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Microfinance is defined as the provision of thrift, credit and other finance services such as money transfer and micro-insurance products for the poor, to enable them to raise their income levels and improve living standards. Today, there is a need to ensure the survival of poor people with little skills or education and without any safety net who are required to earn a livelihood even in resource poor regions. Our goal is to ensure that the poor are enabled to meet their funds requirements in emergencies or set up microenterprises to earn their livelihoods. Microfinance refers to entire range of financial services such as saving s, money transfers, insurance , production and investment credit as also housing finance and includes the need for skill up gradation and entrepreneurial development that would enable them to overcome poverty. Microfinance provides credit support in small doses along with training and other related services to people who are resource- poor but who are able to under take economic activities. Microfinance rests on the following principles.: Self-employment / enterprise formation is a viable means for poverty alleviation. Lack of access to capital assets/credits is a constraint for existing and potential microenterprises. The poor are able to save despite their low level and sporadic incomes.


There are three delivery mechanisms being tried out over the last 35 years for microfinance as under:

Priority sector/weaker sections/ government schemes through the banks to individuals , groups of people and cooperatives as per RBI guidelines. Banks were to ensure 40 percent of total credit for priority sectors with 18 percent for agriculture. The priority sectors have been defined as: 1. Agriculture 2. Small scale industries 3. Land and water transport 4. Retail trade

5. Small business 6. Consumption credit for weaker sections 7. Housing for weaker sections. Rs. 106 billion has been disbursed as against Rs. 105 billion budgeted by Gov. Of India including 25% for loan subsidy and loan administration costs under Integrated Rural Development Programme (IRDP). These had capital subsidies but were poorly targeted and credit programs were badly implemented resulting in wrong targeting with subsidies being cornered by undeserving people and very poor recoveries. Still, 5.38 crores families were assisted under this program, making this the worlds largest microfinance program. In this , the borrowers are identified on the basis of income below Rs. 11000/per annum. Form April 1999 onwards, the IRDP has been replaced by the Swarnajayanti Grameen Yojana, with back end subsidy instead of front end subsidy and using the Self Help Groups (SHGs) . In fact the popularity of SHGs as a reliable credit delivery model with little wastage and neglected sectors of the society, most credit programs are delivered using the SHGs.

The SHG- Bank linage program being implemented by National Bank for Agriculture and rural development (NABARD) and Small Industries Development bank for India (SIDBI) separately has banks utilizing SHGs for onlending, with or without support from NGOs and other promotional institutions. This has been spectacularly successful, with 48 commercial banks having linked up 1188040 SHGs , 158 Regional rural banks(RRBs) having linked up 740024 SHGs and 340 cooperative banks having linked up 307543 SHGs. As on 31 March 2006, a total of 2238565 SHGs have been linked to bank credit.

Bulk loans from banks and specialized financial institutions to various financial intermediaries in the non- formal sector for onlending to SHGs or individuals , Through financial intermediaries like RMK, SEWA, MYRADA, WWF, SHARE, etc.

Largely, due to various government programs like IRDP, DWCRA, TRYSEM, now, modeled as SGSY and the SHG movement , the incidence of poverty in the country has been reduced with the no. of families below the poverty level reducing from 56.4% in 1973-74 to 37.3% in 1993-94 and further to 26% in 2003-04.

The microfinance initiatives taken by the government/ financial ins/banks / NGOs. Since 1992 have provided the following important lessons. : The SHG model is a flexible one and variation of sizes and compositions are permitted as also charging flexible interest rates, purposes and repayment terms. The poor are bankable, with transaction costs reduced for both borrowers and banks. This helps in meeting the microcredit needs of poor people, with greater efficiency. Over 90% of the SHGs financed by banks have been set up by women who are not only saving for their families , but are being subtly empowered in the process. The savings aspect is emphasized and the infrequent and small savings of the members are allowed to accumulate and add to the group funds. Once the members are able to operate bank accounts responsibly, loan screening process time as also costs for the banks are reduced and some individual SHG members may graduate to lasting relationships as valued customers of banks on an individual basis. The poverty alleviation process is hastened as leakages are virtually nil. The members use their own funds judiciously and after estimating individual loan risks, price their loans accordingly. The loan recovery rate at 98 percent when contrasted to loan recovery rates for various bank loans and other loans for government poverty alleviation programs is excellent by any standards. The SHGs are sustainable even though the NGOs have to spend money, time and efforts in group formation. Intermediation costs are often not fully recovered.

The growth rate of SHGs is phenomenal, this shows that how interested rural people are in forming groups and to sharpen their microentrepreneurial skills.


