CHAPTER-I

INTRODUCTION

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INTRUDUCTION

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 lives of people & revitalized
communities in the world‘s poorest as well as richest countries. The microfinance is a
better targeted financial help to a clientele that is poorer & vulnerable than traditional bank
clients. The broad classification of microfinance includes rural credit through specialized
banks traditional informal microfinance like loans from friends & relatives money lenders
etc.

Microfinance as a Development Tool

People living in poverty –like everyone else need access to a diverse range of financial
services, including loans, saving services, insurance & money transfers. Access to
financial services can help enable the poor to increase income & smooth consumption
flows, & thus expend their asset base & reduce their vulnerability to the external shocks
that are a part of their daily existence. The availability of financial services acts as a buffer
against sudden emergencies, business risk & seasonal slums that can push a family into
destitution. More & better financial services specifically geared towards low income
groups can help poor households to move from everyday survival to planning for the
future, investing in better nutrition, improver living condition & children‘s health &
education.
Microfinance has the potential to benefit poor people both indirectly, through
increased growth, & directly as they gain access to needed services. Impact studies show
that in money cases, microfinance reduced poverty through increasing income levels.
Studies also show that microfinance improves poor people‘s lives by contributing to
improved healthcare, children‘s education & nutrition & women‘s empowerment.
In particular, the ability to borrow, save & earn income reduced economic
vulnerability for women & their households, increased financial & food security can bring

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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 programmers 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 children‘s send
them to school, & become empowered members of their community & their household,
many more examples exist of vivacious circles of debt, family violence & increased
workloads.

Access to Microfinance
The consultative group to assist the poor (CGAP) estimates that of the three billion poor
people of working age who could be making use of these services about 500 million-one
sixth currently have access to formal financial services.
If we are ever to reach the estimated three billion poor people who could use
financial services, it will require a whole range of institutions, not just traditional NGO
microfinance institutions to do it. Microfinance institutions have played a key role in
The development of microfinance & they will continue to do so. But what is really
needed-to reach both further & deeper-is a whole range of institutions that will jostle &
compete with one another to serve poor people & to innovate to reach more & more poor
people.

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Sustainable Microfinance
Microfinance is unique as a development tool because of its potential to be
selfsustaining. Successful microfinance institutions have proven that providing financial
services to the poor can be an effective means of poverty reduction & be a profitable
business. Dozens of institutions have proven that financial services for poor people can
cover their full costs, through adequate interest spreads, relentleless focus on efficiency

& aggressive enforcement of repayment. A large & growing proportion of today‘s

microfinance services are being provided by institutions that are profitable even after
adjusting for subsidies that they may have recd.
There will never be enough aid funding available to make an appreciable client the
scale of poverty that still exists around the world. The financial viability of institutions is
what will ultimately guarantee the long term provision of financial services for poor
people and today there‘s greater consensus than even before on what is needed to make
microfinance sustainable.

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%.

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.

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Women’s empowerment
The Indian School of Microfinance for Women, an organization based in Ahmadabad, is a
unique initiative in the discipline of Microfinance. The School has been set up with the
purpose of addressing the huge capacity building gap that exists in the Microfinance
sector.
Launched on 4th October 2003, The School‘s aim is to strengthen and spread
Microfinance as a strategy for poverty alleviation through development of knowledge and
skilled human resources. It believes that microfinance is an effective tool for the
alleviation of poverty and betterment of the lives of women. It looks to bring the realities
of the lives of women to organizations and people working with microfinance to help them
reach the women better in turn. Promoted by SEWA Bank, FWWB (I), and Cody
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. 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

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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 challenge is to mobilize this
knowledge & apply it on a much vaster scale, creating financial systems that work for the
poor & boost their contribution to economic growth. One approach is to tap into
developed capital market through microfinance investment funds enable individual
investors & portfolio managers to allocate a part of their equity or fixed income
investment to microfinance as an asset class.
The microfinance is changing the landscape of banking across the world. It has
change the ivies of people & revitalized communities in the world‘s poorest as well as
richest countries. The microfinance is a better targeted financial help to a clientele that is
poorer & vulnerable than traditional bank clients. The broad classification of microfinance
includes rural credit through specialized banks traditional informal
Microfinance like loans from friends & relatives money lenders etc. BANKNGO
partnership based on microfinance, non NGO, non-collateralized microfinance, Garmin

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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.

FURTHERSTIC STUDY OF MICRO FINANCING IN INDIA

The micro financial institutions are today, no doubt, acquiring the status of moment in the
banking sector. Its importance can be gauged from the fact that United Nations has
designated year 2005 as the international year of micro credit. Today effective micro
finance is seen as solution to many of the existing social and emotive problems ranging
from rural employment to empowerment. The various micro finance institutions models
are quite effective in dispensing the much needed credit to the targeted clients. However,
there exists certain weakness in existing micro finance institution models. There is enough
space of more efficiency and better results in credit disbursement through micro finance
institutions.
If we look back, it is found that Garmin Bank type micro finance institution model
is one of the most successful models in micro finance. The bank has successfully served
the rural people in Bangladesh with on physical collateral relying on group responsibility
to replace the collateral requirements. This model, like other model, has also some
weaknesses. It involves too much of external subsidy which is not replicable.
Garmin Bank has not oriented itself towards mobilizing people‘s resources. The
repayment system of 50 weekly equal instalments 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

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 • Intermediation by individuals or authorities.
• Regulation by statutory bodies.
• The end goal of any such basic model is accessibility of finance to poor.
The new model calls for exploiting the latent rural human resource by talent
spotting and training them as per there, for example, the graduates can be trained in
accounting or as Self Help Group leaders. The awareness campaign regarding various
rights, subsidies, and incentives given by various micro finance schemes may be
disseminated by involving local rural youth, which may very well connect to the local
based on similarity in dialect, living ways and culture.
It envisages the CENTRE as the hub of all activities. It is a place where all
funding, responsibility and accountability, is concentrated. This will ensure efficiency,
better control and reduced cost of interfacing between dispenser and taker of credit. The
CENTRE will also do a grading systems-A,B,C,D, Effect under which grading system
would be based on number of years client has been attached with any of the micro finance
institutions and its positive track in repaying the loans, including the condition that at least
one amount of the loan was greater than rupees 5000.

