Summer Training Report of Role & Implications of Micro-Finance

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A
Project Report
On
“Role & Implications of Micro Finance”
Submitted in Partial fullfilment for the Award of degree of
Master of Business Administration
2009-2011
Submitted to :- Submitted by
Ankit Kumar Jain
(MBA IV SEM)
MANAGEMENT & COMMERCE INSTITUTE OF GLOBAL SYNERGY
(Approved by AICTE, Affiliated to Rajasthan Technical University of Kota)

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Certificate
This is to certify that Mr. Ankit Kumar Jain is a student of MANAGEMENT &
COMMERCE INSTITUTE OF GLOBAL SYNERGY which is affiliated to
Rajasthan Technical University, Kota.
The project undertaken by him is prepared as per my knowledge and the work
has been completed by him under my guidance.
Date
(Lecturer MIGS)

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ACKNOWLEDGEMENT
"Gratitude is not a thing of expressions, it is more matter of feeling."
My Disseration Report work includes the contribution of number of people who supported me throughout
my tenure. I take this opportunity to thank all of them from the core of my heart
There is always a sense of gratitude which one express towards others for their help and supervision in
achieving the goals. This formal piece of acknowledgement is an attempt to express the feeling of gratitude
towards people who helpful me in successfully completing of my training.
I would like to express my deep gratitude to… my supervisor for her constant co-operation. He/She was
always there with her competent guidance and valuable suggestion throughout the pursuance of this research
project.
Special thanks to Dr. N.S. Kothari our Principal who guided me to work honestly and to give valuable
suggestion for improving my work last but not least I would also like to place of appreciation to all the
respondents whose responses were of utmost importance for the project.
Above all no words can express my feelings to my parents, friends all those people who supported me during
my project. I am also thankful to all the respondents whose cooperation & support has helped me a lot in
collecting necessary information. I would also like to thank almighty God for his blessings showered on me
during the completion of project report.
At last, I am also thankful to Prof. Mr. Ishwar Tharaney (Director of MIGS), Family members of MIGS,
my Parents and my Friends, to all known and unknown individuals who have given me their constructive
advise, educative suggestion, encouragement, co-operation and motivation to prepare this report
(ANKIT KUMAR JAIN)

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CONTENTS PAGE NO.
1. MICROFINANCE FAQ‘S 5
2. MICROFINANCE OVERVIEW 11
3. MICROFINANCE IN INDIA 14
4. MICROFINANCE INSTITUTIONS 32
5. SHG BANK LINKAGE MODEL 40
6. URBAN MICROFINANCE 48
7. MICROFINANCE IN NGO‘S 54
8. FUTURE OF MICROFINANCE IN INDIA 66
9. INTRODUCTION OF NABARD & SIDBI 72
10.RESEARCH METHODOLOGY 81
11.FACTS & FINDING 90
12.DATA ANALYSIS AND INTERPRETATION 92
13.SWOT ANALYSIS 111
14.CONCLUSIONS 115
15.SUGGESTIONS 119
16.ANNEXURE 121
17.BIBLIOGRAPHY 125

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Microfinance FAQS
What is microfinance?
Microfinance began as a financial system to provide poor families with very small loans (microcredit) to help
members begin or sustain income-generating activities. Microcredit arose in the 1970s, through the efforts of
Mohammad Yunus, a microfinance pioneer and founder of the Grameen Bank of Bangladesh.
The definition of microfinance has since broadened, and includes savings, insurance, and money transfer
vehicles; the industry has realized that those who lack access to traditional formal financial institutions actually
require and desire a variety of financial products.
Microcredit has largely been directed by the non-profit sector, but recently we see (as in the case of SKS) the
emergence of ―for-profit‖ MFIs. In India, these ‗for-profit‘ MFIs are referred to as Non-Banking Financial
Companies (NBFCs).
What is a Microfinance Institution (MFI)?
A microfinance institution is an organization that offers financial services to low income populations. Almost
all give loans to their members, and many offer insurance, deposit and other services. Various types of institutions
offer microfinance: NBFCs, NGOs, cooperatives, private commercial banks and sectors of government banks.
Some NGOs offer microcredit as one slice amongst a host of non-financial development activities. SKS has
opted instead to focus solely on microfinance, to develop the most efficient and effective mechanisms to deliver
finance to the poor.
How does microfinance help the poor?
Microfinance plays an important role in fighting the multi-dimensional aspects of poverty. Microfinance
increases household income, which leads to attendant benefits: increased food security, the building of assets, and an
increased likelihood of educating one‘s children.
Microfinance is also a means for self-empowerment. It enables the poor, especially women, to become
economic agents of change - they increase income, become business-owners and reduce their vulnerability to external
shocks (illness, weather, etc)
When is microfinance not an appropriate tool?

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Microcredit is best-suited to those with entrepreneurial capability and opportunity. This translates to those
poor who work in growing economies, and who can undertake activities that generate weekly stable incomes.
Microfinance is inclusive of a much larger range of clients.
However, many poor do not fit within the current structure of microfinance. One reason for this is extremely
poor people (destitute and homeless) lack a stable income. Without a stable income, it is difficult to make the weekly
repayments that microcredit requires. Credit requires a 98% ―hit‖ rate to be successful, as high default rates
undermine the very principles of lending.
Programs have been developed to provide these ―very poor‖ with safety net programs that offer basic
subsistence. At SKS, our NGO-arm, SKS Assist aims to do so, and endeavors to graduate members to our
microfinance program.
Why do MFIs charge such high interest rates to poor people?
Providing financial services to poor people is expensive. This cost is one of the most important reasons why
banks don't make small loans. For example, a Rs.2,000 loan requires the same amount of resources as a
Rs.1,00,000 loan.
Microfinance is a high-touch business: At SKS, field staff managers must perform village surveys before
entering a village, conduct interviews with potential members, train members on credit discipline, travel to villages by
motorbike every week to collect interest and disburse loans, and follow-up to ensure the loans are being used for their
intended purpose. These personnel and administration costs easily amount to 11% of our total cost structure.
In addition, we must borrow from commercial sources to lend to our members. This cost of lending is
anywhere from 10-12%. The combination of this personnel/administration costs, the cost of lending, a 1-2% loan loss
provision (due to default or writing off a loan), and 1-2% profit used to expand operations, translates to an interest
that appears high. However, it is the lowest possible interest we can charge to cover our costs. As the microfinance
industry matures, and MFIs like SKS continue to scale and increase efficiency, our cost of lending may reduce. And,
if commercial banks reduce their own rates, we can and will deliver these savings to our borrowers.
How do you know microfinance is making an impact?
Microfinance has gained popularity for several reasons. One, it is a much better alternative than the informal
financial sector. In India for example, moneylenders charge rates of 36-72%. Secondly, members realize the value
of assured long-term access to credit. Many SKS clients have been with us since inception in 1998, and have
consistently taken loans each year.

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This access to finance allows women to increase income, which benefits the entire household. How do we
know this? Our return on investment (ROI) calculations demonstrate that most borrowers earn anywhere from 25%-
200% more than the interest rate charged, due to low infrastructure costs, no tax or legal costs, and the overall capital
cost that is just a small percentage of the total cost.
Why doesn‟t SKS allow members to save?
SKS is a Non-Banking Financial Company (NBFC), and is therefore regulated by the Reserve Bank of India
(RBI). RBI regulations do not allow NBFCs to hold savings deposits.
Why do you only lend to women?
Social development studies have demonstrated that women are much more likely to reinvest income into the
household, for the benefit of the entire family.
Can microfinance be profitable?
Yes it can, as SKS demonstrates.
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 lends to the hope that microfinance can be sufficiently attractive for investors, as well as the mainstream into the
retail banking sector.

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Comparison of New and Old Microfinance
Base Old Microfinance New Microfinance
Rules of Model Intricate, explicit rules dictated and
directed by MFI
Simple rules made by groups
Institutional Thrust Single actor providing both organizing
and credit services
Multiple actors providing organizing,
savings, and credit services
Growth Strategy Reliance on paid animators (field
workers) to engage community members
to participate in scheme
Growth often resulting from ―ripple
effect‖: groups forming new groups; local
volunteers spreading information
Locus of
Sustainability
Self-sufficiency sought at institutional
level; institution to cover all costs
through internally generated income
Self-sufficiency sought at group level;
group able to cover costs through
members‘ labor and internally generated
cash
Transparency of
Options
MFIs tempted to withhold information
concerning competitive local resources
(e.g. lower interest loans)
NGOs have no reason to hold back
important information and options that
speak to the best interests of groups and
members
Service Providers MFIs provide group organizing
functions, credit, and in some cases,
savings and insurance (insurance often
provided by third parties)
SHPIs provide group-organizing
functions; groups and banks provide
credit; third parties provide insurance
Financial Service
Focus
Credit-led with savings services in some
cases; credit minimum high in order to
cover transaction costs of borrower
Savings-led, based on the concept of
thrift; credit minimum nil, as group bears
costs
Credit Profile Credit tailored to the needs of the
financial institution for cost purposes;
loan terms and repayment practices based
on institutional viability; therefore rigid
regarding regular payments of principal
Financial services flexible and based on
capacity of each group member; terms
often negotiated— even mid-term—to
adjust to repayment capacity of borrower

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Base Old Microfinance New Microfinance
Loan Purpose Initial loans typically designated for
income generating purposes
Initial loans typically used for any purpose
Interest Rate Calculated to cover costs of specialized
institution plus institutional and investor
need for return on investment; rates often
ranging from 36% to 87% (CRS MFIs)
Calculated by group to cover ―hard costs‖
and varying according to group need for
return on investment; group level rates
often range 24%–60%; Bank rates 12–
13%
Depth of Outreach High minimum loan amounts (at least Rs.
1000 per member) preventing reaching
the poorest; also, rigidity in repayment of
principal excludes seasonal cash flow
patterns of poorest
Low minimum loan amounts allow even
the most risk-averse poor to participate;
flexible repayment of principal (both at
group and bank level) consider the
variable cash flow of the poorest
Drop Outs CRS own data shows 11% lowest rate;
some programs with 30%
Less than 5% per year (undocumented
officially; data drawn from CRS-partner
reports)
Annual Investment
per Client
Investment and opportunity costs high; in
initial five years investment is as high as
Rs. 15000 per client, including operating
subsidy plus loan capital
Investment and opportunity costs low; in
initial five years, investment is as low as
nil (for self replicating groups) and as
high as Rs. 500 per year per client (for
CRS/partner supported groups)