1. Up scaling of the program : The SHG- bank linkage program is facing

problems of upscaling as there is lack of credible non-governmental organizations and other agencies/individuals who could do social intermediation, i.e, formation and nurturing of SHGs. The absence of quality agencies for social intermediation is limiting the spread of the program.
2. Capacity building: The capacity building of various partners in the

program, namely, bank officials, NGO officials, animators, SHG group leaders and SHG members is a gigantic task. NABARD has been playing attention to the capacity- building of all the partners in the SHG- bank linkage program.
3. Sustainability of SHGs: The sustainability of SHGs depends to great extent

on the quality of SHGs. The quality if SHGs is dependent on the care and attention given by the Self Help Promoting Institution(SHPI) in the formation stage.
4. Graduation form microfinance to microenterprises: There are a vast no.

of SHGs which have come of age and are struggling to graduate from the stage of microfinance to stage of microenterprises. Lack of adequate skills as also marketing linkages affect the graduation of SHGs to microenterprise stage.
5. Attitude of partners: Therehace been a no. of success stories where formal

financial institutions have been able to form and link SHGs on a large scale. However these efforts are isolated in nature. The SHG- bank relationship has still not been institutionalized.
6. Impact of government programs with Subsidy component:

Governmental programs such as SGSY are affecting the sustainability of SHGbank linkage program.
7. Issues facing the MFIs.:

Transparency: Whether microfinance is considered as a social enterprise to alleviate poverty or the future of retail banking, it is fair to say that proliferation of microfinance institutions is a positive trend keeping in view the vast unmet demand of credit by the rural poor. Sustainability with outstretch: the cost of outreach to the poor is high and the MFIs have a major issue before them: how to be sustainable while

serving the poor. They need to address various issues such as minimization of costs for the poor, administrative effectiveness, covering expenses.

Self-Regulation: The MFIs are handling savings of poor people. MFIs need to operate in a self- regulatory framework which could include self regulation to begin with. Beside regulation, supervision is also an important issue.

CHALLENGES AHEAD Appropriate legal structures for the structured growth of MF operations Finding adequate levels of equity for the new entities to leverage loan funds Ability to access loan funds at reasonably low rates of interest. Ability to attract and retain professional and committed human resources. Design of apt MIS including user friendly software for tracking accounts and operations. Appropriate loan products for different segments



A way out is expansion of scale of operations which can bring down the average operating expenses. The major factor holding up scaling of operations is cited to be lack of funds. Majority of MFIs would like to be converted to NBFCs which would enable them to raise public deposits for on lending. A big deterrent is the startup capital of Rs 20 million required to register as an NBFC which is beyond the reach of many MFIs. But this requirement is part of the regulatory apparatus of RBI to ensure the issue of safety of public money. But MFIs need liquidity also. Hence, they should be allowed to borrow public money with adequate safeguards like deposit insurance with banks. MFIs also want to have more freedom in raising equity capital .They face difficulties in raising equity, because NGOs are not allowed to invest in MFI equity, because of the charitable status of NGOs .One good measure of late is NGO-MFIs have been allowed to raise External Commercial Borrowings, where the interest costs are relatively lower, from April 2005. {Reserve Bank of India release April 2005} The stipulations are (1) funds are to be routed through normal banking channels (2) funds to be earmarked for microfinance only (3)the borrowed amount must be hedged. Another area of concern is the activities financed by microfinance tend to remain micro. With a loan of Rs 2000/- to Rs 15,000/- and monthly /quarterly installment payments, there is not much scope for expansion of activities. The activities of selling cow milk, goat milk, chicken, fireweed, agriculture on leased land, only provide the poor with the bare minimum. (Field Survey)One way it makes a difference is that when the income generated is added on to the present income of the upper crust of the poor it

helps them to transcend the income line, but does not help to develop an asset base. The only solution is to enhance the volume of credit in line with the growth of the productive activities i.e. Macro and not Micro finance is needed for a larger scale of operations. A policy direction may be helpful here. Further, if for some reason the micro activity does not fetch any return say crop failure due to bad monsoons, the beneficiaries of Microfinance suffer tremendously. In such instances Micro insurance helps in providing a buffer and it is heartening to note that national and private insurance companies are talking steps here.All said and done, Microfinance remains a powerful tool for development. It may be a drop in the ocean, but it has made people self sufficient. Our task is to spread Microfinance and bring down the cost of capital and the operating costs and strengthen the bonding between Microfinance and the Formal Financial System. However, for sustainable development of the poor and rural economy, we have to focus on development of rural infrastructure and the rural economy, otherwise there will be few activities requiring finance.


SUBMITTED TO: Mrs. Abhilashita Rao