The criteria for grading are:

A>=12 years attached with any MFI, subject to the conditions above.
B>=10 years attached with any MFI, subject to the condition above.
C>=7 years attached with any MFI, subject to the condition above.
D>=5 years attached with any MFI, subject to the condition above.
E>=3 years attached with any MFI, subject to the condition above.
The client of A, B and Consumption can take loan directly from the CENTRE, other
conditions for eligibility being the same. 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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 Objectives of the Study

The project work is done to fulfil 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 performance of SHARE MICROFIN LTD in doing the job of
promoting microfinance in India.
• To know the role of Microfinance in removing the poverty of the study.

Limitation of The study

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

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

Research Methodology

Type of Research
The type of research that is being used in this report is the descriptive one as in this
particular type of research the researcher doesn‘t have any control over the present
scenario of the things that are being studied & we can only study the factors such as
HOW, WHO, WHEN, WHAT etc.

Data Collection Method

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

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 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.

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 CHAPTER-II

REVIEW OF LITERATURE

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REVIEW OF LITERATURE
These literatures include books written on the subject by experts and also journals,
manuals etc. In fact, there are very few literatures available, regarding socioeconomic,
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 scientifically. ―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 forIndia‖, he articulates the changing general perception of bankers,
that SHGs areprofitable clients or bank. Lanmdau Mayoux‘s study (1998) on

ParticipatoryLearning for Women‘s Empowerment in Micro Finance Programs (IDS

Bulletin,Vol. 29 No.4, 1998) proposes a participatory approach for integrating
women‘sempowerment concerns into ongoing programs learning, which itself would be
acontribution to empowerment. Micro finance programs for women are currently
Promoted not only as a strategy for poverty alleviation but also for women‘s
empowerment.
The current literature on micro finance is also dominated by the positive linkages
between micro finance and achievement of Millennium Development Goals (MDGs).
Micro Credit Summit Campaign‘s 2005 report argues that the campaigns offers much
needed hope for achieving the Millennium Development Goals especially relating to
poverty reduction. IFAD along with Food and Agriculture Organization (FAO) and the
World Food Programme (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).
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 BANCOSOL: THE CHALLENGE OF GROWTH FOR
MICROFINANCE ORGANIZATIONS
Banco Sol 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, Banco Sol had to
face a reduction of revenues as a proportion of productive assets and an increase in the
average cost of funds, which combined reduced its operating margin by 13 percentage
points. This challenge was fully met by reducing operating expenses as a proportion of
productive assets.

Mark Schreiner (2003)

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

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

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

GARY M. WOLLER

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

Models of Microfinance
Microfinance Institutions & Poverty Elimination
A MFI is an organization that provides the financial service targeted to the poor. Its
clients are generally poor & low income people. They may be female head of household,
pensioner, artisans or small farmers. It obtains finance from banks & in turn provides
small scale credit & other financial services to low income household & other informal
business. The microfinance works around the concept of group lending where it allows a
no. of individuals to provide collateral or guarantee a loan through a group repayment
pledges. The incentives to repay are based on peer pressure if on person in the group
default; the other group members make the payment. It is powerful tool to reducing
poverty as it makes capital available to the unbaked poor at reasonable rates. A survey by
ABN AMRO bank clients has shown that 58% of those who have used microfinance for
four years‘ experience a significant reduction in poverty & 41% have come right out of it.
The microfinance institutions aim 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.

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Existing Models of Microfinance Institutions
Presently the microfinance institutions are operating with diverse methods & means with
common end results to provide affordable financial services to the poor & low income
people. With access to range of financial tools such families can invest according to their
own priorities viz. school fees, health care, business nutrition having etc.
The microfinance was not popular before seventies. It was in late eighties & early
nineties that it started showing exemplary results in the field of poverty alleviation. The
pioneering effort in this direction was done by Muhammad Yunus of Bangladesh. Today
Garmin Bank has over 1000 branches a branch covers around 25-30 villages with 12 lakh
borrows with over 90% women. The most important feature of the recovery rate of the
loans, which is as high as 98% yet another interesting feature of this bank is advancing
credit without any collateral security.

Garmin Bank Model

The bank lending system is simple but effective to obtain loans, potential borrower
must form a group of five, gather once a week for loan repayment meeting to start with
learning the bond rules & ―16 decisions‖ which they chant at the start of their weekly
sessions. These decisions incorporate code of conduct that members are encouraged to
follow in their daily life. Ex. Production of fruits & housing& education for children, safe
drinking water better health etc. No. of groups in the same village is combined into a
centre. The organization of members in groups & centres 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 instalments spread over a year & simpler interest of
20% is charged once at the year end. Factor behind the success of GRAMIN 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.

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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:
• To promote self-reliance and self-determination among the workers though the
memberships in an integrated nation-wide saving system.
• To invest provident saving of its members taking into account the provident benefits
upon the termination of their membership in fund.
• To promote home ownership through the establishment of an affordable and adequate
housing credit system for its members.
• 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
member‘s 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
channelling them for the long term financing requirement of housing.

SHARE MICROFIN LTD MODEL

SHARE MICROFIN LTD 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 SHARE
MICROFIN LTD for low cost housing projects in India.
For the purpose of actual implementation of the low cost housing projects, SHARE
MICROFIN LTD 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.

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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.