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MICRO
FINANCE
AN
OVERVIEW

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1. MICROFINANCE - AN OVERVIEW
1.1Micro Finance Background
Micro-credit for the poor has emerged as an idea that appeals to several sections of people. In principle, even
the world's poorest people can acquire savings and investment if they have access to capital. The strategy is
redistributive (appeals to liberals), entrepreneurial (appeals to conservatives) and empowering (appeals to radicals).
The emergence of micro-credit as an alternative to the existing methods of addressing rural poverty through the
provision of credit has questioned the fundamentals of the development paradigm in developing countries. Though it
was not the first micro lending institution, the famed Grameen Bank (http://www.grameen-info.org/) of Bangladesh
has become the most celebrated and widely imitated. Grameen, which began as an experiment initiated in 1976 by
economist Muhammed Yunus, became a full-fledged bank in 1983. In a Muslim country with strong patriarchal
traditions, empowering women, as Grameen did, had social-change implications far beyond immediate
entrepreneurship. It also made sound business sense, since repayment rates remained high, generally above 95%. .
The Grameen model has inspired more than 10,000 micro lending organizations providing loans to more than
25 million poor people throughout the world, most of them women. The number of these organizations grew
dramatically during the 1990s, spurred by the notion of 'self-help' and a faith in the creditworthiness and
entrepreneurial potential of the poor. The movement took off with strong support both from the free-enterprise zealots
of the right and the anti-poverty warriors of the left.
But three decades into the vast social experiment of lending to the poor, many questions remain. Does micro-
credit really help the world's poorest citizens? Does it genuinely empower women? How well has the Grameen model
worked in other countries? And can we expect it to be sustainable without subsidy?
Micro-Credit in India: The Early Years
Micro-credit is not a new idea in India. Research conducted in India by t he National Bank for Agriculture
and Rural Development (NABARD) (http://www.nabard.org/) during the early-'80s showed that despite a wide
network of rural bank branches which implemented specific poverty alleviation programmes that sought creation of
self- employment opportunities through bank credit for almost two decades, a very large number of the poor
continued to remain outside the fold of the formal banking system.
NABARD had been set up in 1982 under an Act of Parliament as a development bank to provide and regulate
credit and other facilities for the promotion and development of agriculture, cottage and village industries, handicrafts
and other allied economic activities in rural areas with a view to "promoting integrated rural development and
securing prosperity of rural a Rural development, special schemes and rural banking could not tackle the widespread
poverty in rural areas. Research indicated that existing banking policies and procedures were perhaps not suited to the

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immediate needs of the very poor. What they really needed was better access to these services and products, rather
than cheap, subsidized credit. The priority of the rural poor appeared to be consumption credit, savings, production
credit and insurance. Consumption needs included credit for short periods for emergent needs, which were usually
met by informal sources at exploitative interest rates, as poor borrowers were unable to offer banks any security for
small consumption loans
Against this background, a need was felt for alternative policies, systems and procedures, savings and loan
products, complementary services, and new delivery mechanisms which would fulfill the requirements of the poorest,
especially of the women members of such households. The Grameen Bank in neighbouring Bangladesh had already
proved a successful model of micro lending in South Asia. The self-help group model, pioneered by the Grameen
Bank, emerged as a viable strategy to tackle these issues ' both for borrowers as well as banks.

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MICRO
FINANCE
IN
INDIA

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1.2 Micro Finance in India
Microfinance Institutions in India
More than subsidies poor need access to credit. Absence of formal employment make them non `bankable'.
This forces them to borrow from local moneylenders at exorbitant interest rates. Many innovative
institutional mechanisms have been developed across the world to enhance credit to poor even in the
absence of formal mortgage. The present paper discusses conceptual framework of a microfinance
institution in India. The successes and failures of various microfinance institutions around the world have
been evaluated and lessons learnt have been incorporated in a model microfinance institutional mechanism
for India.
Micro-finance and Poverty Alleviation
Most poor people manage to mobilize resources to develop their enterprises and their dwellings slowly over
time. Financial services could enable the poor to leverage their initiative, accelerating the process of building
incomes, assets and economic security. However, conventional finance institutions seldom lend down-market to serve
the needs of low-income families and women-headed households. They are very often denied access to credit for any
purpose, making the discussion of the level of interest rate and other terms of finance irrelevant. Therefore the
fundamental problem is not so much of unaffordable terms of loan as the lack of access to credit itself (Kim 1995). .
Over the last ten years, however, successful experiences in providing finance to small entrepreneur and
producers demonstrate that poor people, when given access to responsive and timely financial services at market
rates, repay their loans and use the proceeds to increase their income and assets. This is not surprising since the only
realistic alternative for them is to borrow from informal market at an interest much higher than market rates.
Community banks, NGOs and grassroot savings and credit groups around the world have shown that these micro
enterprise loans can be profitable for borrowers and for the lenders, making microfinance one of the most effective
poverty reducing strategies.
To be successful, financial intermediaries that provide services and generate domestic resources must have
the capacity to meet high performance standards. They must achieve excellent repayments and provide access to
clients. And they must build toward operating and financial self-sufficiency and expanding client reach.
Strategic Issues
 Is there a prevailing paradigm for micro-finance?
 Are there clearly visible pattern across the country?

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 Is there a clearly defined foundation building blocks such as organizing principles, gender
preferences and operational imperetives?
 What are methodological issues?
Institutional Issues
 Is there a need for a new institution?
 Should it operate all India or in a state?
 Where should it be located?
 Who can lead an institution of this sort?
 What will its contextual interconnections be?
 Who will be its beneficiaries?
Connectivity Issues
 How should the Corporate Financial Sector be involved?
 What is the role of donor agencies?
 How should communities be involved?
 Are there political issues that should be explicitly considered?
 Are there government policy issues?
The Formal Sector Institutions
Traditionally, the formal sector Banking Institutions in India have been serving only the needs of the
commercial sector and providing loans for middle and upper income groups. Similarly, for housing the HFIs
have generally not evolved a lending product to serve the needs of the Very LIG primarily because of the perceived
risks of lending to this sector. Following risks are generally perceived by the formal sector financial institutions:
 Credit Risk
 High transaction and service cost
 Absence of land tenure for financing housing
 Irregular flow of income due to seasonality
 Lack of tangible proof for assessment of income
 Unacceptable collaterals such as crops, utensils and jewellery

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As far as the formal financial institutions are concerned, there are Commercial Banks, Housing Finance
Institutions (HFIs), NABARD, Rural Development Banks (RDBs), Land Development Banks Land Development
Banks and Co-operative Banks (CBs). .
The Government has taken several initiatives to strengthen the institutional rural credit system. The rural
branch network of commercial banks have been expanded and certain policy prescriptions imposed in order to ensure
greater flow of credit to agriculture and other preferred sectors.
The Existing Informal financial sources
The informal financial sources generally include funds available from family sources or local money lenders.
The local money lenders charge exorbitant rates, generally ranging from 36% to 60% interest due to their
monopoly in the absence of any other source of credit for non-conventional needs. Chit Funds and Bishis are other
forms of credit system operated by groups of people for their mutual benefit which however have their own
limitations.
Lately, few of the NGOs engaged in activities related to community mobilization for their socio-economic
development have initiated savings and credit programmes for their target groups. These Community based financial
systems (CBFS) can broadly be categorized into two models: Group Based Financial Intermediary and the NGO
Linked Financial Intermediary.
Most of the NGOs like SHARAN in Delhi, FEDERATION OF THRIFT AND CREDIT ASSOCIATION
(FTCA) in Hyderabad or SPARC in Bombay have adopted the first model where they initiate the groups and provide
the necessary management support. Others like SEWA in Ahmadabad or BARODA CITIZEN's COUNCIL in Baroda
pertain to the second model.
The experience of these informal intermediaries shows that although the savings of group members, small in
nature do not attract high returns, it is still practiced due to security reasons and for getting loans at lower rates
compared to that available from money lenders. These are short term loans meant for crisis, consumption and income
generation needs of the members. The interest rates on such credit are not subsidized and generally range between 12
to 36%. Most of the loans are unsecured. In few cases personal or group guarantees or other collaterals like jewellery
is offered as security.
The Wholesalers will include agencies like NABARD, Rashtriya Mahila Kosh-New Delhi and the Friends of
Women's World Banking in Ahmadabad. Few of the NGOs supporting SHG Federations include MYRADA in
Bangalore, SEWA in Ahmadabad, PRADAN in Tamilnadu and Bihar, ADITHI in Patna, SPARC in Mumbai, and
ASSEFA in Madras etc. While few of the NGOs directly retailing credit to Borrowers are SHARE in Hyderabad,
ASA in Trichy, RDO Loyalam Bank in Manipur.

