequently argue for
restricting microcredit to loans for productive purposes–such as to start or expand a
microenterprise. Those from the private-sector side respond that because money is
fungible, such a restriction is impossible to enforce, and that in any case it should not be
up to rich people to determine how poor people use their money.

Perhaps influenced by traditional Western views about usury, the role of the traditional
moneylender has been subject to much criticism, especially in the early stages of modern
microfinance. As more poor people gained access to loans from microcredit institutions
however, it became apparent that the services of moneylenders continued to be valued.
Borrowers were prepared to pay very high interest rates for services like quick loan
disbursement, confidentiality and flexible repayment schedules. They did not always see
lower interest rates as adequate compensation for the costs of attending meetings,
attending training courses to qualify for disbursements or making monthly collateral
contributions. They also found it distasteful to be forced to pretend they were borrowing
to start a business, when they were often borrowing for other reasons (such as paying for
school fees, dealing with health costs or securing the family food supply). The more
recent focus on inclusive financial systems affords moneylenders more legitimacy,
arguing in favour of regulation and efforts to increase competition between them to
expand the options available to poor people.

Modern microfinance emerged in the 1970s with a strong orientation towards private-
sector solutions. This resulted from evidence that state-owned agricultural development
banks in developing countries had been a monumental failure, actually undermining the
development goals they were intended to serve. Nevertheless public officials in many
countries hold a different view, and continue to intervene in microfinance markets.

There has been a long-standing debate over the sharpness of the trade-off between
'outreach' (the ability of a microfinance institution to reach poorer and more remote
people) and its 'sustainability' (its ability to cover its operating costs—and possibly also
its costs of serving new clients—from its operating revenues). Although it is generally
agreed that microfinance practitioners should seek to balance these goals to some extent,
there are a wide variety of strategies, ranging from the minimalist profit-orientation of to
the highly integrated not-for-profit orientation. This is true not only for individual
institutions, but also for governments engaged in developing national microfinance
systems.

Microfinance experts generally agree that women should be the primary focus of service
delivery. Evidence shows that they are less likely to default on their loans than men.
Industry data from 2006 for 704 MFIs reaching 52 million borrowers includes MFIs
using the solidarity lending methodology (99.3% female clients) and MFIs using
individual lending (51% female clients). The delinquency rate for solidarity lending was
0.9% after 30 days (individual lending—3.1%), while 0.3% of loans were written off
(individual lending—0.9%). Because operating margins become tighter the smaller the
loans delivered, many MFIs consider the risk of lending to men to be too high. This focus
on women is questioned sometimes, however. A recent study of microenterpreneurs from
Sri Lanka published by the World Bank found that the return on capital for male-owned
businesses (half of the sample) averaged 11%, whereas the return for women-owned
businesses was 0% or slightly negative.

Microfinancial services are needed everywhere, including the developed world. However,
in developed economies intense competition within the financial sector, combined with a
diverse mix of different types of financial institutions with different missions, ensures
that most people have access to some financial services. Efforts to transfer microfinance
innovations such as solidarity lending from developing countries to developed ones have
met with little achievement.

Some other facts about Indian MFIs are given below :-

Growth of linked SHG's in the regions

From the above table we can easily see that the main beneficiary of the micro-finance
system have been the southern states, where the density of the MFIs have been more than
the northern region. This is why the Government has chosen 13 priority states for
focussing more and providing the basic financial services. The reason behind the lagging
of northern states might be the lack of the awareness and literacy. This is the place where
we need to implement the Grameen Bank’s policy of making 16 decisions while giving
loans and need to educate the people and train the people about where and how to invest
their loaned money and make maximum output from it. Now let us see the growth of
SHGs in the 13 priority states nominated by the government:

Growth of linked SHG's in 13 Priority States

As per the data available in above table, the SBLP (SHGs Bank Linkage Programme) has
expanded by 37 percent in 13 priority states which account for 67 percent of the rural
poor. These states have been identified by NABARD in 2005 for their special efforts and
location – specific strategies. The Western region experienced the fastest growth i.e.
about 63% of all regions due to rapid growth in Maharashtra and the share of western
region in the total number of groups linked is only 5 percentage points behind its share of
the total number of poor. The central and eastern regions are still lagging behind their
share of the poor by 21 and 11 percentage points respectively. Growth in the central
region was only 24% and subsequently, in the East was 33%. The main concerns have
been the states like Himachal Pradesh, Jharkhand, Madhya Pradesh and Uttar Pradesh.
Though there are some states which have done better in this regard and have more
numbers of SHGs than the other like Uttar Pradesh, Maharashtra, Orissa, West Bengal
and Rajasthan. Here we can note that some states like Maharashtra, Bihar, Assam and
Rajasthan has reported a tremendous growth in the number of SHGs.