The Emergence of Private Micro finance Industry

The micro finance initiative in private sector can be traced to the initiative undertaken by
Ms.Ela Bhat for providing banking services to the poor women employed in the
unorganized sector in Ahmedabad City of Gujarat State. Shri Mahila SEWA (Self
Employed Women‘s Association) Sahakari Bank was set up in 1974 by registering it as a
Urban Cooperative Bank. Since then, the bank is providing banking services to the poor
self-employed women working as hawkers, vendors, domestic servant etc. As on March
2003, the MFI had a membership of 30,000, seventy per cent of whom are from urban
area. The deposit and loan portfolio stood at Rs 623.9 million ($ 13.86 million) and
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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 programmer 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
Nongovernmental 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
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

18
lopsided with concentration in the southern India where the rural branch network of formal
banks is excellent. It is estimated that the share of MFIs in the total micro credit portfolio
of formal & informal institutions is about 8 percent. MFIs: There are a large number of
NGOs that have undertaken the task of financial intermediation. Majority of these NGOs
are registered as Trust or Society. Many NGOs have also helped SHGs to organize
themselves into federations and these federations are registered as Trusts or Societies.
Many of these federations are performing non-financial and financial functions like social
and capacity building activities, facilitate training of SHGs, undertake internal audit,
promote new groups, and some of these federations are engaged in financial
intermediation. The NGO MFIs vary significantly in their size, philosophy and approach.
Therefore these NGOs are structurally not the right type of institutions for undertaking
financial intermediation activities, as the byelaws of these institutions are generally
restrictive in allowing any commercial operations. These organizations by their charter are
non-profit organizations and as a result face several problems in borrowing funds from
higher financial institutions. The NGO MFIs, which are large in number, are still outside
the purview of any financial regulation. These are the institutions for which policy and
regulatory framework would need to be established.

Non-Profit Companies as MFIs: Many NGOs felt that combining financial

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

Mutual Benefit MFIs: The State Cooperative Acts did not provide for an enabling
framework for emergence of business enterprises owned, managed and controlled by the

19
 members for their own development. Several State Governments therefore enacted the
Mutually Aided Co-operative Societies (MACS) Act for enabling promotion of selfreliant
and vibrant co-operative Societies based on thrift and self-help. MACS enjoy the
advantages of operational freedom and virtually no interference from government because
of the provision in the Act that societies under the Act cannot accept share capital or loan
from the State Government. Many of the SHG federations, promoted by NGOs and
development agencies of the State Government, have been registered as MACS. Reserve
Bank of India, even though they may be providing financial service to its members, does
not regulate MACS.

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

under Companies Act, 1956 and regulated by Reserve Bank of India. Earlier, NBFCs were
not regulated by RBI but in 1997 it was made obligatory for NBFCs to apply to RBI for a
certificate of registration and for this certificate NBFCs were to have minimum Net
Owned funds of Rs 25 lakhs and this amount has been gradually increased. RBI
introduced a new regulatory framework for those NBFCs who want to accept public
deposits. All the NBFCs accepting public deposits are subjected to capital adequacy
requirements and prudential norms. There are only a few MFIs in the country that are
registered as NBFCs. Many MFIs 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

20
present, over Rs.40, 000 million ($ 889 million) every year flows into India to NGOs for a
whole range of activities including micro finance. In a way, foreign donors have facilitated
the entry of NGOs into micro finance operations through their grant assistance.

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

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

21
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
• Structure & Sustainability,
• Funding
• Regulations and
• 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:
• Is non-existence of a separate differential regulatory framework a critical
bottleneck hindering the growth of the sector?
• Will MFIs be sustainable in medium term? If so, will they continue to focus on
the poor?
• Is access to public / member deposit the key issue for their sustainability?
22
 • Can MFIs finance loans for income generation at interest rates, which are
sustainable by the rural poor?
• 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?
• Has the sector reached a critical mass where regulation becomes important?
An Effective Poverty Reduction Strategy
Microfinance is often considered one of the most effective and flexible strategies in
the fight against global poverty. It is sustainable and can be implemented on the massive
scale necessary to respond to the urgent needs of those living on less than $1 a day, the
World‘s poorest.
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 counselling,
while clients provide peer support for each other through solidarity circles. For example, if
a client falls ill, her circle helps with her business until she is well. If a client gets
discouraged, the support group pulls her through. This contributes substantially to the
extremely high repayment rate of loans made to microfinance entrepreneurs. An equally
important part of microfinance is the recycling of funds. As loans are repaid, usually in
six months to a year, they are re-loaned. This continual reinvestment multiplies the impact
of each dollar loaned.
Microfinance has a positive impact far beyond the individual client. The vast
majority of the loans go to women because studies have shown that women are more
likely to reinvest their earnings in the business and in their families. As families cross the
poverty line and micro-businesses expand, their communities benefit. Jobs are created,
knowledge is shared, civic participation increases, and women are recognized as valuable
members of their families and communities.

23
 Microfinance is often considered one of the most effective and flexible strategies in
the fight against global poverty. It is sustainable and can be implemented on the massive
scale necessary to respond to the urgent needs of those living on less than $1 a day, the

World‘s poorest.
Microfinance consists of making small loans, usually less than $200, to
individuals, usually women, to establish or expand a small, self-sustaining business. For
example, a woman may borrow $50 to buy chickens so she can sell eggs. As the chickens
multiply, she will have more eggs to sell. Soon she can sell the chicks. Each expansion
pulls her further from the devastation of poverty.
Microfinance, the Garmin way, includes several support systems that contribute
greatly to its success. Microfinance institutions offer business advice and counselling,
while clients provide peer support for each other through solidarity circles. For example, if
a client falls ill, her circle helps with her business until she is well. If a client gets
discouraged, the support group pulls her through. This contributes substantially to the
extremely high repayment rate of loans made to microfinance entrepreneurs. An equally
important part of microfinance is the recycling of funds. As loans are repaid, usually in six
months to a year, they are re-loaned. This continual reinvestment multiplies the impact of
each dollar loaned.
Microfinance has a positive impact far beyond the individual client. The vast
majority of the loans go to women because studies have shown that women are more
likely to reinvest their earnings in the business and in their families. As families cross the
poverty line and micro-businesses expand, their communities benefit. Jobs are created,
knowledge is shared, civic participation increases, and women are recognized as valuable
members of their families and communities.

