Microfinance : Project Report

A
RESEARCH PROJECT REPORT
On

“Impact of Micro Finance on Living Standard
Empowerment and Poverty Alleviation of Poor
Women: A Case Study of North India”

Submitted to:

Kurukshetra University, Kurukshetra
in partial fulfillment for the degree of

Master of Business Administration (Session -)

Under the Supervision of: Submitted by:
Ms. Shelly Singhal
Faculty MBA Uni. Roll. No.………..
MAIMT MBA (F)

MAHARAJA AGRASEN INSTITUTE OF MANAGEMENT & TECHNOLOGY (ISO
9001-2008),JAGADHRI-135003 (YAMUNA NAGAR),

Approved by AICTE and HRD Ministry, affiliated to Kurukshetra University, Kurukshetra

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DECLARTION

I hereby declare that this research project report entitled "Impact of Micro Finance on
Living Standard Empowerment and Poverty Alleviation of Poor Women: A Case
Study of North India” submitted by me for the partial fulfillment of the degree of
Master of Business Administration, submitted to Kurukshetra University,
Kurukshetra is an original work done by me.

I also hereby declare that this project report has not been submitted at any time to any
other university or institute for the award of any Degree or Diploma.

(student name)

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ACKNOWLEDGEMENT

The project on “Impact of Micro Finance on Living Standard Empowerment and
Poverty Alleviation of Poor Women: A Case Study of North India’’ would not have
seen the light of the day without the following people and their priceless support and
cooperation. Hence I extend my gratitude to all of them.

As a student of MAHARAJA AGARSEN INSTITUTE OF MGT & TECH,
JAGADHRI. I would first of all like to express my gratitude to Dr. Raj Kumar,
Director, MAIMTfor granting me permission to undertake the project report in their
esteemed organization.

I would also like to express my sincere thanks to Mr.AdarshAggarwal (H.O.D -MBA
Department) for supporting me and being always there for me whenever I needed.

During the actual research work, Ms. Shelly Singhal (Research Guide) and other office
staff who set the ball rolling for my project. They had been a source of inspiration
through their constant guidance; personal interest; encouragement and help. I convey
my sincere thanks to them. In spite of their busy schedule they always found time to
guide me throughout the project. I am also grateful to them for reposing confidence in
my abilities and giving me the freedom to work on my project. Without their invaluable
help I would not have been able to do justice to the project.

I express my sincere thanks to Ms. Shelly Singhal, Faculty MBA, MAIMT for the
valuable suggestion & making this project a real successful.

(Student name)

PREFACE
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MBA Students of Kurukshetra University are required to undergo Research Project as
an integral part of curriculum.To accomplish this project as “Impact of Micro Finance
on Living Standard Empowerment and Poverty Alleviation of Poor Women: A
Case Study of North India” there is need to become familiar with the project.

It can be possible through theoretical inputs as well as practical exposure in which my
practical knowledge is helpful acquired at the college. I have also done this study from
secondary sources.

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CHAPTER 1
INTRODUCTION

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Introduction

Microfinance is defined as any activity that includes the provision of financial services such as credit,
savings, and insurance to low income individuals which fall just above the nationally defined poverty
line, and poor individuals which fall below that poverty line, with the goal of creating social value. The
creation of social value includes poverty alleviation and the broader impact of improving livelihood
opportunities through the provision of capital for micro enterprise, and insurance and savings for risk
mitigation and consumption smoothing. A large variety of sectors provide microfinance in India, using
a range of microfinance delivery methods. Since the ICICI Bank in India, various actors have
endeavored to provide access to financial services to the poor in creative ways. Governments also have
piloted national programs, NGOs have undertaken the activity of raising donor funds for on-lending,
and some banks have partnered with public organizations or made small inroads themselves in
providing such services. This has resulted in a rather broad definition of microfinance as any activity
that targets poor and low-income individuals for the provision of financial services. The range of
activities undertaken in microfinance include group lending, individual lending, the provision of
savings and insurance, capacity building, and agricultural business development services. Whatever
the form of activity however, the overarching goal that unifies all actors in the provision of
microfinance is the creation of social value.

Microfinance Definition

According to International Labor Organization (ILO), “Microfinance is an economic development
approach that involves providing financial services through institutions to low income clients”.

In India, Microfinance has been defined by “The National Microfinance Taskforce, 1999” as
“provision of thrift, credit and other financial services and products of very small amounts to the poor
in rural, semi-urban or urban areas for enabling them to raise their income levels and improve living
standards”.