The main source for the finance of the SHGs and micro loans in India has majorly been
the commercial banks and RRBs (Regional Rural Banks).

Agency wise share of SHGs financed

The above table shows respective share of commercial banks, RRBs and cooperatives in
financing SHGs. As clearly visible, the share of commercial banks has gone up in 2006-
07, both in respect of number of loans and amounts disbursed, at the most of the expense
of RRBs in respect of share of number of loans and subsequently, at the expense of the
cooperatives in respect of share of loans disbursed. Now the main problem in front of our
MFIs is to arrange for the funds. Till now the main source of funds for Indian MFIs have
been the institutional debts and donations. And hence they are not self dependent and
they have to manage for their funds from different sources whereas the Grameen Bank is
self dependent for its funds. The main reason behind it is that the Grameen Bank is
allowed to accept deposits from its customers and in India it is not allowed to accept
deposits.
Sources of funds for microfinance operations

As clearly seen from the above bar graph, the whole structural shift has taken place due
to an increase in debt financing among Indian MFIs while net worth as a proportion of
the total has been reduced and a very limited flow of grants have failed to keep pace with
growth. The funds have been readily available from both private and public commercial
banks thereby facilitating the borrowings to reach three quarters of total liabilities on MFI
balance sheets.
MFIs as a beneficial business strategy:-

The MFIs have been proved a very effective and profitable business strategy over the
years. The Indian as well as the other countries MFIs have earned a handsome profit
below are some data regarding it :-

The above mentioned data is about State Bank of India. It shows that the number of
SHGs linked, the amount disbursed, the number of beneficiaries are increasing i.e. the
service is being available to more and more persons effectively and efficiently.

Similarly the ICICI bank and many other banks apart from NABARD, the apex body for
the rural and agricultural financing, have done impressive work from the model was
derived from the SHG-Bank linkage program of NABARD. Through this program, banks
financed Self Help Groups (SHGs) which had been promoted by NGOs and government
agencies. NABARD’s bank linkage program has cumulatively reached a total of 9.4 lakh
SHGs with about 1.4 crore households. Grameen Bank which has so far loaned $6.5
billion is a highly successful micro-lender. It had started with providing a loan of $27 to a
group of impoverished women in the year 1976. Over 95% of the Grameen Bank's 3.8
million members are women. It has reversed conventional banking practice by removing
the need for collateral and created a banking system based on mutual trust,
accountability, participation and creativity. It has lifted people in 80,000 villages of
Bangladesh out of poverty. It pays out $500 million a year in loans and has a repayment
record that exceeds 98%. It currently has loans in the hands of borrowers totalling over
US$300 million, with deposits of a similar amount. In India SKS micro-finance alone has
made loans worth $149 million and is said to be among the world's fastest-growing
microfinance organizations. The commercial banks have main problem about micro-
lending is that the processing fees and other fees for a small loans is very high as a
percent of the total loan size which makes it a non profitable business for them but after
bank linkage initiative by NABARD they have found it very profitable and beneficial for
both of them, the customer and the bank.

Operating Expense Ratio of Indian MFIs by loan size

Analysis of operating expense ratio by loan size is the major determinant of operating
efficiency. As the loan size increases from Rs. 3,000 to Rs. 10,000, the operating expense
ratio declines from 25% down to an average of around 12%. That is why, the normal
banks do not provide small size loans directly but they hire a third party lender for such
loans. And the commercial banks have linkages with the other local NGOs and SHGs to
operate successfully and profitably. There are several insurance schemes are also very
popular among the rural people like insuring their livestock, managing agriculture risk
like SEWA and Rainfall Insurance etc.

Financial needs of poor people

Financial needs and financial services.

In developing economies and particularly in the rural areas, many activities that would be
classified in the developed world as financial are not monetized: that is, money is not
used to carry them out. Almost by definition, poor people have very little money. But
circumstances often arise in their lives in which they need money or the things money
can buy.

In Stuart Rutherford’s recent book The Poor and Their Money, he cites several types of
needs:

• Lifecycle Needs: such as weddings, funerals, childbirth, education, homebuilding,

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

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

• Inappropriate donor subsidies

• Poor regulation and supervision of deposit-taking MFIs
• Few MFIs that meet the needs for savings, remittances or insurance
• Limited management capacity in MFIs
• Institutional inefficiencies
• Need for more dissemination and adoption of rural, agricultural microfinance
methodologies.