Microfinance
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 financial products.
Microcredit came to prominence in the 1980s, although early experiments date back 30
years in Bangladesh, Brazil and a few other countries. The important difference of

24
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. Clients of
Microfinance
The typical microfinance clients are low-income persons that do not have access to formal
financial institutions. Microfinance clients are typically self-employed, often household-
based entrepreneurs. In rural areas, they are usually small farmers and others who are
engaged in small income-generating activities such as food processing and petty trade. In
urban areas, microfinance activities are more diverse and include shopkeepers, service
providers, artisans, street vendors, etc. Microfinance clients are poor and vulnerable non-
poor who have a relatively stable source of income.
Access to conventional formal financial institutions, for many reasons, is directly
related to income: the poorer you are, the less likely that you have access. On the other
hand, the chances are that, the poorer you are, the more expensive or onerous informal
financial arrangements. Moreover, informal arrangements may not suitably meet certain
financial service needs or may exclude you anyway. Individuals in this excluded and
under-served market segment are the clients of microfinance.

As we broaden the notion of the types of services microfinance encompasses, the

potential market of microfinance clients also expands. For instance, microcredit might
have a far more limited market scope than, say, a more diversified range of financial
services which includes various types of savings products, payment and remittance
services, and various insurance products. Microfinance helps the poor
25
 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.

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.
--

The microfinance institution could subsidize the loans to make the credit more
"affordable" to the poor. Many do. However, the institution then depends on permanent
subsidy. Subsidy-dependent programs are always fighting to maintain their levels of
activity against budget cuts, and seldom grow significantly.
Evidence shows that clients willingly pay the higher interest rates necessary to
assure long term access to credit. They recognize that their alternatives—even higher
interest rates in the informal finance sector (moneylenders, etc.) or simply no access to
credit—are much less attractive for them. Interest rates in the informal sector can be as
high as 20 percent per day among some urban market vendors. Many of the economic
activities in which the poor engage are relatively low return on labour, 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.

26
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
jewellery, 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
dwellingburial-weddings.
These informal ways that people save are not without their problems. It is hard to cut off
one leg of a goat that represents a family's savings mechanism when the sudden need for a
small amount of cash arises. Or, if a poor woman has loaned her "saved" funds to a family
member in order to keep them safe from theft (since the alternative would be to keep the
funds stored under her mattress), these may not be readily available when the woman
needs them. The poor need savings that are both safe and liquid. They care less about the
interest rates that they can earn on the savings, since they are not used to saving in
financial instruments and they place such a high premium on having savings readily
available to meet emergency needs and accumulate-assets.
-

These savings services must be adapted to meet the poor‘s particular demand and their
cash flow cycle. Most often, the poor not only have low income, but also irregular income
flows. Thus, to maximize the savings propensity of the poor, institutions must provide
flexible opportunities--- both in terms of amounts deposited and the frequency of pay ins
and pay outs. This represents an important challenge for the microfinance industry that has
not yet made a concerted attempt to profitably capture deposits.

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

27
―financial NGO‖, an NGO that is fully and virtually exclusively dedicated to offering
financial services; in most cases microcredit NGOs are not allowed to capture savings
deposits from the general public. This group of a few hundred NGOs have led the
development of microcredit, and subsequently microfinance, the world over. Most of these
constitute a group that is commonly referred to as "best practice" organizations, ones that
employ the newest lending techniques to generate efficient outreach that permit them to
reach down far into poor sectors of the economy on a sustainable basis. A great many
NGOs that offer microcredit, perhaps even a majority, do 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.

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
favourably 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
-

28
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‖..
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.

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

Government’s role in supporting microfinance

Governments have a complicated role when it comes to microfinance. Until
recently, governments generally felt that it was their responsibility to generate
development finance', including credit programs for the disadvantaged. Twenty years of
insightful critique of rural credit programs revealed that governments do a very bad job of
lending to the poor. Short term political gain is just too tempting for politically controlled
lending organizations; they disburse too quickly (and thoughtlessly) and they collect too
sporadically (unwillingness to be tough on defaulters). In urban areas, governments never
really got into the act, and subsidized microenterprise credit is still relatively rare when
compared to its rural counterpart.
Now that microfinance has become quite popular, governments are tempted to use savings
banks, development banks, postal savings banks, and agricultural banks to move
29
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.

Role of the financial regulator in supporting the development of

microfinance
Many feel that the most important role of a financial regulator in supporting the
development of microfinance is to create an alternative institutional type that allows sound
financial NGOs, credit unions, and other community-based intermediaries to obtain a
license to offer deposit services to the general public and obtain funds through apex
organizations. In a few countries, this may be an appropriate strategy. In most countries,
however, the general level of development of the microfinance industry does not yet
warrant the licensing of a separate class of financial institutions to serve the poor. And, in
most countries, budgetary restrictions faced by bank regulators make it very unlikely that
they will be able to supervise a whole host of small institutions; these institutions' total
assets may make up a tiny percent of the total financial system, but the cost of adequate
supervision could eat up between 25 and 50% of the total budget of the agency. Rather,
regulators can work with the nascent microfinance industries of most countries on issues
such as modifying usury limits as stated in the commercial code to allow appropriate
levels of interest, generating credit information clearinghouses to share information on
defaulting borrowers to limit their ability to go from one MFI to another, working with
civil authorities to ensure that private loan contracts can be recognized by courts in those
transition economies that lack even basic legislative infrastructure, and reporting
requirements that will prepare MFIs to eventually become regulated. Regulators can also
examine the laws, executive decrees, and internal regulations that limit the ability of
traditional banking institutions to do microfinance. These regulations include limits on the
percent of a loan portfolio that can be lent on an unsecured basis, limits on group
30
guarantee mechanisms, reporting requirements, limits on branch office operations
(scheduling and security), and requirements for the contents of loan files.

Is microfinance an appropriate tool?