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Strengths of Informal Sector
A synthesis that can be evolved out of the success of NGOs/CBOs engaged in microfinance is based on
certain preconditions, institutional and facilitating factors.
Preconditions to Success:
Those NGOs/ CBOs have been successful that have istilled financial value/ discipline through savings and
have demonstrated a matching value themselves before lending. A recovery system based on social intermediation
and various options including non-financial mechanisms has proved to be effective. Another important feature has
been the community governance. The communities in which households are direct stake holders have successfully
demonstrated the success of programs. A precondition for success is to involve community directly in the program.
Experience indicates that savings and credit are both critical for success and savings should precede credit. Chances
of success more with women: Programs designed with women are more successful.
Operating Indicators
The operating indicators show that programs which are designed taking into account the localized and
geographical differences have been successful. Effective and responsive accounting and monitoring mechanisms have
been an important and critical ingredient for the success of programs. The operational success has been more when
interest rates are at or near market rates: The experience of NGOs/CBOs indicates that low income households are
willing to pay market rates. The crucial problem is not the interest rates but access to finance. Eventually in absence
of such programs households end up paying much higher rates when borrowing from informal markets. Some NGOs
have experimented where members of community decide on interest rates. This is slightly different from Thailand
experience where community decides on repayment terms and loan amount. A combination of the three i.e. interest
rates, amount and repayment period if decided by community, the program is most likely to succeed. A program
which is able to leverage maximum funds from formal market has been successful. Experience indicates that it is
possible to leverage higher funds against deposits.
Facilitating Factor
Another factor that has contributed to the success is the broad environment. A facilitative environment and
enabling regulatory regime contributes to the success. The NGOs/CBOs which have been able to leverage funds from
formal programs have been successful. An essential factor for success is that all development programs should
converge across sectors.
Weaknesses of Existing Microfinance Models
One of the most successful models discussed around the world is the Grameen type. The bank has
successfully served the rural poor in Bangladesh with no physical collateral relying on group responsibility to replace
the collateral requirements. This model, however, has some weaknessed. It involves too much of external subsidy

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which is not replicable Grameen bank has not oriented itself towards mobilizing peoples' resources. The repayment
system of 50 weekly equal installments is not practical because poor do not have a stable job and have to migrate to
other places for jobs. If the communities are agrarian during lean seasons it becomes impossible for them to repay the
loan. Pressure for high repayment drives members to money lenders. Credit alone cannot alleviate poverty and the
Grameen model is based only on credit. Micro-finance is time taking process. Haste can lead to wrong selection of
activities and beneficiaries.
Another model is Kerala model (Shreyas). The rules make it difficult to give adequate credit {only 40-50
percent of amount available for lending). In Nari Nidhi/Pradan system perhaps not reaching the very poor.
Most of the existing microfinance institutions are facing problems regarding skilled labour which is not
available for local level accounting. Drop out of trained staff is very high. One alternative is automation which is not
looked at as yet. Most of the models do not lend for agriculture. Agriculture lending has not been experimented.
 Risk Management : yield risk and price risk
 Insurance & Commodity Future Exchange could be explored
All the models lack in appropriate legal and financial structure. There is a need to have a sub-group to
brainstorm on statutory structure/ ownership control/ management/ taxation aspects/ financial sector prudential
norms. A forum/ network of micro-financier (self regulating organization) is desired.
1.2.1 A New Paradigm
A new paradigm that emerges is that it is very critical to link poor to formal financial system, whatever the
mechanism may be, if the goal of poverty alleviation has to be achieved. NGOs and CBOs have been involved in
community development for long and the experience shows that they have been able to improve the quality of life of
poor, if this is an indicator of development. The strengths and weaknesses of existing NGOs/CBOs and microfinance
institutions in India indicate that despite their best of efforts they have not been able to link themselves with formal
systems. It is desired that an intermediary institution is required between formal financial markets and grassroot. The
intermediary should encompass the strengths of both formal financial systems and NGOs and CBOs and should be
flexible to the needs of end users. There are, however, certain unresolved dilemmas regarding the nature of the
intermediary institutions. There are arguments both for and against each structure. These dilemmas are very
contextual and only strengthen the argument that no unique model is applicable for all situations. They have to be
context specific.

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Dilemmas
Community Based Investor Owned
 Community Managed
 Community (self) financed
 Integrated (social & finance)
 Non profit / mutual benefit
 Only for poor
 'Self regulated'
 Professionally managed
 Accepting outside funds for on-lending
 Minimalist (finance only)
 For profit
 For all under served clients
 Externally regulated
The four pillars of microfinance credit system (Fig. 1) are supply, demand for finance, intermediation and
regulation. Whatever may the model of the intermediary institution, the end situation is accessibility of finance to poor.
The following tables indicate the existing and desired situation for each component.
DEMAND
Existing Situation Desired Situation

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 fragmented
 Undifferentiated
 Addicted, corrupted by capital & subsidies
 Communities not aware of rights and responsibilities
 Organized
 Differentiated (for consumption,
housing)
 Deaddicted from capital & subsidies
 Aware of rights and responsibilities
SUPPLY
 Grant based (Foreign/GOI)
 Directed Credit - unwilling and corrupt
 Not linked with mainstream
 Mainly focussed for credit
 Dominated
 Regular fund sources
(borrowings/deposits)
 Demand responsive
 Part of mainstream (banks/FIs)
 Add savings and insurance
 Reduce dominance of informal,
unregulated suppliers
INTERMEDIATION
 Non specialized
 Not oriented to financial analysis
 Non profit capital
 Not linked to mainstream FIs
 Not organized
 Specialized in financial services
 Thorough in financial analysis
 For profit
 Link up to FIs
 Self regulating
REGULATION

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 Focussed on formal service providers (informal not
regulated)
 regulating the wrong things e.g. interest rates
 Multiple and conflicting (FCRA, RBI, IT, ROC,
MOF/FIPB, ROS/Commerce)
 Negatively oriented
 include/informal recognise e.g. SHGs
 Regulate rules of game
 Coherence and coordination across
regulators
 Enabling environment
1.2.2 The Profile of Microfinance in India
The profile of micro finance in India at present can be traced out in terms of poverty, it is estimated that 350
million people live Below Poverty Line and this translates to approximately 75 million households with annual credit
demand by the poor in the country is estimated to be about Rs. 60,000 crores.
The following are some of important components of microfinance:
 Cumulative disbursements under all microfinance programmes is only about Rs. 5000 crores.(Mar.
04)
 Total outstanding of all microfinance initiatives in India estimated to be Rs. 1600 crores. (March 04)
 Only about 5 % of rural poor have access to microfinance.
 Though a cumulative of about 20 million families have accessed microfinance to the extent of Rs.
5000 crores, the total outstanding is estimated to be only about Rs. 1600 crores. The active
borrowers are estimated to have a per capita outstanding of only Rs. 2500.
 While 10 % lending to weaker sections is required for commercial banks, they neither have the
network for lending and supervision on a large scale nor the confidence to offer term loans to big
MFIs.
• The non poor comprise of 29 % of the outreach.
Non-Institutional or Informal Sources of Micro-Credit in India
In nutshell, one can say that RFIs do not fulfill the credit needs of the farmers, rural producers and the rural
poor in general, resulting in non-institutional sources of credit. The indirect reason responsible for the growth of non-
institutional sources of credit was also the economic weakness of the Jajmani System*. The non-institutional sources
of credit would include big farmers, big farmer-cum-money-lenders, commission agents, friends/ relatives,
moneylenders, traders, village shopkeepers and others. The All India Rural Credit Survey Committee, appointed by
the RBI in 1951 under the Chairmanship of Gorwala, undertook a comprehensive survey of rural credit and submitted

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its report in August 1954. The survey revealed that shares of institutional and non-institutional sources of rural credit
were 7.3 per cent and 92.7 per cent respectively.
In brief analysis micro finance chronology can be evaluated by the following steps:
 Microfinance has been in practice for ages (though informally).
 Legal framework for establishing the co-operative movement set up in 1904.
 Reserve Bank of India Act, 1934 provided for the establishment of the Agricultural Credit
Department.
 Nationalisation of banks in 1969
 Regional Rural Banks created in 1975.
 NABARD established as an apex agency for rural finance in 1982.
• Passing of Mutually Aided Co-op. Act in AP in 1995.
The Status of Microfinance
• Considerable gap between demand and supply for all financial services
 Majority of poor are excluded from financial services. This is due to, inter-alia, the following
reasons
 Bankers feel that it is fraught with risks and uncertainties.
 High transaction costs
 Unfavourable policies like caps on interest rates which effectively limits the viability of serving the
poor.
 While MFIs have shown that serving the poor is not an unviable proposition there are issues that
have constrained MFIs while scaling up.
 About 56 % of the poor still borrow from informal sources.
 70 % of the rural poor do not have a deposit account
 87 % have no access to credit from formal sources.
 Less than 15 % of the households have any kind of insurance.
 Negligible numbers have access to health insurance (0.4 %) and crop insurance (0.2 %).
• NABARD‘s bank linkage program has cumulatively reached a total of 9.4 lakh SHGs with about 1.4 crore
households.

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Opportunities for Micro-Finance Sector in India
Keeping in view of above mentioned issues relating to how and why the rural informal credit system is
strengthened, NGOs are need to sensitize the state institutions and NGOs it self has to take initiatives for the rural
banking in micro rural credit system. Moreover, rural population is a major population segment in India.
According to the 2001 Census of India 2001, 72.22 percent of the total population is rural and dependent on
agriculture and allied activities for their livelihood. Due to the failure of agricultural reforms and not adopting a
farmer-oriented agricultural policy, growth rate of employment in agriculture sector has declined from 2.32 per cent
in 1972-73 to 1.2 per cent in 1983 to 0.65 per cent in 1985. Agriculture contributed only 31.7 percent to GDP in
1993-94 down from 56.5 per cent in 1951. But this is not the complete picture of the rural economy. The rural
economy has a strong base for employment generation.
Rural economy still accounts nearly 40 per cent of India‘s GDP including 10 per cent of RNFS. Share of
exports in GDP has increased from 6.2 per cent in 1991-92 to 9.2 per cent in 1994-95. Major contribution to exports
comes from the agricultural and allied sectors such as handloom, power loom, gem and jewellery, handicrafts,
carpets, leather and mineral products, all of which have at least one primary rural production base. .
Rural non-agricultural activities have thus been growing much more rapidly than the overall employment,
agricultural employment and also urban employment. In fact, the non-agricultural rural employment has grown at an
average rate of about 5 per cent during the ten-year period 1977-78 to 1987-88. Consequently, there has been a shift
from agriculture in which employment has grown at a rate of only 0.74 per cent, to the non-agricultural activities.
It is because of decrease in self-employment and regular wages/ salaried employment in agriculture and
increase in employment in non-agricultural sector. Micro-enterprises established in RNFS contribute about 40 per
cent of the gross industrial turnover and 34 per cent of total exports. RNFS is the potential sector for employment
generation through establishment of micro-enterprises.
There is a need to match the decline in agriculture sector with the gain in non-farm activities, to absorb the
surplus labour from agriculture. Eighth Five-Year Plan document (Government of India 1992: 122) states that: "In the
long run, however, it must be recognized that agriculture and other land-based activities, ever with a reasonably high
rate and possible diversification of growth, will not be able to provide employment to all the rural workers at
adequate levels of incomes.
Indian microfinance continued growing rapidly towards the main objective of financial inclusion, extending
outreach to a growing share of poor households, and to the approximately 80 percent of the population which has yet