Ways in which poor people manage their money

Saving up

Rutherford argues that the basic problem poor people as money managers face is to
gather a 'usefully large' amount of money. Building a new home may involve saving and
protecting diverse building materials for years until enough are available to proceed with
construction. Children’s schooling may be funded by buying chickens and raising them
for sale as needed for expenses, uniforms, bribes, etc. Because all the value is
accumulated before it is needed, this money management strategy is referred to as 'saving
up'.

Often people don't have enough money when they face a need, so they borrow. A poor
family might borrow from relatives to buy land, from a moneylender to buy rice, or from
a microfinance institution to buy a sewing machine. Since these loans must be repaid by
saving after the cost is incurred, Rutherford calls this 'saving down'. Rutherford's point is
that microcredit is addressing only half the problem, and arguably the less important half:
poor people borrow to help them save and accumulate assets. Microcredit institutions
should fund their loans through savings accounts that help poor people manage their
myriad risks.
Saving down

Most needs are met through mix of saving and credit. A benchmark impact assessment of
Grameen Bank and two other large microfinance institutions in Bangladesh found that for
every $1 they were lending to clients to finance rural non-farm micro-enterprise, about
$2.50 came from other sources, mostly their clients' savings. This parallels the experience
in the West, in which family businesses are funded mostly from savings, especially
during start-up.

Recent studies have also shown that informal methods of saving are unsafe. For example
a study by Wright and Mutesasira in Uganda concluded that "those with no option but to
save in the informal sector are almost bound to lose some money – probably around one
quarter of what they save there.

The work of Rutherford, Wright and others has caused practitioners to reconsider a key
aspect of the microcredit paradigm: that poor people get out of poverty by borrowing,
building microenterprises and increasing their income. The new paradigm places more
attention on the efforts of poor people to reduce their many vulnerabilities by keeping
more of what they earn and building up their assets. While they need loans, they may find
it as useful to borrow for consumption as for microenterprise. A safe, flexible place to
save money and withdraw it when needed is also essential for managing household and
family risk.
REASONS FOR FOCUS ON POOR WOMEN

The National Credit Fund for Women or the Rashtriya Mahila Kosh (RMK) is
working exclusively for poor women. Its loans are available solely and entirely to this
target group. The reasons for this are several :

• Among the poor, the poor women are the most disadvantaged - they are
characterized by lack of education and access to resources, both of which are
required to help them work their way out of poverty and for upward economic and
social mobility.
• The problem is more acute for women in countries like India, despite the fact that
women’s labour makes a critical contribution to the economy - this is due to low
social status and lack of access to key resources.
• Evidence shows that groups of women are better customers than men - they are
better managers of resources - benefits of loans are spread wider among the
household if loans are routed through women - mixed groups are often
inappropriate in Indian society - record of all-male groups is worse than that of all-
women groups, everywhere.

RMK - ITS PROFILE, AIMS & OBJECTIVES, ROLES

It has been felt for some time in India that the credit needs of poor women,
particularly in the unorganised sector, have not been adequately addressed by the
formal financial institutions in the country. The vast gap between demand for and
supply of credit to this sector established the need for a National Credit Fund for
Women.

The National Credit Fund for Women or the Rashtriya Mahila Kosh (RMK)
was set up in March 1993 as an independent registered society by the Department
 of Women & Child Development in Government of India’s Ministry of Human
Resource Development with an initial corpus of Rs. 310,000,000 - not to replace
the banking sector but to fill the gap between what the banking sector offers and
what the poor need.

Its main objectives are:

• To provide or promote the provision of micro-credit to poor women for income

generation activities or for asset creation.
• To adopt a quasi-informal delivery system, which is client friendly, uses simple
and minimal procedures, disburses quickly and repeatedly, has flexibility of
approach, links thrift and savings with credit and has low transaction costs both for
the borrower and for the lender.
• To demonstrate and replicate participatory approaches in the organisation of
women’s groups for thrift and savings and effective utilisation of credit.
• To use the group concept and the provision of credit as an instrument of women’s
empowerment, socio-economic change and development.
• To cooperate with and secure the cooperation of the Government of India, State
Governments, Union Territory administrations, credit institutions, industrial and
commercial organisations, NGOs and others in promoting the objectives of the
Kosh.
• To disseminate information and experience among all these above agencies in the
Government and non-government sectors in the area of microfinance for poor
women.
• To receive grants, donations, loans, etc., for the furtherance of the aims and
objectives of the Kosh.

The office of the Kosh is situated in New Delhi. The Kosh does not have any
branch offices.
The Executive Director is the chief executive officer of the Kosh. The Executive
Director functions under the overall supervision, direction and control of the
Governing Board.