Microfinance increasingly refers to a host of financial services—savings, 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 time‘s governments and aid agencies wish to use microfinance as a tool to
compensate for some other social problem such as flooding, relocation of refugees from
civil strife, recent graduates from vocational training, and redundant workers who have
been laid off. Since microcredit has been sold as a poverty reduction tool, it is often
expected to respond to these situations where whole classes of individuals have been
―made poor‖. Microcredit programs directed at these types of situations rarely work.
Credit requires a 98% ―hit‖ rate to be successful. This means that 98% of recent
vocational school graduates or returning refugees would need to be successful in
establishing a microenterprise for repayment rates to be high enough to allow for a
program's overall sustainability. This is simply unrealistic. Running a program with
substantial default rates undermines the very notion of credit and destroys credit discipline
among those who could repay promptly but who look foolish given that many do not.
Microcredit serves best those who have identified an economic opportunity and who are in
a position to capitalize on that opportunity if they are provided with a small amount of
ready cash. Thus, those poor who work in stable or growing economies, who have
demonstrated an ability to undertake the proposed activities in an entrepreneurial manner,
and who have demonstrated a commitment to repay their debts (instead of feeling that the
credit represents some form of social re-vindication), are the best candidates for
microcredit.

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
31
enabling them to raise their income levels and improve living standards. Micro Credit
Institutions are those which provide these facilities.
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.

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.

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.

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.

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
32
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
modelwise 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:
• 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;
• 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
• 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

33
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.

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.

Micro Finance Development Fund

There is an urgent need for micro credit providers to shift from a minimalist
approach – that is offering only financial intermediation – to an integrated approach to
poverty alleviation taking a more holistic view of the client including provision of
enterprise development services like marketing infrastructure, introduction of technology
and design development. In this context, the setting up of the Micro Finance Development
Fund marks an important step. Pursuant to the announcement of Union Finance Minister in
his budget speech for the year 2011-01, this Rs. 100 crore Fund has been created in
NABARD to support broadly the following activities:
• giving training and exposure to self-help group (SHG) members, partner
NGOs, banks and govt. agencies;
• providing start-up funds to micro finance institutions and meeting their
initial operational deficits;
• meeting the cost of formation and nurturing of SHGs;
• designing new delivery mechanisms; and
• 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
34
contributed Rs. 40 crore each to this Fund. The balance Rs. 20 crore were contributed by
11 public sector banks.

Types of micro credit providers are there in India and what is the
present legal framework governing them
The position is as under:
Categories of Providers Legal Framework governing their activities

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

Public Sector Banks; (ii) BR Act (iii) SBI 1949

Private Sector Banks & (iv) SBI Subsidiaries Act

(v) Acquisition & Transfer of Undertaking Act Act
Local Area Banks
1970 & 1980

(b) Regional Rural Banks RB Act 1976

(c) Co-operative Banks
(d) Co-operative Societies
BI Act 1934
R Act 1949
o-operative Societies Act
R Act 1949 (AACS)
BI Act 1934 (for sch. banks)
(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 (i) Societies Registration Act

Societies, Trusts, etc. ‘60
(ii) Indian Trusts Act

(iii) Chapter IIIC of RBI

Act ‘34
(iv) State Moneylenders Act.

35
ASSESSING A SELF HELP GROUP 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.

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 smallsized
individual accounts, borrowers as part of a SHG cut down expenses on travel (to & from
the branch and other places) for completing paper work and on the loss of workdays in
canvassing for loans.
The norms for SHGs in a particular place may have to be developed keeping in
view the local conditions. The above pattern is only a model and indicative one and could
be used as the basis for developing suitable norms for financing SHGs be it banks or any
other financing institution. A few proactive commercial banks, Regional Rural Banks and
Cooperative Banks have already introduced their own norms and the same is being
followed by the financing units.
This note may be read with NABARD circular letter dated February 2011, which
also shares different formats for appraising a SHG for finance.
For any financing institution, appraisal is very important for ensuring the utility of the loan
and repayment of the loan. Bankers generally appraise the project and the borrower. In
case of SHG financing, most of the project appraisal norms like assessing the cost benefit
and profits will not be workable due to the peculiarities of SHG financing. For considering
a loan application for financing the Financer has to evaluate the capacity and character of
the prospective borrower. SHG‘s also being customers have to be appraised before
extending credit facilities. But then assessment of creditworthiness of a SHG is very
different from that of an individual. SHGs are not to be assessed in terms of their ability to
provide collateral or guarantees of net worth. The SHGs have to be assessed in terms of
Group dynamics like cohesion, vibrancy, goal oriented action, participation of members,

36
democratic decision and collective leadership. The appraiser has to see whether the group
is functioning, actually as a group, why the members have come together, whether it is for
obtaining loan from bank or the group sees other purposes, what is the group discipline
and whether it is sustainable.
The basic principles on which the SHGs function are:
• The members of the groups should be residents of the same area and must have an
affinity. Homogeneity of relationship could be in terms of caste/occupation/gender or
economic status (which is critical).
• Savings first, credit thereafter SHGs should hold regular meetings
• SHGs should maintain record of financial and other transactions they should have
norms regarding membership, meetings etc.
• Group leaders should be elected by members and rotated periodically.
• Transparency in operations of the group and participatory decision making.
• Rates of interest on loans should be decided by the group
• Group liability and peer pressure to act as substitutes for traditional collateral.
For assessing a Self Help Group the important aspects that a financer should look into
include.

Norms for functioning:

The SHG should have developed some kind of norms for its functioning the norms
should be covering major areas of its functioning as well as the decision making processes,
leadership etc., Norms generally relate to-
Membership
Meetings - time, periodicity
Savings - amount, periodicity, rate of interest (return)
Credit - procedure for sanction, ceiling amount, purposes, rate of interest to be charged,
repayment period etc.
Fines - in case of default in attending meetings, savings and credit repayment. Group may
also levy fines for any deviant behaviour 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.