"The poor stay poor, not because they are lazy but because they have no access to capital."

The dictionary meaning of „finance‟ is management of money. The management of money denotes
acquiring & using money. Micro Finance is buzzing word, used when financing for micro
entrepreneurs. Concept of micro finance is emerged in need of meeting special goal to empower under-
privileged class of society, women, and poor, downtrodden by natural reasons or men made; caste,
creed, religion or otherwise. The principles of Micro Finance are founded on the philosophy of
cooperation and its central values of equality, equity and mutual self-help. At the heart of these
principles are the concept of human development and the brotherhood of man expressed through
people working together to achieve a better life for themselves and their children.
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Traditionally micro finance was focused on providing a very standardized credit product. The poor,
just like anyone else, (in fact need like thirst) need a diverse range of financial instruments to be able
to build assets, stabilize consumption and protect themselves against risks. Thus, we see a broadening
of the concept of micro finance--- our current challenge is to find efficient and reliable ways of
providing a richer menu of micro finance products. Micro Finance is not merely extending credit, but
extending credit to those who require most for their and family‟s survival. It cannot be measured in
term of quantity, but due weightage to quality measurement. How credit availed is used to survive and
grow with limited means.

Concept and Features of Micro-finance:

1. It is a tool for empowerment of the poorest.
2. Delivery is normally through Self Help Groups (SHGs).
3. It is essentially for promoting self-employment, generally used for:
(a) Direct income generation
(b) Rearrangement of assets and liabilities for the household to participate in future
opportunities and
(c) Consumption smoothing.
4. It is not just a financing system, but a tool for social change, specially for women.
5. Because micro credit is aimed at the poorest, micro-finance lending technology needs to mimic
the informal lenders rather than the formal sector lending. It has to:
(a) Provide for seasonality
(b) Allow repayment flexibility
(c) Fix a ceiling on loan sizes.

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

1. That the poor are bankable; successful initiatives in micro finance demonstrate that there need
not be a tradeoff between reaching the poor and profitability - micro finance constitutes a
statement that the borrowers are not „weaker sections‟ in need of charity, but can be treated as
responsible people on business terms for mutual profit .
2. That almost all poor households need to save, have the inherent capacity to save small amounts
regularly and are willing to save provided they are motivated and facilitated to do so.
3. That easy access to credit is more important than cheap subsidized credit which involves
lengthy bureaucratic procedures - (some institutions in India are already lending to groups or
SHGs at higher rates - this may prevent the groups from enjoying a sufficient margin and
rapidly accumulating their own funds, but members continue to borrow at these high rates,
even those who can borrow individually from banks).
4. 'Peer pressure' in groups helps in improving recoveries.

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CHAPTER 2
LITRATURE REVIEW

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Mohammed AnisurRahaman (2007)

Has examined that about microfinance and to investigate the impact of microfinance on the poor
people of the society with the main focus on Bangladesh. We mainly concise our thesis through
client‟s (the poor people, who borrowed loan from microfinance institutions) perspective and build up
our research based on it. Therefore, the objective of this study is to show how microfinance works, by
using group lending methodology for reducing poverty and how it affects the living standard (income,
saving etc.) of the poor people in Bangladesh. Microfinance has the positive impact on the standard of
living of the poor people and on their life style. It has not only helped the poor people to come over the
poverty line, but has also helped them to empower themselves.

SusyCheston (2002)

Has examined that Microfinance has the potential to have a powerful impact on women‟s
empowerment. Although microfinance is not always empowering for all women, most women do
experience some degree of empowerment as a result. Empowerment is a complex process of change
that is experienced by all individuals somewhat differently. Women need, want, and profit from credit
and other financial services. Strengthening women‟s financial base and economic contribution to their
families and communities plays a role in empowering them. Product design and program planning
should take women‟s needs and assets into account. By building an awareness of the potential impacts
of their programs, MFIs can design products, services, and service delivery mechanisms that mitigate
negative impacts and enhance positive ones.