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to be reached directly by the banks. The larger of the two main models, the Self-Help Group (SHG) Bank Linkage
Programme (SBLP) covered about 143 million poor households in March 2006 and provided indirect access to the
banking system to another 14 million, including the "borderline poor".
1.2.3 Models of Micro Finance
There are different models followed by the different microfinance institutions in India. The following are the
some of established microfinance and their activities in microfinance can be seen here.
 Grameen bank
 Spandana
 Grameen koota
 Swayam krishi sangam
 Danda credit society
Grameen Bank
Grameen Bank (GB) has reversed conventional banking practice by removing the need for collateral and
created a banking system based on mutual trust, accountability, participation and creativity. GB provides credit to
the poorest of the poor in rural Bangladesh, without any collateral. Professor Muhammad Yunus, the founder of
"Grameen Bank"
As of July, 2004, it has 3.7 million borrowers, 96 percent of whom are women. With 1267 branches, GB
provides services in 46,000 villages, covering more than 68 percent of the total villages in Bangladesh.
General features of Grameen credit are :
a. It promotes credit as a human right
b. Its mission is to help the poor families to help themselves to overcome poverty. It is targeted to the poor,
particularly poor women.
c. Most distinctive feature of Grameen credit is that it is not based on any collateral, or legally enforceable
contracts. It is based on "trust", not on legal procedures and system.
d. It is offered for creating self-employment for income-generating activities and housing for the poor, as
opposed to consumption
e. It was initiated as a challenge to the conventional banking which rejected the poor by classifying them to be
"not creditworthy". As a result it rejected the basic methodology of the conventional banking and created its
own methodology.
SPANDANA

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Institution's Mission
Spandana envisions itself as a financially self sustainable Micro Finance Institution with a diversified
ownership. It is committed to strengthening significantly the socio-economic status of poor women in Rural and
Urban areas by providing technical and financial services on a continued basis for establishing their identity and
self-image
Products
 Loans
 Voluntary Savings
 Insurance
Main Funding Sources
 Grants
 Loans
 Savings
Largest funder for Micro Finance
The following institutions are the important funders:
ICICI Bank, SIDBI, Indian Overseas Bank, HDFC Bank, IDBI Bank, ABN AMRO Bank, ING Vysya Bank,
HDFC, UTI Bank.
SHARE Micro Finance Limited
Introduction
SML started operations in 1989 as a not-for-profit society. It was the first MFI in India to obtain a
NBFC (non-deposit accepting) license and also the first Indian MFI to carry out a microfinance
securitization transaction.
SML has employed a for-profit approach to create social returns by channeling funds from
development institutions and commercial banks as collateral-free loans to Joint Liability Groups (JLGs).
JLGs are the central element of the Grameen lending methodology adopted by SML.
Vision

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To improve the quality of life of the poor by providing access to financial and support services add
to be a viable financial institution developing sustainable communities.
Our Mission
• To mobilize resources to provide financial and support services to the poor, particularly women, for viable
productive income generation enterprises enabling them to reduce their poverty
Objectives
 To provide financial services predominantly to poor women.
 To create opportunities for self- employment for the underprivileged.
 To train rural poor in simple skills and enable them to utilize the available resources and contribute
to employment and income generation in rural areas.
Loan Proposals and their Processing
In the first step, every member who intends to access credit from the company has to complete the
compulsory group training programme and Group Recognition Test organized by the company. This
programme is conducted by the Field Credit Assistant (FCA) or a designated staff member, authorized by
SML.
Primary data is collected in a prescribed format from borrower/member to comply with the KYC
(Know your Customer) norms.
FCA should verify the loan application and completely fill the following information:
 Date of application
 Borrower identification particulars
 Loan product details
 Loan Amount
 Need for Loan
 Applicable interest rates
 Term of the Loan

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 Repayment particulars
• Acceptance by the borrower‘s family member / the relevant SHG members
The expected date of loan disbursement should be mentioned on the loan application form and to be
intimated to the borrower / member.
Loan appraisal and Terms & conditions
FCA or designated staff of the Company should convey to the borrower/member the amount of loan
sanctioned along with the terms and conditions including the annualized rate of interest and method of
repayment of the loan.
Disbursement procedure of loans
Authorized staff of SML should verify the Loan application along with all securities, sureties and
approvals, which is applicable as per the applicable policy of the company.
 Demand promissory Note
 Surety or guarantee
 SHG members/Group acceptance
 Family members‘ acceptance
 Acceptance of the terms and conditions by the borrower/member for rate of interest, processing
charges if any and repayment terms.
Documentation for Hypothecation or charge creation or any security or surety/guarantee
 The acceptance letter
• Letter of confirmation of deposit of security documents
The Company keeps all the documents in the safe custody in the respective premises by the
authorized persons. Loan passbook has to be given to every borrower/member for each loan. The loan
passbook contains the repayment schedule, effective interest rate and other processing charges etc. The
company gives prior notice of any change in the interest rate and other charges to the borrower / member.

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Microfinance and Enterprises
15%05%80%1,105Non Farm
21%07%72%282Animal husbandry
22%23%55%168Agriculture
17%08%76%1,555Total
No changeDecreaseIncreaseNo.Enterprises
Income change across sector for clients from
enterprises with credit support
The company takes a decision whether to recall / accelerate the payment or performance under the
loan agreement / Promissory Note as agreed with the borrower/member under intimation.
Conclusion
Some valuable lessons can be drawn from the experience of successful Microfinance operation. First of all,
the poor repay their loans and are willing to pay for higher interest rates than commercial banks provided that access
to credit is provided. The solidarity group pressure and sequential lending provide strong repayment motivation and
produce extremely low default rates. Secondly, the poor save and hence microfinance should provide both savings
and loan facilities. These two findings imply that banking on the poor can be a profitable business. However,
attaining financial viability and sustainability is the major institutional challenge. Deposit mobilization is the major
means for microfinance institutions to expand outreach by leveraging equity (Sacay et al 1996). In order to be
sustainable, microfinance lending should be grounded on market principles because large scale lending cannot be
accomplished through subsidies.
A main conclusion of this paper is that microfinance can contribute to solving the problem of inadequate
housing and urban services as an integral part of poverty alleviation programmes. The challenge lies in finding the
level of flexibility in the credit instrument that could make it match the multiple credit requirements of the low
income borrowers without imposing unbearably high cost of monitoring its end-use upon the lenders. A promising
solution is to provide multi-purpose loans or composite credit for income generation, housing improvement and
consumption support. Consumption loan is found to be especially important during the gestation period between
commencing a new economic activity and deriving positive income. Careful research on demand for financing and
savings behaviour of the potential borrowers and their participation in determining the mix of multi-purpose loans are
essential in making the concept work (tall 1996).

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Eventually it would be ideal to enhance the creditworthiness of the poor and to make them more "bankable"
to financial institutions and enable them to qualify for long-term credit from the formal sector. Microfinance
institutions have a lot to contribute to this by building financial discipline and educating borrowers about repayment
requirements.

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MICRO
FINANCE
INSTITUTIONS

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1.3 Micro Finance Institutions
Fighting poverty is one of the core objectives of the Millennium Development Goals (MDG).Micro Finance
is the best way to eradicate poverty and to empower people. Micro finance is the newly emerging financial industry.
It has the target market of more than 1.8 billion people in the whole world. The emphasis of this study is to analyze
the prospects of micro finance industry in India. Our research stresses the need of the diverse micro financial services
in order to make the micro finance banks sustainable and profitable while serving the diverse needs of the poor.
MFI‘s should be distinguished from the NGOs as they are not just charity organizations. The diverse products will
mitigate the risk and at the same time gives a variety of services and choices to the clients. Today the reason of the
loss of the most of the micro finance institutions is that they offer very few products dominantly micro credit, a
successful MFI in India and has developed its recommendations on the basis of this analysis that can be implemented
on the other MFI‘s. There is a demand for diverse micro financial services in India and just by meeting a very small
group, So, if there are more innovations in the product development, this sector can become sustainable. Future of
micro finance is bright in India.
Definition of Microfinance:
Micro Finance is defined as formal scheme designed to improve the well being of poor through better access
to saving and services loans (Schreiner, 2000).
Micro finance is the tool that can bring the positive change in the life of the poor people of India. Micro
finance is more than simply credit.
According to the ‗‘India Microfinance Network‘‘, an institution involved in the research and development of
microfinance in India, microfinance is a composition of not only micro credit but includes a whole range of financial
services such as deposits, remittances, insurance and micro leasing.
According to Robinson, Marguerite (2001), ―microfinance refers to small-scale financial services primarily
credit and savings provided to people who farm or fish or herd; who operate small enterprises or micro enterprises
where goods are produced, recycled, repaired, or sold; who provide services; who work for wages or commissions;
who gain income from renting out small amounts of land, vehicles, draft animals, or machinery and tools; and to
other individuals and groups at the local levels of developing countries, both rural and urban. Many such households
have multiple sources of income‖.
Microfinance Institution (MFI)

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According to the definition on ‗‘Microfinance Gateway‘‘ an MFI is the organization that offers financial
services to the low-income people (Microfinance gateway, 2008).
There is a wide range of micro financial institutions. Mostly when we talk about these, financial NGO`s come
into the mind. These financial NGO‘s provide micro credit and micro finance services too and in most cases these
financial NGO‘s are not allowed to capture saving deposits from general public. Many NGO‘s provide other financial
services along with the micro finance and similarly some commercial bank are also providing micro finance along
with their routine financial activities so because of these micro finance services which are quite bit part of the whole
of the activities of these commercial banks we can call these as a micro finance institutions (Rehman, 2007). There
are some other MFI´s that can be considered in the business of micro finance. These institutions are the community
based financial intermediaries such as credit union; cooperative housing societies and some other are owned and
managed by the local entrepreneur and municipalities. This type of institution is varying from country to country
(Rehman, 2007).
Significance of Microfinance Institutions:
The microfinance institutions have a pivotal role to play in a society marked by economic classes. By
providing small loans to poor people, these institutions attempt to provide remedies to the woes of the deprived class.
Apart from this, it is through these institutions that poor people are able to avail small loan facilities on reasonable
terms and interest rates. In the absence of these institutions the poor people are more likely to fall prey to the
exploitation of money lenders, who are more likely to exploit the poor masses by providing loans on enormously high
rates. As a result the problems of the poor class are likely to be multiplied instead of being nullified. According to
Robinson, Marguerite (2001), poor people are exploited by informal money lenders who provide loans at high costs
which can range from ten to more than a hundred percent.