37
The above norms may be written or oral. They may be decided in the initial meetings or
they may evolve over a period of time depending upon the need of the group. The
important aspect to be looked into are:
• How norms evolved, whether by the consensus of the whole group.
• Whether the members are aware of the norms (even if they are oral) and understand
them.
• Whether the norms are implemented

Meetings
The group decides the periodicity of the meetings i.e., weekly, fortnightly or monthly.
They also decide on the time of the meeting. Decision on time and periodicity helps in
regular conduct of meetings. The regularity in the holding of the meeting and the
attendance during meeting gives an indication bout groups functioning. Therefore a
Financer should see whether.
• The meetings have been held regularly.
• The attendance in the meetings.
• The members are punctual and stay till the end of the meeting.
• Are there any sanctions for the delinquent members?
The Financier can use his observations during the meetings and the meeting register to get
data on this appraisal aspect.
Maintenance of Books
Whether group is maintaining the basic books that will give details of its
functioning and accounts of the group is an important criterion to be judged. The books
should give the details of number of meetings held, decisions taken in the meetings,
amount of savings of the members and credit availed, the total savings of the group and
repayments. Who maintains these books is another important criteria for judging the
group. Do members maintain it, if not are they making efforts to achieve basic numeracy
or literacy so that they can start doing it themselves.
inancer 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.

38
In case of illiterate groups whether what is the system followed, does the group verify the
books maintained by NGO/outsider.
Whether systems have been developed to ensure safe custody of cash.

Leadership
Two or three group members are elected as leaders/ book-writers. Initially the
opinion leaders may be the leaders and over a period of time they are expected to be take
turns. The group leaders are expected to a) regularly convene and conduct the meetings, b)
help the group members in taking decisions, c) resolve conflicts, d) maintain books of
account and e) approach bank branch for operation of accounts. The aspects that are to be
seen are :
Whether the leaders have been elected and rotated.
Whether they help in democratic functioning of the group.
Whether there is a conscious attempt to groom other members to take up leadership Are
they marginalizing the benefits (especially loans?)
Participation and Awareness of Group Members
Are the Members aware of the purpose of group formation, the operations and
activities of the group viz? The savings and the credit of the group as well as the
individual member‘s savings and credit details.
• Do they participate in group discussions and decision making?
• Do they help solve the problem that are raised in the meetings?
• Do they work cohesively and have transparent dealings?
The democratic character of the group may be judged by attending one or two
meetings and talking to individual members. The awareness level of members helps in
healthy functioning of the group and resolution of conflicts within the group.

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:

39
• The decision making process of selecting loans
• 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.

SHGs and Linkage Programme

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.

Supplementary to SHG linkage does not supplant the existing banking system, but it
formal supplements it thus taking full advantage of the resources and other
advantages of the banking system.
banking

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.

40
NPA Savvy The Linkage mechanism has proved that the repayments are as high as
95% - 100 %

Peerpressue as The SHG linkage emphasizes peer pressure within the group as
collateral 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 SHGs have exclusive focus on absolute have-nots, who have been
focus bypassed by the banking system. Social banking does not have any
meaning if the lowest strata and the unreachedss are not focused.

No-subsidy- The programme does not envisage any subsidy support from the
dependence government in the matter of credit. The issue is to build capabilities
syndrome 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.

Vikram Gandhi, Chair

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

41
 Before joining CSFB, Mr. Gandhi spent 16 years at Morgan Stanley where he held
various positions including the Co-Head of the Financial Institutions Practice; Head of
Institutional Strategy and Business Development; Chief Operating Officer for the Firm‘s
E-Commerce Steering Committee; and President, Morgan Stanley India.
Mr. Gandhi has a wealth of experience in being involved in various Financial
Institutions high-profile M&A transactions and financings across the globe; such as
Bank of America‘s acquisition of Fleet, the sale of National Processing Company to Bank
of America, merger of Chase Manhattan and Chemical Bank, the sale of First Fidelity to
First Union, and Bank of Boston‘s acquisition to Bay Bank.
Mr. Gandhi received his B. Com from the University of Bombay and an MBA
from the Harvard Business School, where he was designed a Baker Scholar. He is also a
qualified Chartered Accountant.

Susan Davis, Member

Susan serves as the Vice President and Director of Global Academy for Social
Entrepreneurship. She oversees expansion to the Middle East and Central Asia region.
Susan also acts as an advisor to the International Labour Organization and Environmental
Defence. In 1997, she helped to found and now chairs the board of the Garmin
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 19871991
where she worked for the Ford Foundation and was responsible for the organizing the
donor consortia to scale up Garmin 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 travelled 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

42
established its executive training program for the Middle East and he is currently a
member of the Global Advisory Council at his alma mater, the Garvin School of
International Management at Thunderbird. He also remains active in Rotary, particularly
with Rotary‘s international microfinance and other social development programs and is a
member of the International Executive Services Corps and the
Financial Services Volunteer Corps. . Bob‘s other interests include international current
affairs, tennis, hiking, rafting, extensive travel.

Jim Greenberg, Member

Chairman and CEO of DevCorp International, Greenberg developed and managed two
large joint venture companies in Saudi Arabia as General Manager. In 1995 he became the
founding partner of DevCorp International E.C., a GCC based venture development and
investment company with active projects spanning shrimp farming, petrochemicals, light
manufacturing, and telecoms/IT. Jim is a 1968 Graduate of West Point and holds advanced
degrees from Harvard Business School, the University of Southern California, and the
Industrial College of the Armed Forces.
Elke Ward-Smith, Member
Elke Ward-Smith, a multilingual German citizen, started her 20 year banking career at
Citibank NY with assignments in Latin America, Europe and Asia. These assignments
typically involved building new structured finance business and taking US financial
expertise to ―emerging‖ markets and helping multinationals raise liquidity in an
environment of debt crises and strict capital controls. Elke later joined Chase Manhattan
Asia, Ltd in Hong Kong to set up an Asian Structured Finance Unit, then moved onto UBS
in Zurich and London to add her international tax expertise to Project and Leveraged
Finance. Most recently Elke structured and closed tax efficient cross border transactions
for the German HypoVereinsbank working out of its London, Munich and New York
offices.