The Governing Board comprises 16 members consisting of senior officers of the

Government of India and State Governments, specialists and representatives of
NGOs active in the field of microfinance for women. The Governing Board is
chaired by the Minister in charge of the Department of Women & Child
Development in the Government of India.

The General Body of the Kosh consists of all members of the Board, institutional
members and individual members.

The Kosh has three main roles:

Wholesaling Role -

It acts as a wholesaling apex organisation for channelising funds from government

and donors to retailing intermediate microfinance organisations (IMOs).

[The Kosh has so far received only a one-time grant from government and has not
needed to raise funds from any other sources].

Market Development Role -

It develops the supply side of the micro finance market by offering institution
building support to new and existing-but-inexperienced IMOs by structures of
incentives, transfers of technology, training of staff and other non-financial
services -

[The Kosh realises that it can play a value adding wholesaling role only when a
sufficiently large and well established micro finance sector already exists - this
depends on the number of IMOs and the sustainability of IMOs - subsidized
institution building increases the equity of any IMO as much as grants do - large
and premature disbursement of funds to the IMO can reduce the effectiveness of
any institution building effort].

Advocacy Role - whereby RMK acts as an advocate or agent for influencing

development and micro-finance policy and creating a more enabling policy and
legal environment for spread of micro-finance activities in India. Being a creation
and a representative of the government, RMK has a particular advantage in this
area.

Current Scenario of Micro - financing in India

With 75 million poor households potentially requiring financial services, the

microfinance market in India is among the largest in the world. Estimates of
household credit demand vary from a minimum of Rs. 2,000 to Rs. 6,000 in rural
areas and Rs. 9,000 in urban settings. Given that 80 percent of poor households are
located in rural areas, total credit demand ranges between Rs. 255 billion and Rs.
500 billion. However, only Rs.18 billion of this amount has been generated so far.
The reason for this is that major portion for rural crediting has been from the
informal sector and this is at a very high interest rate, thus reducing the volumes of
such credits, and by far has been for investment purposes (13%) and more for
family emergencies (29%) and social expenditures (19%).

There are a number of factors why rural crediting by the formal sector has not
taken pace so far.

 High fiscal deficits have meant that Government is appropriating a large share
of financial savings for itself.
 Persisting interest rate restrictions reduce the attractiveness of lending,
particularly to small, rural clients.

On the other hand, informal credits have been attractive albeit high interest rates
due to:

 Flexible repayment options

 Convenience and frequency with which such loans can be accessed

 Less reliance on collateral (only 16.5% of households report providing

collateral against the loan)

Meeting the Demands

Inadequacies in rural access to formal finance and the seemingly extortionary

terms of informal finance for the poor provide a strong need and ample space for
innovative approaches to serve the financial needs of India’s rural poor. A gap of
as high as 85%-90% in supply and demand cannot be closed by only the existing
MFIs because many, particularly the younger and smaller organizations, lack the
institutional capacity to expand.

Key Concerns

All said and done however, there are certain key issues that need to be tackled
before ensuring the benefits of micro-financing would reach their optimum levels.

Scaling-Up Microfinance: Microfinancing through formal and semi-formal can

reach self-sustainability only when there is substantial volume which they can
generate.
Effective policy, legal and regulatory framework - An enabling policy, legal
and regulatory framework is critical to scaling-up. For this the govt. needs to take
certain steps as:

 Reducing minimum start-up capital requirements to facilitate the

transformation of MFIs into NBFCs

 Encouraging multiple sources of equity for MFIs

 Developing a set of prudential norms that are more appropriate to institutions

serving the poor, and set up supervision mechanisms around those norms.

Inclusiveness and competition in the microfinance sector can generate high

payoff. This will not only give the borrower a no of options for raising debt, but
also drive the costs down to raise them.

Proven Impact of Micro-financing

The effects of micro-financing trickling down to the poorest of Indians can already
be observed in the Indian economy.

Improvement in Asset Position

The average increase in assets was about 72%, from Rs6,843 to Rs11,793 in real
terms (in one to three years) in most of the households where micro-financing has
been extended. Before given the credit, one in three households had no assets;
after that, it changed to one in six.
Increase in Savings

While most households given micro-credits were having negligible or no savings,

this improved to Rs. 160-Rs. 460 and in some cases, the average household
savings rose to as high as Rs. 1444.

Changes in Borrowing Patterns

With improvement in above two factors, people were more ready to borrow from
the semi-formal and formal sector rather than their traditional creditors i.e. friends
and family, moneylenders, landlords.