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1.3.1 Leading Views on Microfinance:
According to Marguerite (2001), there are two leading approaches to microfinance:
1. Poverty lending approach.
2. Financial systems approach.
Both these approaches tend to provide the availability of financial services for the poor, despite having
consonance in their goals, each approach tends to adopt a different modus operandi for the achievement of their
desired aim. We look at how these two approaches tend to operate:
1. Poverty Lending Approach
According to Robinson & Marguerite (2001), the basis focus of the poverty lending approach is the
reduction of poverty through institutions which receive funds from donors or governmental authorities. The
basic aim of the poverty lending approach is to reach the poorest of the poor. In poverty lending approach to
microfinance saving is only limited to a trivial status i.e. only as a compulsion for receiving credit. Institutions
adopting the poverty lending approach are not sustainable, the reason being that the interest rate on their loans is too
low for the recovery of even their costs. These institutions also do not cater to the demand for micro saving services
among the poor. The focus of poverty lending approach is upon micro-credit not microfinance.
2. Financial Systems Approach
According to Robinson, Marguerite (2001), the financial systems approach focuses on financial
intermediation between the poor borrowers and savers on commercial basis. This approach lays its emphasis on the
institutional self-sufficiency. The world has witnessed the emergence of many commercial microfinance
intermediaries in the past decades. These commercial microfinance intermediaries provide credit and saving services
to the economically active poor. The loans of these institutions are financed by savings, commercial debts and
through profitable investments. The financial systems approach represents a more globally acceptable model of
microfinance.
Difference Between Conventional Banking And Microfinance Banking
The main difference between a conventional banking institute and microfinance institute is of their approach
towards their customers. The main difference is of their target market. A microfinance institute is opened with the
main aim of targeting the poor and providing its services to that part of the community which is vulnerable to
poverty. Now days it also include small and medium enterprises. Where as, a conventional banking institute has a
bigger target market. It covers all the clusters of the community. Its main aim is profitability and other things are set
aside. Increasingly, formal financial institutions are recognizing the benefits of serving poorer clients but these

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institutions are only going there because they are recognizing that they can also get profits from the poor. Another
difference between the commercial and microfinance banking is of group lending with only social collateral.
Commercial banks have developed products that are targeting the poor but they also demand physical collateral
whereas the microfinance institutions rely on social collateral.
Difference Between Micro Credit and Microfinance
Microfinance is the provision of a wider range of financial services to the very poor and Micro credit is
one of the services offered by microfinance Institutes. As mentioned in the definition of Microfinance. Micro
credit is very small loan given to the poor which are considered unbankable. These people are usually unemployed or
poor entrepreneurs. They lack collateral, steady employment and a verifiable credit history and therefore cannot meet
even the most minimal qualifications to gain access to traditional credit. Micro credit is a part of microfinance, which
is the provision of a wider range of financial services to the very poor.
Impact of Microfinance on Poverty
Microfinance has helped poor in increasing their income levels and improvements in other social indicators.
In case of Lusaka, an impact study by Copestake et al. (2001) report there was increase in their business and house
income of borrowers who were able to repay the first loan. Aghion and Morduch (2005) show how a loan of $150
changed the life of poor woman and after ten loans she built a toilet and was looking forward to do much.
Microfinance has changed lives of thousands of poor just as this woman which is yet to be captured by studies. There
are so many examples in this regards. According to Goldberg, apart from these income increases there were social
gains of the microfinance programs like the increase in education of children, nutrition of babies and empowerment
of women (Goldberg, 2005).
In the early1970‟s, Microfinance started as a revolution in countries of Latin America and South Asia
with independent initiatives. Now there are more than one thousand micro finance institutions over 100
countries, 73% are NGO‟s, 13.6% are credit unions 7.8% are banks and rest are saving unions. And about 65
million people are served by the micro finance institutions these days. (Morduch, 2005)
Microfinance Clients
Microfinance clients are poor and vulnerable non-poor who have a relatively stable source of
income (microfinance gateway, 2008). The clients of microfinance can be divided in to 2 main
categories, „‟Rural‟‟ and „‟Urban‟‟ clients. But the common character between them is that they are low
income persons who do not have access to the formal financial institutions and they are typically self-
employed. Usually, they have household-based enterprises (microfinance gateway, 2008) (Rehman, 2007).

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According to a report printed in „‟The Times‟‟ magazine the clients have experienced positive increase in
their income and the increase was more significant for women than for men. Clients experienced improved
relationships with suppliers of inputs for their business, increased household consumptions, improved quality of their
children education, increased income and improved employment generations.
Micro Finance for the Economically Active Poor
Poor people need shelter, clothes and food. The services of the micro finance institutions are aimed at the
economically active poor. The people who are already involved in some ventures and they need some leverage and
that are the micro finance which seems to be a catalyst to boost their activities. The economically active poor have
some financial literacy. They know how to diversify their portfolios, how to save and where to invest. To such people
micro finance is useful which increases their income and improves their lives. (Robinson, 2005).
1.3.2 Objectives of the Micro Finance Institutions.
The goal of the MFIs which serves as the development organizations is to fulfil the needs of
unserved and underserved people. (Ledgerwood, 1998) describes these objectives as,
 To reduce poverty
 To empower women or other disadvantaged population groups
 To create employment
 To help existing businesses grow or diversify their activities
 To encourage the development of new businesses
Two main objectives of the MFIs serving in any country are
Outreach
It is to serve those people who have been deprived previously or are underserved (Women, poor and
indigenous and rural poor).
Sustainability
It is to generate enough revenues to cover the expenses for providing the financial services. The
main theme of the financial system approach is the sustainability. (Ledgerwood, 1998)
Diversified Product Lines

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Leading microfinance institutions in the world the kinds of product lines that could be offered and which can
improve the current scenario of micro financial institutions in India, according to our suggestion are:-
Micro insurance
―Micro-insurance is a financial arrangement to protect low-income people against specific perils in
exchange for regular premium payments proportionate to the likelihood and cost of the risk involved‘‘
(Churchill 2006). It can be delivered through a variety of different channels, including small community-
based schemes, credit unions or other types of microfinance institutions, but also by enormous multinational
insurance companies, etc.
Micro Savings
Saving products benefit low income people and entrepreneurs. It helps them to build assets and
provide security at the time of the financial distress. It also constitutes an additional source of income. MFIs
must formulate themselves to become regulated entities to accept saving deposits. Products like Term
finance certificates, ranging from 3 months to 1 year is a good example of saving products. The World
Bank‘s world wide inventory of micro finance institutions found that many sustainable institutions rely
heavily on the saving mobilization.
Compulsory Savings
Compulsory savings are the funds which are contributed by the borrowers as a preliminary condition to
receive the loans. Compulsory savings are of no use to the clients rather they are use to the banks. Normally they are
taken in the group lending.
Voluntary Savings
They are not obligatory as part of assessing the credit services. They are provided to the borrowers and the
non borrowers. Who can deposit according to their cash flows and the needs. (Ledgerwood, 1997) Poor with irregular
cash flows have some irregular excess cash. If the MFIs provide the saving services, these people can deposit their
money and the interest on the principle will motivate them to save more.
Micro Leasing
―Financial leasing is a contractual arrangement between two parties, which allows one party (the lessee) to
use an asset owned by the other (the lessor) in exchange for specified periodic payments. The lessee uses the asset

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and pays rental to the lessor, who legally owns it‖ (Gallardo, 1997). Grameen bank Bangladesh started micro leasing
in 1992. In 1994, the leasing facilities were delivered from all the zones.