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
Stream serve, heading its next generation web services products division. Prior to Stream
serve, Deepak was the founder and CEO of jungle, Inc, a web services integration and

43
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, RedmondUSA.

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.

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
analyses 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
priorities 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 skilfully, 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 fulfil their needs further. SHGBank
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.
44
Capacity Building Initiatives
Sensitization of senior executives of commercial banks and Chairmen of RRBs has
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 internalize 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.

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.

45
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.

46
 CHAPTER IV
DATA ANALYSIS & INTERPRITATION

47
Q1- The age of the respondent, was classified into
• 18-25
• 26-30
• 31-35 •
36-40
• 41-50
• >50
Valid
Age Frequency Percent Percent Cumulative Project
18-25 20 20 20 20
26-30 30 30 30 50
31-35 9 9 9 59
36-40 15 15 15 74
41-50 10 10 10 84
>50. 16 16 16 100
Total 100 100 100

Table no 1

Graph no 1

Interpretation

The maximum number of respondents is in the age group of 26-30 which is 30%
and minimum number of respondents is in the age group of 31-35 which is 9%.
20% respondents are in the age group of 18-25, 15% respondents are in the age
group of 36-40, 10% respondents are in the age group of 41-50 and16% of
respondents are in the age group of 51 and above.

48
2- Education Status: The education status of the respondent, was classified
into
• Illiterate
• SSC fail
• SSC pass
• HSSC pass
• Graduate
• Any other
Cumulative
Education status Frequency Percent Valid Percent Project
Illiterate 15 15 15 15

SSC fail 10 10 10 25

SSC pass 20 20 20 45

HSSC pass 30 30 30 75

Graduate 9 9 9 84

Any other 16 16 16 100

Total 100 100 100

Table No 2

100

50

0
Illiterate SSC fail SSC pass HSSC pass Graduate Any other Total

Frequency Percent Valid Percent Cumulative Project

Graph No 2
Interpretation

The education status of the respondents is as follows. The maximum number of

respondents is HSSC Pass which is 30%. The minimum number of respondents
are graduates which is9% respectively. 15% respondents are Illiterate, 10%
respondents are SSC Fail, 20% respondents are SSC pass and 16% respondents
are Any other.
49
Q3 - Marital Status : The marital status of the respondent, was classified
into
• Married
• Divorce
• Widow

Marital status Frequency Percent Valid Percent Cumulative Project

Married 60 60 60 60

Divorce 15 15 15 75

Divorce 25 25 25 100

Total 100 100 100

Table no

250

200

Total
150
Divorce
100 Divorce
Married
50

0
Frequency Percent Valid Cumulative
Percent Project

Graph No 3

Interpretation
Maximum number of respondents is married and is 60%. The minimum
number of respondents is divorced which is 15%. 25% of the respondents are
widow and none of the respondents are unmarried.

50
Q4 Occupation: The occupation of the respondent, was classified into
Service
• Labour
• Maid servant • Petty business • Any
other.
Cumulative
Occupation Frequency Percent Valid Percent Project
Service 20 20 20 20

Labour 15 15 15 35

Maid servant 30 30 30 65

Petty business 25 25 25 90

Any other 10 10 10 100

Total 100 100 100

Table No 4

300

250

200

150 Cumulative Project

Valid Percent
100
Percent
50
Frequency
0

Graph No 4

Interpretation
Maximum number of respondents are maid servants which count 30%. Minimum
number of respondents are into various other jobs which counts to be10%. 20%
respondents are into service, 15% respondents are labours and 25% respondents are
doing petty business.
51
Q5 Total number of members in the family: It is classified into
1-2 members
• 3-5 members
• More than 5 members

Numbers Frequency Percent Valid Percent Cumulative Percent

1-2 members 62 62 62 62

3-5 members 20 20 20 82

>5 members 18 18 18 100

Total 100 100 100

Table No 5

250

200

Total
150
>5 members
100 3-5 members
1-2 members
50

0
Frequency Percent Valid Cumulative
Percent Percent

Graph No 5

Interpretation
Maximum number of respondents has 1-2 members in their family which is 62%.
Minimum number of respondents have more than 5 members in their family which is
18% and 20% respondents have 3-5 number of members in their family.

52
 Q6 Earning members in the family: It is classified into
 1
 2
 3

Numbers Frequency Percent Valid Percent Cumulative Percent

1 70 70 70 70

2 20 20 20 90

3 10 10 10 100

Total 100 100 100

Table No 6

100
90
80
70
60 1
50 2
40 3
30 Total
20
10
0
Frequency Percent Valid Percent Cumulative
Percent

Graph No 6

Interpretation

Maximum number of respondents has only 01 earning members in the family which is
70%. Minimum number of respondents has 03 earning members in the family which is
10% and 20% respondents have 02 earning members in the family.

53
Q7 - Monthly Income: It is classified into
• Less than 1000
• 1001-2000
• 2001-3000
• 3001 and more
Cumulative
Monthly income Frequency Percent Valid Percent Percent
Less than 1000 40 40 40 40

1001-2000 20 20 20 60

2001-3000 30 30 30 90

3001 and more 10 10 10 100

Total 100 100 100

Table No 7

300

250

200

150 Cumulative Percent

Valid Percent
100
Percent
50
Frequency
0

Graph No 7

Interpretation
Maximum number of respondents earn less than Rs.1000 per month. Minimum
number of respondents earn 3001and more in a month. 20% respondents earn
between10012000 in a month and 30% respondents earn between 2001-3000.

54
 Q8 - Housing status: It is classified into
• Rented house
• Own house

Housing status Frequency Percent Valid Percent Cumulative Percent

Rented 60 60 60 60
Own house 40 40 40 100
Total 100 100 100
Table No 8

100%
90%
80%
70%
60%
50%
40% Total
30%
20% Own house
10% Rented
0%

55
 Q9 - Micro Finance Awareness amongst respondents

Valid Frequency Percent Valid Percent Cumulative Percent

1 90 90 90 60

2 10 10 10 100

Total 100 100 100

Table No 9

100%
90%
80%
70%
60% Total
50%
40%
30%
20%
10%
0%
FrequencyPercent
Valid Percent
Cumulative Percent

Interpretation
Question number 9 deals with, whether respondents have heard about micro finance.
Out of 100 respondents, 90 respondents responded‖Yes‖, which is 90%. The outcome of
this question is positive about the awareness about micro finance.