Linda Mayoux (Feb 2006)

Has examined that Micro-finance programmes not only give women and men access to savings and
credit, but reach millions of people worldwide bringing them together regularly in organized groups.
Through their contribution to women‟s ability to earn an income, micro-finance programmes can
potentially initiate a series of „virtuous spirals‟ of economic empowerment, increased well-being for
women and their families and wider social and political empowerment Banks generally use individual
rather than group-based lending and may not have scope for introducing non-financial services. This
means that they cannot be expected to have the type of the focused empowerment strategies which
NGOs have

EoinWrenn (2005)

Has examined that microfinance creates access to productive capital for the poor, which together with
human capital, addressed through education and training, and social capital, achieved through local
organization building, enables people to move out of poverty (1999). By providing material capital to a
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poor person, their sense of dignity is strengthened and this can help to empower the person to
participate in the economy and society. The impact of microfinance on poverty alleviation is a keenly
debated issue as we have seen and it is generally accepted that it is not a silver bullet, it has not lived
up in general to its expectation (Hulmeand Mosley, 1996). However, when implemented and managed
carefully, and when services are designed to meet the needs of clients, microfinance has had positive
impacts, not just on clients, but on their families and on the wider community.

Cheston& Kuhn (2004)

Has examined that in their study concluded that micro-finance programmes have been very successful
in reaching women. This gives micro-finance institutions an extraordinary opportunity to act
intentionally to empower poor women and to minimize the potentially negative impacts some women
experiences. We also found increased respect from and better relationships with extended family and
in-laws. While there have been some reports of increased domestic violence, Hashemi and Schuler
found a reduced incidence of violence among women who were members of credit organizations than
among the general population.

Dr. JyotishPrakashBasu (2006)

Has examined that the two basic research questions. First, the paper tries to attempt to study how a
woman‟s tendency to invest in safer investment projects can be linked to her desire to raise her
bargaining position in the households. Second, in addition to the project choice, women empowerment
is examined with respect to control of savings, control of income, control over loans, control over
purchasing capacity and family planning in some sample household in Hooghly district of West
Bengal. The empowerment depends on the choice of investment of project. The choice of safe project
leads to more empower of women than the choice of uncertain projects. The Commercial Banks and
Regional Rural banks played a crucial role in the formation of groups in the SHGs -Bank Linkage
Program in Andhra Pradesh whiles the Cooperative Banks in West Bengal.

Chintamani Prasad Patnaik (March 2012)

Has examined that microfinance seems to have generated a view that microfinance development could
provide an answer to the problems of rural financial market development. While the development of
microfinance is undoubtedly critical in improving access to finance for the unserved and underserved
poor and low-income households and their enterprises, it is inadequate to address issues of rural
financial market development. It is envisaged that self-help groups will play a vital role in such
strategy. But there is a need for structural orientation of the groups to suit the requirements of new
business. Microcredit movement has to be viewed from a long-term perspective under SHG

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framework, which underlines the need for a deliberate policy implication in favour of assurance in
terms of technology back-up, product market and human resource development.

Hunt, J &Kasynathan (2002)

Has examined that poor women and men in the developing world need access to microfinance and
donors should continue to facilitate this. Research suggests that equity and efficiency arguments for
targeting credit to women remain powerful: the whole family is more likely to benefit from credit
targeted to women, where they control income, than when it is targeted to men. Microfinance must
also be re-assessed in the light of evidence that the poorest families and the poorest women are not
able to access credit. A range of microfinance packages is required to meet the needs of the poorest,
both women and men. Donors need to revisit arguments about the sustainability of microfinance
programmes. Financial sustainability must be balanced against the need to ensure that some credit
packages are accessible to the poorest.

R.Prabhavathy (2012)

Has examined that collective strategies beyond micro-credit to increase the endowments of the
poor/women enhance their exchange outcomes the family, markets, state and community, and socio-
cultural and political spaces are required for both poverty reduction and women empowerment. Even
though there were many benefits due to micro-finance towards women empowerment and poverty
alleviation, there are some concerns. First, these are dependent on the programmatic and institutional
strategies adopted by the intermediaries, second, there are limits to how far micro-credit interventions
can alone reach the ultra-poor, third the extent of positive results varies across household headship,
caste and religion and fourth the regulation of both public and private infrastructure in the context of
LPG to sustain the benefits of social service providers.

Reginald Indon (2007)

Has examined that informal businesses represent a very large cross-section of economic enterprises
operating in the country. Informal businesses may be classified as either the livelihood/ survival type
or the entrepreneurial/ growth-oriented type. Livelihood enterprises are those which show very limited
potential for growth in both income and employment generation. There are existing policies, program
and services that directly/ indirectly cover informal. Variety of support programs, services and
information are currently being offered by different institutions. These programs and support services
fail to reach or remain inaccessible to informal business operators and owners. This is borne out of and
perpetuated by lopsided economic policies and poor governance that inadvertently encumber informal
businesses from accessing mainstream resources and services.