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SELF HELP
GROUP BANK
LINKAGE
MODEL

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1.4 Self Help Group Bank Linkage Model
Introduction
The SHG - Bank Linkage Programme is a major plank of the strategy for delivering financial services to the
poor in a sustainable manner. The search for such alternatives started with internal introspection regarding the
innovations which the poor had been traditionally making, to meet their financial services needs. It was observed that
the poor tended to come together in a variety of informal ways for pooling their savings and dispensing small and
unsecured loans at varying costs to group members on the basis of need. The SHG – Bank Linkage Programme was
started as an Action Research Project in 1989 which was the offshoot of a NABARD initiative during 1987 through
sanctioning Rs. 10 lakh to MYRADA as seed money assistance for experimenting Credit Management Groups. In the
same year the Ministry of Rural Development provided PRADAN with support to establish self-help groups in
Rajasthan. The experiences of these early efforts led to the approval of a pilot project by NABARD in 1992. The pilot
project was designed as a partnership model between three agencies, viz., the SHGs, banks and NGOs.
No. of SHGs Financed During the Year (In Lakh)
Cumulative no. of SHGs financed (in lakh)
2001-02 1.98 4.61
2002-03 2.56 7.17
2003-04 3.62 10.79
2004-05 5.39 16.18
2005-06 6.20 22.38
2006-07 6.87 29.25
2007-08 7.12 24.31

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Positive Features of the SHG - Bank Linkage Programs
7.07 The financial inclusion attained through SHGs is sustainable and scalable on account of its various
positive features. The program confronts many challenges and for further scaling up, these challenges need to be
addressed.
The Financial Scheme
The financial scheme under the Linkage Programme could be based on the following broad principles:
 Savings first, no credit without saving.
 Saving as partial collateral
 Bank loans to the group, for onlending to members
 Credit decisions for onlending to members by the group
 Interest rates and other terms and conditions for loans to members to be decided by the group
 Joint liability as a substitute for physical collateral
 Ratio between savings and credit contingent upon credit worthiness of the group; increasing with
good repayment record.
 Small loans to begin with. Financial Inclusion of Poor Women
7.08 The Committee noted that more than 90% of the members of SHGs are women and most of them are
poor and assetless. The SHG movement has been instrumental in mainstreaming women by-passed by the banking
system.
Loan Repayments
7.09 One of the distinctive features of the SHG - Bank Linkage Programme has been very high on-time
recovery. As on June 2005, the on-time recovery under SHG - Bank Linkage Programme was 90% in commercial
banks, 87% in RRBs and 86% in cooperative banks.
Program Impact
7.10 The major findings and recommendations of three studies on the impact of the SHG - Bank Linkage
Programme are summarised in Annexure III. 7.11 The main findings reveal that the programme has:
 Reduced the incidence of poverty through increase in income, and also enabled the poor to build
assets and thereby reduce their vulnerability.

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 Enabled households that have access to it to spend more on education than nonclient households.
Families participating in the programme have reported better school attendance and lower drop out
rates.
 Empowered women by enhancing their contribution to household income, increasing the value of
their assets and generally by giving them better control over decisions that affect their lives.
 Reduced child mortality, improved maternal health and the ability of the poor to combat disease
through better nutrition, housing and health - especially among women and children.
 Contributed to a reduced dependency on informal money lenders and other noninstitutional sources.
 Facilitated significant research into the provision of financial services for the poor and helped in
building ―capacity‖ at the SHG level.
• Finally, it has offered space for different stakeholders to innovate, learn and replicate. As a result, some
NGOs have added micro-insurance products to their portfolios, a couple of SHG federations have
experimented with undertaking livelihood activities and grain banks have been successfully built into the
SHG model in the Eastern Region. SHGs in some areas have employed local accountants for keeping their
books, and IT applications are now being explored by almost all for better management information sytems
(MIS), accounting and internal controls.
Challenges
Group Loans to SHGs and SHG Loans to Members
7.12 The average loan provided to SHGs by the banks for the last three years is presented in the following
table : 7.13 During the year 2005-06, the average loan provided to new SHGs was Rs. 37,581. On an average, per
member loans work out to less than Rs. 4,000. Many believe that such loan amounts are grossly inadequate for
pursuing any meaningful livelihood activity. Per capita loans in mature SHGs are increasing very gradually. It has
also to be kept in view that members take very short term loans of 3 to 6 months on many occasions and there can be
more than one cycle of borrowing/ repayment in one year. Committee is of the view that the existing dispensation of
subsidy in the form of a revolving fund initially and as capital subsidy for income generating activities in the second
stage may not be sustainable with the exponential growth recently observed in the formation of groups under the
programme. 7.18 At present, banks do not incur incremental costs for lending to SHGs, as it is done through the
existing branch network. SHG lending to members has been reportedly at interest rates ranging between 15% and
24%. While this has been considered high, it is also reported that members borrow for short periods and do not feel
the annualized burden of interest rates. Further, the interest income of SHGs is ploughed back into the corpus for
lending and is beneficial to all members.
1.4.1 MFI and SHG Bank Linkage Credit Supply
Models of Linkage between Banks and Self-Help Groups

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 BANK = Commercial Bank
 NABARD = National Bank for Agriculture and Rural Development
 SHG = Self Help Group (or community groups, people's organizations)
 SHPI = Self Help Promotion Institution (or NGOs)
Three distinct model can be observed in linkage programmes between banks and low-income groups.
MODEL I: Bank-SHG with active support of SHPI
The most common linkage model in India is where the banks deal directly with individual SHGs. In
case of most of these SHGs, the SHPI had provided the intial training, guidance to rural poor in organizing
themselves into thrift and credit groups. In many cases, the SHPI had also provided some initial support to
these SHGs to sugment their resources. (In case of of an NGO, MYRADA, it became possible for it to
provide such financial assistance to SHGs from an initial support of Rs. 1 million by NABARD before the
Pilot Project was started). The SHPI also keeps a watch and ensures satisfactory functioning of the SHGs
even after the linkage. While linkage of the banks is direct with the SHGs, the SHPI has an important role
in pre- as well as post-linkage stages.
MODEL II: BANK-SHG
A slight variant to Model 1 is where Banks have provided financial support to SHGs which had
grown almost spontaneously without any intervention of any SHPI. The SHGs were initially on the basis of
acommon activity, problem and took up thrift and credit activities. The cases of such linkages are of course
not very common.

44 | P a g e
MODEL III: BANK-SHPI-SHG
In this model, the SHPI have taken the role of a financial intermediary between the banks and a
number of SHGs. Again, the SHPIs take up such responsibilities only in respect of the groups
promoted/nurtured by them and nopt for other groups. The SHPI accepts the contractural responsibility for
repayment of the loan to the bank. In this respect it is indirect linkage support to the SHGs. This model is
quite common.
Another model that has emerged ... is a combination of SHG linkage concept and credit programmes
where loan assistance is given to the individual members of the group and not to the group. It is also not
directly connected to the savings of the group. The loans in these cases were given only for income
generating investment credit activities. The SHG and SHPI help the bank in identification, preperation of
loan application, monitoring, supervision and recovery of loans.

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1.4.2 Microfinance and Poverty Alleviation
In the year 2000, the United Nations drew up a list of Millennium Goals which aim to spur globalization and
development and eradicate extreme poverty. Extreme poverty is defined as those living on less that $1 a day
(Simanowitz and Walter 2002:15). The UN Resolution adapted by the General Assembly states, ―We will spare no
effort to free our fellow men, women, and children from the abject and dehumanizing conditions of extreme poverty,
to which more than a billion of them are currently subjected‖ (4). The seven Millennium Goals are as follows: 1)
eradicate extreme poverty and hunger, 2) achieve universal primary education, 3) promote gender equality and
empower women, 4) reduce child mortality, 5) improve maternal health, 6) combat HIV/AIDS, malaria, and other
diseases, and 7) ensure environmental sustainability. These goals, which are to be achieved by the year 2015, are a
monumental step in the direction of poverty alleviation (UN Homepage).
 Increase in Income
 Better Nutrition
 Higher School Attendance
 Women‘s Empowerment
 Lifts Poor Out of Poverty
 Integrated Programs
Conclusion
Microfinance is an effective method of poverty alleviation. MFIs have developed many unique and
innovative practices to account for the difficulties of providing credit to the poor. The use of village banks has
enabled microfinance programs to reach areas with restricted mobility and lack of infrastructure. Trust and group
lending practices encourage the poor to collaborate in mutual trust and friendship and to offer support for
communityloans and small businesses. Focus on female entrepreneurs allows marginalized women to gain access to
the economic opportunities that they need to empower themselves.
Qualified leadership assures that microfinance will continue its success and innovation in the critical years to
come. Research has shown that MFIs can and will reach the poorest of the poor by implementing integrated programs
that address the diversified needs of destitute families.
Increasing numbers of microfinance institutions are achieving financial sustainability and widening their
outreach while still focusing on the neediest in society. Microfinance allows women to gain autonomy and control
over their lives and to enter the public sphere with skill and confidence. The benefits of microfinance are not only felt
by those who directly participate, but by their families and entire communities as well. Some of these benefits are
increase in household income, consumption smoothing, capacity to sustain gains over time, better nutrition and

46 | P a g e
health, higher education and school attendance, female empowerment, and the ability to completely break free from
the bonds of extreme poverty.
Microfinance has achieved its success and popularity through its recognition of the poor as agents of change.
MFIs do not dole out aid packages, they present the poor with the opportunities to advance themselves. A true
poverty alleviation program fights poverty by addressing the social, political, and economic constraints that keep the
poor in an oppressed condition and by implementing tactics specified to overcome those constraints. In most parts of
the world, the poor are not given a voice in any sphere whether political, social or economic. They are deterred from
holding political office, segregated to pariah status in society, and restricted from access to economic opportunity.
Any poverty purging strategy that aims for marked reform needs to recognize that the poor know how to help
themselves far better than aid agencies and social organizations. Microfinance gives the power to the people. Clients
are given opportunities for economic advancement that will eventually lead to empowerment in social and political
spheres. Living conditions are markedly improved along with self-esteem and sense of control. Impoverished people
with credit are not dependent on aid, the responsibility rests with each individual family to work hard and to enjoy the
overwhelming pride that comes with well-deserved success.
Microfinance is not a miracle solution. It is not for everyone and is not solely responsible for poverty
alleviation. Microfinance must also be coupled with other social programs that are flexible to meet the diverse needs
of destitute families. An MFI should also be sure to incorporate the customs and practices of the people into its
programs. But through a holistic approach to fighting poverty and a recognition of the importance of the poor as
agents of change, the battle against extreme poverty can be fought and won. Globalization will not be allowed to
expand the gap between the rich and the poor. Affluent countries cannot continue to dump aid on needy nations;
developing countries must not be permitted to ignore the needs of their impoverished population. Let the oppressed
people speak. Let them change their own lives. Listen to them.