Looking Ahead

What will it take for micro credit to become a mainstream mode for lending? One
option is to provide other financial services similarly built around small amounts
of money, such as micro insurance. There is tremendous scope to design well
adapted insurance products for the poor in the insurance sector as well. A number
of initiatives that should be taken in this area as:

Mothering of Development Innovations

The institution aims to promote and nurture new ideas on different development
themes, which have larger potential to address the livelihoods and development of
the poor in a region viz., microfinance, small scale irrigation, dry land agriculture,
ICT for poor, working with panchayats.

Promoting Institutions to reach Scale

Exclusive thematic organizations will be promoted to undertake development

work with a sub-sectoral focus. The primary role of the institutions is promotional
and to ensure that benefits reach a large number of poor with quality.
Human Resource Development

The institution would bring young professionals into the development sector and
provide them an opportunity to practice and develop relevant knowledge, attitudes
and skills to work long term in the development sector.

Hence, with proper regulation and a major thrust given by the government to
provide a suitable environment for micro-financing, it would certainly bring out
the most optimum results in alleviating poverty from the country and allowing the
poorest on Indian in joining the bandwagon of prosperity and growth, that India is
poised to achieve in the years to come.

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 collateral.

Advantages of financing through SHGs

An economically poor individual gain strength as part of a group. Besides,

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

The SHG model was initiated by the National Bank for Agriculture and Rural
Development (NABARD) through the SHG-Bank Linkage Programme in the
early 1990s. Today the SHG model, which links informal groups of women to the
mainstream banking system, has the largest outreach to microfinance clients in the
world.

List of Top Microfinance Companies in India

1. Spandana Sphoorty Financial Ltd (SSFL)

2. SKS Microfinance Ltd (SKSMPL)

3. Asmitha Microfin Ltd (AML)

4. Share Microfin Limited (SML)

5. Shri Kshetra Dharmasthala Rural Development Project (SKDRDP)

6. Bhartiya Samruddhi Finance Limited (BSFL)

7. Bandhan

8. Cashpor Micro Credit (CMC)

9. Grama Vidiyal Micro Finance Pvt Ltd (GVMFL)

10. Grameen Financial Services Pvt Ltd (GFSPL)

 A Primer on Microfinance in India

Indian microfinance is dominated by two operational approaches: self-help groups

(SHGs), and microfinance institutions (MFIs), in addition to a few cooperative forms.
The SHG model was initiated by the National Bank for Agriculture and Rural
Development (NABARD) through the SHG-Bank Linkage Programme in the early
1990s. Today the SHG model, which links informal groups of women to the mainstream
banking system, has the largest outreach to microfinance clients in the world. MFIs
emerged in the late 1990s to harness social and commercial funds available for on-
lending to clients. Today there are over 1,000 Indian MFIs.

According to estimates from Intellecap's inverting the Pyramid: The Changing Face of
Indian Microfinance (2007), SHGs and MFIs have together disbursed USD 3.7 billion in
microloans through March 2007. While the SHG model provides the majority of
disbursements, the MFI model has demonstrated a higher growth rate. From 2003 to
2007, the MFI disbursement share rose from 28% to 47% of all Indian microfinance
loans - a value of USD 1.7 million. Despite such growth, estimates suggest that the
current supply of microcredit amounts to only about 7% of potential demand.

Self-Help Groups

According to NABARD, almost 3 million SHGs have linked to nearly 500 banks since
the program started, reaching over 11 million households across.

SHG Federations

Some NGOs such as MYRADA and Dhan Foundation have promoted federations. These
apex institutions aggregate savings from SHGs and act as intermediaries between
financial institutions and SHGs. SHG Federations were envisioned as an exit strategy for
the promoting agencies and a means of ensuring SHG sustainability. However, most
federations have yet to demonstrate operational self-sufficiency, the ability to mobilize
sustained financial resources and most importantly, the institutional capacity to run
without the promoting agency's support.

Financing Strategies

Commercial banks, regional rural banks (RRBs) and cooperative banks primarily fund
the SHG-Bank Linkage Programme, and NABARD in turn re-finances them. Credit lines
to SHGs are critically limited, as they are based on a certain multiple of SHG members'
savings accounts within banks. While the cumulative savings of SHGs could serve as a
low-cost source of funds for on lending, their potential is limited by the lack of
aggregated savings across SHGs. Commercial equity investments are not available to for
SHGs due to their informal status

Illusive socio-economic impacts

SHGs form a critical link for poor women to access a variety of financial services. They
are effective platforms for women to participate in politics through awareness campaigns
and community action. SHGs have also emerged as "last mile" channels for government
to distribute financial benefits and for corporations to retail their products through
member-entrepreneurs. Even so, questions remain about the ability of SHGs to attain a
primary objective - economic empowerment of poor women.