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Mallory A. Owen (2006)

Has examined that microfinance has signaled a paradigm shift in development ideology. Using my
experiences with microfinance in a fishing village in Senegal, this study will address the claims driving
the microfinance movement, debate its pros and cons and pose further questions about its validity and
widespread implementation. Instead of lifting people out of poverty and empowering women,
microfinance may have regressive long term potential for borrowers. How loans get used is a central
theme of this essay. How microfinance and the notion of the “entrepreneur” fit into the rural,
Senegalese cultural context is also addressed. Microfinance programs should be implemented with
complementary measures that challenge the systematic causes of inequality examined in this article.
The microfinance model (group lending based on joint liability) uses the social capital generated by
group membership to ensure that loans get re-financed. If one woman fails to pay back her loan, she
puts her entire loan group at jeopardy. As a result, “Women‟s participation in microenterprise does not
show any signs of creating the new forms of solidarity among women that the advocates of
empowerment desire. Instead, women are placed under enormous pressure to maintain existing modes
of social relationships, on which depends not only the high rates of loan repayments but also the
survival of families.”

Jennifer Meehan (2004)

Has examined that it will need to do three things simultaneously. First, it will need to rapidly scale up,
in key markets, like India, home to high numbers of the world‟s poor. Second, in this process, clear
priority is needed for philanthropic, quasi-commercial and commercial financing for the business plans
of MFIs targeting the poorest segments of the population, especially women. Third, microfinance will
need to realize its possibility as a broad platform and movement, more than simply an intervention and
industry. The pioneering financings completed by leading, poverty-focused MFIs have shown the
industry what is possible – large amounts of financing that allows for rapid expansion of financial
services to new poor customers. The MFIs offer a model to others that are interested in tapping the
financial markets. If leading MFIs continue on their present course and adopt some or all of the
suggestions offered, financial market interest – or more specifically, debt capital market interest – in
leading, poverty-focused MFIs is expected to grow.

Jacob Levitsky and Leny van Oyen (1999)

Has examined that micro-businesses to large corporations, located in large urban centres, in rural areas
and in the formal and informal sectors. Financing needs are therefore of varying nature. In describing
experiences, a link is made between size of enterprises, financing schemes/instruments and typical
delivery channels. When referring to enterprises in this paper, focus is predominantly on businesses,

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both existing and potential, in the manufacturing sector and related services. It is clear from this paper
that increasing the volume of finance available and the delivery of such funds in various appropriate
forms, to support enterprises in Africa, is a difficult challenge. Central banks have to be given more
independence, strengthened with qualified, experienced personnel, able to fulfil adequately the role of
supervising and monitoring the performance of commercial banks in the provision of loans to those
enterprises able to make effective use of them. Formal financial institutions such as commercial banks
and, in a few cases, development banks, have to be encouraged and pressed to make appropriate loans
to those who have proved themselves by paying off a number of loans they have received from NGOs
or from formal financial institutions. The minimalist credit approach has clear limitations, and for
credit schemes to be effective and have impact, complementary services are needed.

Marguerite S. Robinson (1995)

Has examined that HIID's role in the formulation of the initial hypotheses and HIID's contributions in
planning and coordinating the underlying research, advising on the policies and implementation
strategies that put concept into practice, analysing the results, and disseminating the findings. Drawing
on work in Asia, Africa, and Latin America, the paper analyses the paradigm shift in microfinance
from government and donor-funded subsidized credit to sustainable financial intermediation. This shift
has occurred because of the work of many people in many countries. This paper, however, is limited to
HIID's contribution. The policy implications of the 'new microfinance' for governments, donors, banks,
and NGOs are explored. HIID is advising BRI on its program for international visitors. In addition,
HIID is analysing and teaching - in universities, financial institutions, donor agencies, bank
superintendence‟s, and NGOs - the principles and the results of the new microfinance paradigm.

Pillai (1995)

Has examined that the emergence of liberalization and globalization in early 1990's aggravated the
problem of women workers in unorganized sectors from bad to worse as most of the women who were
engaged in various self-employment activities have lost their livelihood. Microfinance is emerging as a
powerful instrument for poverty alleviation in the new economy. In India, Microfinance scene is
dominated by Self Help Group (SHGs)-Bank Linkage Programme as a cost effective mechanism for
providing financial services to the "Unreached Poor" which has been successful not only in meeting
financial needs of the rural poor women but also in strengthening collective self-help capacities of the
poor leading to their empowerment. Micro finance is necessary to overcome exploitation, create
confidence for economic self-reliance of the rural poor, particularly among rural women who are
mostly invisible in the social structure. Micro finance can contribute to solving the problems 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
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multiple credit requirements of the low income borrower without imposing unbearably high cost of
monitoring its end use upon the lenders.