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URBAN
MICRO
FINANCE

48 | P a g e
1.5 Urban Microfinance
Why urban microfinance
 According to 2001 census, urban poor comprise of 35 to 40% of total population
 Current urban market of 280 million is expected to grow by 600 million by 2030
 Urban market contributes to 62% of GDP
 Only 0.01% of them have banking relationships
Who are the clients?
Spandana Study Preliminary Results
 The average family size is of 5, with monthly expenditure of Rs 5,000
 Poor, but not ultra poor: only 6% of these households live under a dollar a day per member, but 47%
live under 2 dollars a day
 67% of the household live in a house they own, and 29% in a house they rent. The median house has
two room, kutcha for 2/3 of the time
Businesses are very prevalent
 31% of the households run at least one small business
 Out of these, 9% of households run more than one
• For comparison, in the OECD, only 12% of the households run a business Who are the clients?
But these businesses have limited
• Specialized skills:
– 11% tailors
– 8% fruits and vegetablesellers
– 17% general store or Kirana store
– 6.6% telephone boot – 4.31% auto owners

49 | P a g e
– 6.3% milk business
• Employees:
– Only 2% of business have a partner
– Only 10% have any employee, none has more than 3
– Including household members, 58% of business have only one person working in them, and 95%
have less than 3
Debt
• A large fraction of household have debt:
– 69% of the households have at least one outstanding loan
– 46% of the households have more than one outstanding loan
• The average loan, when it was taken out, was for Rs 20,000 (median Rs 10,000)
• The average interest rate is 3.85% per month. •Loans are taken from moneylenders (49%),
family members (13%), friends or neighbors (28%). Rarely commercial banks, almost no MFI loan (before
penetration)
• Among those households who do not have a loan, 56% say they want one but could not obtain one.
– Main purposes for taking out a loan: Health (17%), temporary difficulty (10%), Marriage (13%),
Home construction (10%), regular consumption (10%).
– Business acquisition only 7% and business expansion only 1.33%.
People are largely unaware of: how much of the loan is still outstanding, how much longer they will need to
pay the installment for, etc…

50 | P a g e
Savings, Insurance and shocks
 34% of the households have a savings account. •26% have a life insurance policy.
 But almost none have any health insurance cover.
 Yet 40% of the household had to spend Rs500 or more on health in the last year.
• 60% of the households who had a sick memberhad to borrow: so 24% of the household borrowed for health
in the past year.
Number of new clients opening savings accounts with SEWA (annual data)
 Each bin represents number of new clients (as measured by when they opened their first savings
account) in the calendar year
 Roughly 12000-13000 new clients a year with greater increase in client base in 2003 and 2005Who
are the clients?
Number of clients taking out a first unsecured loan with SEWA (annual data)
What are the challenges?
 Highly competitive environment
 Difficult to find strong social networks and information on SHG members
 Lack of requisite documentation, irregular incomes and migration Some of the successful suppliers
1.5.1 Key Lessons in Urban Microfinance
Services Resources/Logistics Management

51 | P a g e
 Successful product
diversification
 Adapting distribution
models
 Hiring local staff, particularly
female credit officers
 Solving distributional
difficulties, such as space
limitations
 Sufficiently motivating staff with
incentives and training
 Effectively monitoring
management information
system.
 Anticipating client needs
through focus group
discussions and market
research
 Expanding through existing
operations and deepening
penetration in urban areas
CMF did six case studies of some of the successful MFIs across India
1. Ujjivan - Bangalore
2. SEWA - Ahmadabad
3. VWS - Calcutta
4. SWAWS - Hyderabad
5. WWF - Chennai
6. Indian Bank‘s - Chennai
What are the innovative strategies?
 Tracking loan usage/meeting the life-cycle needs of salaried women
 Overcoming space constraints
 Focusing on field staff
 Implementing training programs and credit- plus activities
 Effectively managing information systems
 Coping with rural-urban migration and risk Tracking loan usage/meeting the life-cycle needs of
salaried women
 Ujjivan‘s separate product exclusively for family helped to avoid borrowings to meet household
expense. This also helped MFI in tracking the credit needs and usage by their clients
• SEWA‘s Sanjivani loan for closed textile mill workers and accounts for marriage, education and gifts helps
salaried women to prepare for life cycle events and reduces her burden

52 | P a g e
Overcoming space constraints
 As urban MFIs continue to grow, having space for a typical JLG meetings is difficult
 Urban working women tend to have less free time for meetings and travel
 Ujjivan and WWF found a solution to this by organizing interactive meetings at public places like
schools, health centers, community centers, temples, mosques or churches.
Focusing on field staff
 It was evident through case studies that people working in microfinance have genuine desire to help
poor access finance and are sensitive to their needs
 Many MFIs have hired female fieldworkers to create supportive environment for women
 VWS introduced incentive system of providing motorbikes for employees who exceeded expected
performance
 Both, financially and professionally rewarding careers must be considered for field staff to retain
them
Implementing training programs and credit-plus activities
 SEWA Bank‘s financial literacy training •SWAWS need based training for vocational skills and
management of small enterprises
 Indian bank – training clients in operating two wheelers, exhibition of products made by SHG
members
• VWS established a home for elderly, helpline for women and runs primary school
Effectively managing information systems
 Urban lending is complex and requires putting together detailed individual level information into
single database
• SEWA and WWF have met the challenge of establishing MIS which helps them to develop credit rating
system which helps in loan sanctioning process and leads to lower risks plus lower transaction costs
Coping with rural-urban migration and risk
 Migration posses risks to MFIs operating in cities
 Ujjivan has added a residency requirement stating that clients must have lived in a particular area for
a certain period of time before joining the group

53 | P a g e
 SWAWS requires clients to produce proof of residency to confirm that they are residents of target
locality Key lessons from Case Studies
 What further needs to be done?
 Credit Bureau to reduce risk and help clients keep track of their credit histories
• Developing variety of consulting and training programs for MFIs to expand and establish their operations in
urban India.
MICRO
FINANCE
AND

55 | P a g e
1.7 Micro Finance and NGOs
“Self realization and self initiative are the two most powerful weapons to wash poverty out from the world”
– Chanakya
World‟s Greatest Ancient Economic and Political Scholar
Non-Governmental Organizations and voluntary action have been part of the historical legacy1
. In the context
of contemporary social empowerment, self realization and self initiative is the base for the formation of self help
groups. This is the logic motivated NGOs to form SHGs in rural areas to empower them through developing their
inherent skills. Thus, SHG movement among the rural poor in different parts of the country is emerging as a very
reliable and efficient mode for technology transfer2
. Chanakya‘s philosophical statement has transformed into the
SHGs with the help of NGOs and their efforts. Microfinance is the tool to empower the rural poor and also tool
against human deprivation. Microfinance is motivating sustainable development through the supportive NGOs.
Microfinance institutions are highly encouraging. Microfinance through SHG has become a ladder for the
poor to bring them up not only economically but also socially, mentally and attitudinally3
. Initially, SHGs and
microfinance, as an instrument for social and economic empowerment, are established by the non governmental
organizations. In the era of 21st
century, NGOs are transforming from non-profit to profit making business model
NGOs. Especially, the success formula of microfinance non profit model is learned from the PRODEM - Bolivia and
Grameen Bank – Bangladesh. It is proved that committed for the social development NGOs can develop the society
through providing finance accessibility to the poor based on self help model. Many NGOs (non-government
organizations) in India came forward to promote micro-finance. At present more than 1000 NGOs are implementing
micro-finance projects in India.
Some of them are leading MFIs (micro-finance institutions) playing the role of social intermediation and
building better society in rural areas. These MFIs have adopted different strategies of people‘s livelihood through
micro-finance delivery.
Microfinance Institutions:
The following are the some of leading microfinance institutions in India working in the sector.

This is quoted by Rimjhim Mousami Das’s “Micro-finance through SHGs: A Boon for the Rural Poor” from
S.B. Verma and Yaswant Tukaram Pawar, (Ed) Rural Empowerment through Self Help Groups, Non
Governmental Organizations and Panchayati Raj Institutions, New Delhi: Deep and Deep Publication,
2005. p.16.
1
. S.B. Verma and Y.T. Pawar, 2005. p.99.
2
. Verma, S.B. and Pawar. Y.T. 2005, p. x.
3
. Ibid, p. 16.

56 | P a g e
 Association for Sarva Seva Farms (ASSEFA)
 Mitrabharati - The Indian microfinance Information Hub Mysore Resettlement and Development
Agency (MYRADA)
 SADHAN - The Association of Community Development Finance Institutions
 SEWA: Self-help Women's Association
 SKS India - Swayam Krishi Sangam
 Streedhan - Banking with Rural Women
 Working Women's Forum, Madras, India
The goals are
 Eradicate Extreme Poverty & Hunger.
 Achieve Universal Education.
 Promote Gender Equality & Women‘s Empowerment.
 Reduce Child Mortality
Combat Diseases
Concept of Micro-Finance
Before we understand the concept of micro-finance, it would be worthwhile to understand the term micro-
credit as the two terms are closely related to each other. Poor people need micro credit for various and different
purposes. It may be to meet the major household expenses; emergency needs or even basic livelihood support. There
are two main systems of micro credit4
. One is formal financial institutions, banks and co-operatives, which provide
micro-credit to the poor people under different schemes for livelihood support or helping them to start micro-
enterprises. The other is informal system comprising traditional moneylenders, pawnbrokers and trade specific
lenders. Both the systems have their own positive and negative aspects.
Examples of Recent Innovations in World‟s Financial Services for the Poor:
1. CCACN (Central de Cooperativas de Ahorroy Crédito Financieras de Nicaragua) is marketing its
"Agriculture Salary" savings product to farmers. The goal of the product is to smooth the flow of income
from the proceeds of an annual or semi-annual harvest. Each credit union works with its farmers to identify
their individual expenses and determine a monthly "salary" (portion of harvest proceeds on deposit
combined with an above-market interest rate) to be withdrawn from the credit union. In its infancy stage,
4
. Chauhan, Brij Raj (1990). Rural – Urban Articulations, Etawah: A. C. Brothers. Chippa, M.L. (1987). Commercial Banking
Development in India: A Study in Regional Disparity. Jaipur: Printwell Publishers. p. 50-51.