56
 Q10- Question No. 10 deals with the awareness about various schemes
under micro finance. Options given for the respondents, were
• Micro credit
• Micro insurance
• Saving schemes
• Employment schemes
Schemes Frequency Percent Valid Percent Cumulative Percent
Micro credit 10 10 10 10
Micro insurance 5 5 5 15
Saving schemes 65 65 65 80
Employment schemes
20 20 20 100
Total 100 100 100
Table No 10
120

100

80

60

40

20

0
Micro credit Micro insurance Saving schemes Employment Total
schemes

Frequency Percent Valid Percent Cumulative Percent

Graph No 10
Interpretation
Respondents are aware about the various micro finance schemes. Maximum
number of respondents which counts 65% is aware about micro saving
schemes. Minimum number of respondents which counts 5% are aware about
micro insurance schemes. 10% respondents are aware about micro credit
schemes and 20% respondents are aware about employment schemes related to
micro finance

57
 Q11 - Are you aware about Microfinance.
S.No. Result No. of respondent Percentage

1 Yes 88 88

2 No 12 12

Table No 11

100
98
96
94
2 No
92
1 Yes
90
88
86
84
82
No. of respondent Percentage

Graph NO 11

Interpretation
From the above we interpretative that 88% people aware about the
microfinance & 12% people who unaware about the microfinance.A depth
study is required to look at the channels where microfinance can communicate
to 12% of people. Channels being print and digital media as well by arranging
community programmers.

58
Q12- If yes, does Microfinance provides the better service than traditional bank
service?
S. No. Result No. of respondent Percentage

1 Yes 65 74

2 No 23 26

Table No 12

80
70
60
50
40
30
20
10
0
No. of respondent Percentage
1 2

Graph No 12

Interpretation
From the above 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. Microfinances need to provide
additional services to its customers like a nationalized bank .This can be done
by using innovative products to attract these
26.14% people.

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 Q13 - Purpose of loan is taken through Microfinance
S. No. Purpose No. of respondent Percentage

1 Small business 25 28.41

2 Tiny/cottage industry or service 15 17.04

activity

3 Artisan activity 12 13.63

4 Agricultural & Allied activity 20 22.73

5 Transport sector activity 16 18.18

Table No13

60
50
40
30
20
10
0 Percentage
Transport sector
Small business

Artisan activity

Agricultural & Allied

Tiny/cottage industry
or service activity

No. of respondent
activity
activity

1 2 3 4 5

Interpretation
From the above 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. Number of loans given to small
business is highest among other sectors. It indicates that this sector is neglected
by banks as they ask for collateral security which cannot be provided by these
people so they approach microfinance

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Q14-How much loan you have taken?
a)Less then 50000 or more 75000 and above More then 100000
50000 but less then but less then
75000 100000

25 15 12 48

Table No 14

Graph No 14

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

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Q15- Do you feel that you become more self-dependent after taking the
loan through Microfinance?
S. No. Result No. of respondent Percentage

1 Yes 75 85.23

2 No 13 14.77

Table No15

100
90
80
70
60 2 No
50 1 Yes
40
30
20
10
0
No. of respondent Percentage

Graph No 15
Interpretation
7m the above 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. Evaluation must be done on 15% people to know how these finance
systems can help them further.

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CHAPTER V

FINDINGS

SUGGESTIONS

CONCLUSION

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 FINDINGS

• Ability to save and access loans.

• Opportunity to undertake an economic activity.
• Mobility-Opportunity to visit nearby towns.
• Awareness- local issues, MFI procedures, banking transactions.
• Skills for income generation.
• Decision making within the household.
• Group mobilization in support of individual clients- action on Social issues.

• Role in community development activities.

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 SUGGESTION

The microfinance should be -

• Designing financially sustainable models.

• Aim for community participation which results in scaling up of operations for the
deserved people.
• Demonstrate that banking the unbanked people can create economic and social
infrastructure thereby increasing the GDP of the country.
• Build professional systems that can help people to be financial literate through which
poverty eradication is possible within the community.
• Ensure transparency and enhance credibility through disclosures which can help to attract
investments and earn more clients.
• Provide support for capacity building initiatives.

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 CONCLUSION
The legitimacy of microfinance is beyond doubt. In a context of growing
financialisation, the poor more than anybody else need microfinance services.
In the same vein, in a context where democracy remains mainly formal and
inaccessible to the poorest, the collective approach (which is at the core of
Indian microfinance through the Self-help-group concept) undeniably
represents a tool for democratic practices and therefore for grass roots
development, especially for women.
In practice, however, real effects are much more limited than what is usually
presented. How far and under what conditions can microfinance combat
poverty and contribute to grass roots development? The question is all the
more acute in India, where microfinance has grown very fast and intensively
over the last decade. After a first cycle of growth where the number of clients
went from a few thousand to several millions, microfinance is nowadays at the
core of many agendas, be they public or private. Indian microfinance, both in
terms of the number of clients and the volume of credit disbursed, is not
anecdotal any more. Because of the socio-economic, political, even cultural
questions it raises, microfinance becomes a societal challenge. If it is indeed
urgent not to let oneself be blinded by the surrounding optimism and not to
under-estimate the present weaknesses of microfinance, it is equally necessary
to identify efficient and innovative experiments in order to better reflect on the
future of microfinance.
This is why this communication aims to shed light at the process of
microfinancialization in particular at the spatial dimension and dynamics.
Findings on the spatial variation and changes in the development of the
microfinance sector can enhance our understanding of the complex processes of
current regional development in India and can contribute to the formulation of
innovative regional development policies.

66
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Websites:
• http://www.indiastat.com/
• www.share microfin ltdbank.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

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