Microfinance Institutions (MFIs)

Indian MFIs range from Grameen-replicator NGOs to for-profit entrepreneurial ventures

to developmental NGOs which
moved from SHG promotion to
direct financial intermediation.
Based on asset sizes, MFIs can
be divided into three
categories:
 • Category 1: 5-6 institutions which have attracted commercial capital and scaled
up dramatically over last five years. These MFIs, which include SKS, SHARE and
Spandana, were initiated in the 1990s as NGOs promoting SHGs or Grameen-style
programs but after 2000, converted into for-profit, regulated entities, mostly Non-
Banking Finance Companies (NBFCs).
• Category 2: Around 10-15 institutions with high growth rates, including both
NGOs and recently formed for-profit MFIs (mostly NBFCs). Many NGOs have
transformed into regulated, for-profit structures recently or are in process now, and
seek commercial equity investments. Examples include Grameen Koota, Bandhan
and ESAF.
• Category 3: The bulk of India's 1000 MFIs are NGOs struggling to achieve
significant growth. Most continue to offer multiple developmental activities in
addition to microfinance and have difficulty accessing growth funds.

MFI Mainstreaming and Commercialization

While SHGs tend to have a multi-sectoral development approach and are challenged by
sustainability, most MFIs focus on scaling up microcredit operations while creating a
sustainable legal structure and business model. The MFI approach is generally more
attractive to commercial capital and mainstream market players.

Increasing outreach

Many Indian MFIs are increasingly becoming national players. As of 2008, at least 12
MFIs operate in more than one state. There is an increased focus on urban market and a
new generation of MFIs, such as Ujjivan and Swadhaar, operate solely in urban areas.

Scaling up Indian Microfinance: Opportunities and Considerations for the Future

While Indian microfinance has grown substantially over the last decade, future success
will require informed decisions and proactive strategies by key stakeholders, taking
advantage of emerging opportunities and mitigating potential risks.

Funder coordination for retail microfinance

Most investors, apart from a few funds such as Bellwether, Lok Capital, and Aavishkaar-
Goodwell, tend to focus on the established Category 1 MFIs, leaving plenty of room for
more early-stage MFI investments. Complementing this, the space can benefit from
specialized microfinance debt financing vehicles that provide an alternative to
commercial bank funding and an increased participation from capital markets through
mechanisms such as bond issues and securitization.

Supporting infrastructure needed

As in any industry, microfinance can expect to see a period of consolidation with mergers
and acquisitions, innovative financing mechanisms as well as unfamiliar risks such as
competition and inadequate growth management. To complement this, parallel
investments need to build a supporting ecosystem. Specialized advisory assistance is
particularly relevant for MFIs that plan IPOs and bond issues and experiment with
technology interventions such as mobile banking. Human resources for microfinance,
both in terms of quantity and quality, will prove to be a key challenge, especially with a
booming Indian economy and increasing competition for good quality human resources.
Adoption of good governance practices and quality monitoring and reporting will be
critical to ensure balanced growth and satisfied stakeholders

Policy
Recognizing that SHGs and MFIs can form key actors in the pursuit of an inclusive
financial system, the Indian policy makers have tried to adopt many promotional and
regulatory measures over time, the latest being the proposed Microfinance Bill. The bill
is expected to identify a specialized regulator and guidelines for NGO-MFIs while the
for-profit entities will be governed by the Reserve Bank of India regulations. Their legal
status will determine their future scope of services, ability to mobilize various types of
finance and to be part of the mainstream financial system.

Credit Mechanisms Adopted by HDFC (India) for Funding the Low Income Group
Beneficiaries

HDFC has been making continuous and sustained efforts to reach the lower income
groups of society, especially the economically weaker sections, thus enabling them to
realise their dreams of possessing a house of their own.

HDFCs' response to the need for better housing and living environment for the poor,
both, in the urban and rural sectors materialised 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. HDFCs' approach to low-income lending
has been extremely professional and developmental in nature. Negating the concept of
dependence, HDFCs' low cost housing schemes are marked by the emphasis on people’s
participation and usage of self-help approach wherein the beneficiaries contribute both in
terms of cash and labour for construction of their houses. HDFC also ensures that the
newly constructed houses are within the affordability of the beneficiaries, and thus
promotes the usage of innovative low cost technologies and locally available materials
for construction of the houses.

For the purpose of actual implementation of the low cost housing projects, HDFC
collaborates with organisations, both, Governmental and Non-Governmental. Such
organisations act as co-ordinating agencies for the projects involving a collective of
individuals belonging to the Economically Weaker Sections. The projects could be either
in urban or rural areas.