57 | P a g e
the credit unions have noted an interest from agriculture-based clients in such a savings management
program.
2. Caja los Andes in Bolivia offers four loan repayment options that fit the cash flow of various
agricultural activities, including an end-of-term payment for both principal and interest that fits single crop
activities, and unequal payments at irregular intervals for farmers that have planted several crops with
different harvesting periods. Flexibility is also provided in loan disbursements, and farmers can receive the
sanctioned loan amount in as many as three installments.
3. PRODEM in Bolivia has introduced a combination of biometric fingerprint and Smart Cards to deliver
financial services to its clients. Biometric technology measures an individual's unique physical or
behavioral characteristics, such as fingerprints, facial characteristics, voice pattern, and gait, to recognize
and confirm identity. Although the technology is still new, growing awareness of the importance of data
security is increasing adoption steadily. Prodem's fingerprint verification has reduced fraud, error, and
repudiation of transactions. Staff had not had to deal with forgotten PIN numbers or unauthorized use of
cards and accounts so they have more time to provide personal service and advice to clients.
4. Unibanka (Latvia): Prior to introducing credit scoring, Unibanka, a commercial bank, viewed
microfinance loans as too costly to deliver. With the assistance of Bannock Consulting, Unibanka instituted
a credit-scoring system based on qualitative client data because sufficient quantitative data was not
available to develop a statistical model5
.
5. ICICI Bank (India): Two state banks in India (Corporation and Canara) partnered with an NGO to
provide salaried low-income workers with access to savings. The project uses the already established
automatic teller machines (ATMs) in the factories to offer a recurring savings product, along with education
on personal finance6
.
1.7.1 SHG Bank Linkage Programme
Of the two major models of microfinance in India, the SHG Bank Linkage Programme (SBLP) is by far the
dominant model in terms of number of borrowers and loans outstanding7
. The cumulative number of SHGs linked has
grown almost tenfold in the last five years, to achieve an outreach of about 31 million families through women's
membership in about 2.2 million SHGs by March 2006. Not all SHGs are currently "linked" in the sense of having
loans outstanding to the banks or federations, and only an estimated half of their members are poor. However, this
5
. CGAP it innovation series: Credit Scoring.
6
. CGAP it innovation series
7
. Ibid. p. 27.

58 | P a g e
still means about 14 million poor households have been reached so far. Moreover the entire membership is saving
regularly, and has access to a ready source of small emergency and consumption loans in the form of loans extended
out of the group's own funds8
.
NGOs Involvement in Micro-Finance and Strategies of People‟s Livelihood
The NGO‘s strength lies in target group approach, flexibility, experimentation, innovation, grassroots
presence and motivation. By learning from the example of Grameen Bank, Bangladesh, many NGOs in India, came
forward to provide financial services to the rural poor and RNFS enterprises. For NGOs, it is also a shift in approach
from development to empowerment wherein they can plan their withdrawal strategy from service delivery projects
and think of their own sustainability by providing financial services. At present there are almost 600 NGOs involved
in micro-finance delivery systems in India. These NGOs have adopted different strategies of promoting people‘s
livelihood through micro-finance. These strategies are based on their clientele, approach, focus area, interest rate,
savings linkages, collateral, coverage and organisational/ legal structure. These strategies can be classified into four
broad categories, namely, SHG promotion, MFI, micro-enterprise development and social development.
In all this NGO gets some financial support in terms of grant from Apex Financial Institutions (AFIs) like
NABARD and RMK (Rashtriya Mahila Kosh). The examples of such NGOs who are following SHG promotion
approach are: MYRADA in Karnataka, SHARE in Andhra Pradesh, RDO (Rural Development Organisation) in
Manipur, PREM (People‘s Right and Environment Movement) in Orissa & Andhra Pradesh, YCO (Youth Charitable
Organisation) in Andhra Pradesh, Anarde (Acil Navsarjan Rural Development Foundation) in Gujarat, PRADAN
(Professional Assistance for Development Action) & RUDSOVAT (Rural Development Society for Vocational
Training) in Rajasthan and ADITHI in Bihar.
Micro-Finance Institution Strategy
The approach of promoting MFIs is based on the premise that AFIs like SIDBI (Small Industries
Development Bank of India), RMK and other donor agencies provide bulk lending, soft loan and some grant to such
NGOs which can act as MFIs by on-lending the money to the poor people/ SHGs/ Federations/ smaller NGOs. These
MFIs stimulate the credit demand of the poor people. They also provide technical support for the beneficiaries to
ensure proper utilization of loans and repayment. At the same time they meet their cost of funds, cost of credit
management and cost of default through the spread of interest and generate surplus for the viable operation of micro-
finance.
The examples of such MFIs are Sewa Bank & FWWB in Gujarat, BASIX in Andhra Pradesh and RGVN
(Rashtriya Grameen Vikas Nidhi) in north-eastern states, Orissa and Bihar. 8.3 Micro-Enterprise Development
8
. Ibid,

59 | P a g e
Strategy Entrepreneurship is one of the most important inputs in the economic development of a country and of the
regions within the country. Economic growth and industrialization are the by-products of entrepreneurship.
It is a breeding ground for the development of small-scale enterprises. The term EDP (Entrepreneurship
Development Programme) means a programme of entrepreneurship development designed to help a person in
strengthening his/ her entrepreneurial motive and in acquiring skills and capabilities necessary for playing his/her
entrepreneurial role effectively. It inculcates entrepreneurial traits into a person and develops his/her personnel,
financial, technical, managerial and marketing skills. There are number of programmes which are aimed at providing
informational or managerial inputs required by a new entrepreneur. However, a programme not touching upon
entrepreneurial motivation and behaviour cannot be called an EDP9
.
Growth trends in the SHGs Bank Linkage Programme
Source: NABARD annual reports and data sheet for 2005-06published in Prabhu Ghate, Microfinance in India: A
state of the sector Report 2006, New Delhi, Microfinance India, p.28.
9
. Desai, Vasant. Entrepreneurial Development (Vol. I): Principles, Programmes and Polices. Bombay: Himalaya
Publishing House. 1991.

60 | P a g e
Social Development Strategy
The social development approach of micro-finance is based on the premise that people should earn money by
investing in viable micro-enterprises. They should earn profit from their enterprises. Major share of the profit should
be reinvested in enterprises for their growth. The other share of the profit should be spent on social development that
is, health, education, housing, sanitation etc.
By earning profit from the viable micro-enterprises, people will increase their paying ability for services
delivered to them under different social development projects run by NGO and States/ Central Government. For the
NGOs and Government it can be a process of gradual withdrawal and for people, decrease dependency on the NGOs
and Government. Such projects have micro-finance as a major component coupled with social service delivery.
These projects have demonstrably positive effects. The examples of such projects are Indo- Canada
Agriculture Extension Project in Uttar Pradesh, IFFDC (Indian Farm & Forestry Development Corporation) project of
farm and forestry development in Uttar Pradesh and Rajasthan, ICDS (Integrated Child Development Services)
project of RASS (Rayalseema Sewa Samiti) in Andhra Pradesh and Conversion of ICDS project into Indira Mahila
Yojana.
Role of Financial Institutions in Micro-Finance
Especially during 1991-92, NABARD launched projects to provide micro credits to SHGs by bank linkages.
In the same way, NGOs also have done excellent work in the areas of microfinance. tSince the emergence of micro-
finance sector in India, role of AFIs has become significant. NABARD initiated the process of micro-finance in India
through linkage programme of SHGs under Automatic Refinance Scheme. SIDBI is second important player in
microfinance, providing bulk lending to MFIs. RMK is the third player providing loans to NGOs for on lending to the
women SHGs. These are the three major AFIs in India. Each has a different approach in micro-finance sector.
While NABARD‘s emphasis is entirely on SHGs linkage programme by mobilizing their own savings also,
SIDBI is focusing on building and creating larger MFIs and RMK is lending money to smaller NGOs as well. Taking
into consideration the growth and potential of micro-finance sector in India, other organizations and international
agencies have also made their entry in the micro-finance sector by providing loans and grants to NGOs for different
income generating projects as well as for incorporating micro-finance component in the service delivery projects of
social development.

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Exposure to Commercial Banks as on March 2006
Exposure to Commercial Banks as on March
2006
1991 **Total
109Some Public Sector banks
63Rishikulya Grameen Bank, Ganjam
158HSBC
5012Standard Chartered Bank
6119ING Vysya Bank
8719ABN AMRO Bank
10340UTI Bank
250HDFC Bank
2350 *100ICICI Bank
Loan O/s.
Rs. Crores
No. of MFIsBank
1.7.2 Microfinance Support Institutions in the Formal Sector
The following are the major support institutions in India.
 National Bank for Agriculture and Rural Development
 Rashtriya Mahila Kosh
 SIDBI - Small Industries Development Bank of India
 Tamil Nadu Women's' Development Corporation

62 | P a g e
Commercial banks exposure to Microfinance
of selected banks, March 2006
The Role of NGOs
Non-Government Organizations (NGOs) have emerged as an integral part of the institutional structure for
addressing poverty as well as rural development, gender equality, environmental conservation, disaster management,
human rights and other social issues.
The NGOs, in order to support social and economic empowerment of the poor, have vastly widened their
activities to include group formation, micro credit, formal and non-formal education, training, health and nutrition,
family planning and welfare, agriculture and related activities, water supply and sanitation, human rights and
advocacy, legal aid and other areas.
These organizations mostly follow the target-group strategy under which the poor with similar
socioeconomic interests are organized into groups to achieve their objectives.
Co-ordinating the role of NGOs
In order to meet the need for a one-stop service to the NGOs, the Government created the NGO Affairs
Bureau in 1990. Located in the Prime Minister‘s Secretariat, the Bureau enables the NGOs to obtain their registration
clearance, approval and permission through a single agency of the Government within a specified time frame. The
aim of the Bureau is to ensure quality performance of the NGO sector and its accountability to the state.

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