The security for the loan is generally the mortgage of the property being financed.
The construction work is regularly monitored by the co-ordinating agencies and HDFC.
The loans from HDFC are disbursed depending upon the stages of construction. To date,
HDFC has experienced 100% recovery for the loans disbursed to various projects.

Efficiency with Growth of MFIs:-

Following is the table showing the data about the scenario of Indian micro-finance :-

Fact sheet on coverage and growth of Indian microfinance, 2007-08

Most of the Indian MFIs are working in profit. Following is the table showing the
operating and financial information about the SKS Micro-finance India :-
Operating and Financial Information
The above table clearly shows that there is progress in almost all the fields for the SKS
Micro-Finance.

There have been both positive and negative critical developments in the Indian MFI
sector. On the positive side, there has been leverage of MFIs newly found management
expertise to achieve scale and spread their operations well beyond their traditional
operational areas. On the negative side, they have been under attack from politicians and
bureaucrats dominant in some of their traditional operational areas in Andhra Pradesh and
Karnataka as their loan recovery practices are under scrutiny and their interest rates
appear to be exorbitant. So these types of irregularities should not be there. And there
should be a sense of responsibility in the staff of all the MFIs and proper training should
be given to them. There are some social responsibilities of MHIs like reaching poor or
excluded clients, improving the quality and appropriateness of financial services,
contributing to employment and enterprise growth, improving the economic and social
conditions of clients and their households, and ensuring social responsibility to clients, to
staff and to the communities in which they work. These should also be taken care.

There have not only been rural MFIs but also the urban MFIs and There has been an
upsurge of interest in urban microfinance with several recent start-ups in the metros,
promoted by professionals who have a proven track record of successful careers in
banking and other fields. And new micro-finance services like health insurance,
education loans etc.
These are given below :

As can be seen from the table that the percentage of people using these facilities are still
very low and hence this sector has a lot of potential.

Technology:-

The use of technology is another important aspect of the Indian MFIs and technological
solutions such as branchless banking is needed. Ujjivan for instance is taking advantage
of broadband connectivity in urban areas by centralizing all data entry at the head office
and having the branches merely scan daily loan transaction data sheets and transmit them
by email. SEWA and Swadhaar are using biometric smart cards to make it easier for their
members to operate savings accounts through ATMs, since they tend to forget their PINs.
There is a very god usage of IT by MFIs like they are using several software for the
Grameen model like FAMIS Plus, Delphix, Micro Financier, Banksoft etc. IIT Chennai,
The Tenet group, and ICICI Bank have designed a secure, low cost, and low maintenance
ATM called the Gramateller. The idea behind this is to increase financial institutions'
outreach and penetration in rural areas.
MICRO FINANCING INSTITUTIONS IN PUNJAB

* Mother Self-Help Groups

* Punjab Pradesh Mahila Congress

* Punjab National Bank

* Umeed Khanna Foundation

* Help the People Fund

* PCI

* Bhai Ghanya Health Insurance Scheme

Mother Self-Help Groups

http://www.punjabeducation.gov.in/sub-pages/mshg.htm
This link is an EXCELLENT resource and provides a list of mother self-help groups by
village and district. If you click on the village names, you can find the names and roles of
members.

Punjab Pradesh Mahila Congress

Mahila Congress will be forming self-help groups and microfinance programs for
women.
Punjab National Bank

Punjab National Bank plans to open Micro Credit Centers in all states, launching its first
center in the region at village Maloya in Chandigarh. It also gave life insurance to 2,000
female members from self help groups through a social security group scheme called
Janashree Bima Yojna.

Micro Credit

The Bank continued to promote Micro Finance through formation & credit linkage of
Self Help Groups which is an effective instrument for increasing the income level and
reducing poverty and unemployment. Adequate thrust is being given to financing Tenant
Farmers’ Groups (TFGs). In addition, the Bank has laid emphasis on capacity building
and training of intermediaries, such as

NGOs /Volunteer Vahinis and the ultimate beneficiaries. During 2007-08, the Bank
contributed Rs 22.75 lakh to the corpus formed for providing financial assistance towards
infrastructure for the RUDSETI being run by J&K Government. Further, the Board
approved a budget of Rs 13.09 lakh for recurring expenses of RUDSETI at Distt. Solan,
Himachal Pradesh, established in association with Ambuja Cement Foundation. As at end
March 2008, the Bank has credit-linked 1,18,952 SHGs, registering a growth of 18.2
percent.

Promoting Financial Inclusion

Launch of Rickshaw Projects

The Bank launched two Rickshaw Projects for assisting the rickshaw pullers to become
self reliant. While one project was launched at Varanasi (UP) in association with Centre
for:
Rural Development (CRD), an NGO, the other was launched at Patna (Bihar) with
MicroFinance Institution “Sammaan Foundation”, a non-profit organization.

Financial Literacy and Education Counselling

In order to foster a “financially inclusive growth”, the biggest challenge is the challenge
of financial education because an important reason for financial exclusion is lack of
awareness on the part of people regarding the importance of being the customers of a
bank. A social revolution is needed and the Financial Literacy and Education
Counselling Centres are required to face this challenge.

Towards this, the Bank being the SLBC Convenor in the States of Punjab and Haryana
opened 9 such Centres (7 in Lead Districts of Punjab and 2 in Lead Districts of Haryana).

PNB Farmers’ Welfare Trust working as BC

PNB Farmers’ Welfare Trust has also been acting as the Business Correspondent. For
this, the Trust launched “Kisan Bandhu Scheme” wherein local youth have been trained
to contact the people in the villages for (i) opening of Bank accounts and (ii) providing
extension services.

PNB Centenary Rural Development Trust working as BC

PNB Centenary Rural Development Trust’s Matki Jharoli unit is also working as
Business Correspondent.

Mobile ATMs

As a unique initiative, the Bank has launched 4 mobile ATMs on April 14, 2008. These
ATMs will mainly cover unbanked rural/slum areas under Circle Office Delhi. They will
be stationed at pre-determined destinations for specific time. The ATM services will be
available to PNB customers as well as other banks’ customers under sharing
arrangement.

Punjab State Co-Operative Agricultural Development Bank Ltd

National Bank of Agriculture and Rural Development (NBARD)

Umeed Khanna Foundation

Umeed Khanna Foundation (UKF) was established in 1996, and is operating in Sangrur,
the poorest district of Punjab, India. It began by providing health services to the
underprivileged and has recently received a loan from Grameen Trust, to provide
microcredit to the poor in Sangrur and Barnala town. So far, Umeed has assisted over
40,000 people and has recently broadened their projects to include activities in the field
of basic literacy, women empowerment, family welfare, youth development, up-liftment
of the poor farmers, and drug rehabilitation programs.
Conclusion

The Indian economy at present is at a crucial juncture, on one hand, the optimists are
talking of India being among the top 5 economies of the world by 2050 and on the other
is the presence of 260 million poor forming 26 % of the total population. The enormity of
the task can be gauged from the above numbers and if India is to stand among the comity
of developed nations, there is no denying the fact that poverty alleviation & reduction of
income inequalities has to be the top most priority. India’s achievement of the
Millennium Development Goals of halving the population of poor by 2015 as well as
achieving a broad based economic growth also hinges on a successful poverty alleviation
strategy.

In this backdrop, the impressive gains made by SHG-Bank linkage programme in

coverage of rural population with financial services offers a ray of hope. The paper
argues for mainstreaming of impact assessment and incorporation of local factors in
service delivery to maximize impact of SHG –Bank linkage programme on achievement
of MDGs and not letting go this opportunity.
 REVIEW OF LITERATURE

The concept of micro-finance was given by Bangladeshi economist Mohammad Yunus in

the year 1976 and was successfully implemented in Grameen Bank. Micro-finance is
providing basic financial services to the poor or the people who don’t have any
creditworthiness. The basic financial services not only mean the micro-loans but also the
savings, insurance (crop, cattle etc.), housing loans and other financial products and
services. Most MFIs usually travel to clients to give loans and receive loan payments.
And most of the times the loans are disbursed to a group of people usually called Self
Help Group (SHGs).

The MFIs have been proved a very effective and profitable business strategy
over the years. The Indian as well as the other countries MFIs have earned a handsome
profit. The number of SHGs linked, the amount disbursed, the number of beneficiaries
are increasing i.e. the service is being available to more and more persons effectively and
efficiently. There have been both positive and negative critical developments in the
Indian MFI sector. On the positive side, there has been leverage of MFIs newly found
management expertise to achieve scale and spread their operations well beyond their
traditional operational areas. On the negative side, they have been under attack from
politicians and bureaucrats dominant in some of their traditional operational areas in
Andhra Pradesh and Karnataka as their loan recovery practices are under scrutiny and
their interest rates appear to be exorbitant. So these types of irregularities should not be
there. And there should be a sense of responsibility in the staff of all the MFIs and proper
training should be given to them. There are some social responsibilities of MFIs like
reaching poor or excluded clients, improving the quality and appropriateness of financial
services, contributing to employment and enterprise growth, improving the economic and
social conditions of clients and their households, and ensuring social responsibility to
clients, to staff and to the communities in which they work. These should also be taken
care.
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