Crabb, P. (2008)

Has examined that the relationship between the success of microfinance institutions and the degree of
economic freedom in their host countries. Many microfinance institutions are currently not self-
sustaining and research suggests that the economic environment in which the institution operates is an
important factor in the ability of the institution to reach this goal, furthering its mission of outreach to
the poor. The sustainability of the micro lending institutions is analyzed here using a large cross-
section of institutions and countries. The results show that microfinance institutions operate primarily
in countries with a relatively low degree of overall economic freedom and that various economic
policy factors are important to sustainability.

Fehr, D. and G. Hishigsuren. (2006)

Has examined that microfinance institutions (MFIs) provide financial services to the poorest
households. To date, funding of MFI activities has come primarily from outright donor grants,
government subsidies, and often debt capital, including debt with non-market terms favorable to the
MFI. These traditional sources of MFI financing may not be sufficient to allow MFIs to provide
maximum services. There is a subset of the pool of mainstream equity investors who would consider
investing in MFI opportunities, even knowing that they would not expect to earn the full economic rate
of return that such investments would otherwise require. However, as part of their investment
evaluation process, these investors would ask: What would the market determine required expected
rate of return for my MFI investment be? What return on investment (ROI) do I expect to earn on my
MFI investment? Is the difference in the above two returns acceptable given my level of social
motivation? How will I "monetize" my investment and when? The purpose of this article is to employ
modern corporate finance techniques to address these questions.

Demirguc-Kunt, A. and Martinez, P.M.S. (2005)

Has examined that this paper (i) presents new indicators of banking sector penetration across 99
countries, based on a survey of bank regulatory authorities, (ii) shows that these indicators predict
household and firm use of banking services, (iii) explores the association between the outreach
indicators and measures of financial, institutional, and infrastructure development across countries, and
(iv) relates these banking outreach indicators to measures of firms „financing constraints. In particular,
we find that greater outreach is correlated with standard measures of financial development, as well as
with economic activity. Controlling for these factors, we find that better communication and transport

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infrastructure, and better governance are also associated with greater outreach. Government ownership
of financial institutions translates into lower access, while more concentrated banking systems are
associated with greater outreach. Finally, firms in countries with higher branch and ATM penetration
and higher use of loan services report lower financing obstacles, thus linking banking sector outreach
to the alleviation of firms‟ financing constraints.

Srinivasan, Sunderasan (2007)

Has examined that micro banking facilities have helped large numbers of developing country nationals
by supporting the establishment and growth of microenterprises. And yet, the microfinance movement
has grown on the back of passive replication and needs to be revitalised with new product offerings
and innovative service delivery. Renewable Energy systems viz., solar home systems, biogas digesters,
etc., serve to improve indoor air quality, provide superior light and extend working and study hours.
Such applications are not inherently income generating and returns on such investments accrue from
cost avoidance, but should qualify for micro funding, as such 'quality of life' investments, reflect
borrower maturity and simultaneously contribute to MFI sustainability.

Basu, P., Srivastava (2005)

Has examined that the current level and pattern of access to finance for India's rural poor and examines
some of the key microfinance approaches in India, taking a close look at the most dominant among
these, the Self Help Group (SHG) Bank Linkage initiative. It empirically analyzes the success with
which SHG Bank Linkage has been able to reach the poor, examines the reasons behind this, and the
lessons learned. The analysis in the paper draws heavily on a recent rural access to finance survey of
6,000 households in India, undertaken by the authors. The main findings and implications of the paper
are as follows: India's rural poor currently have very little access to finance from formal sources.
Microfinance approaches have tried to fill the gap. Among these, the growth of SHG Bank Linkage
has been particularly remarkable, but outreach remains modest in terms of the proportion of poor
households served. The paper recommends that, if SHG Bank Linkage is to be scaled-up to offer mass
access to finance for the rural poor, then much more attention will need to be paid towards: the
promotion of high quality SHGs that are sustainable, clear targeting of clients, and ensuring that banks
linked to SHGs price loans at cost-covering levels. At the same time, the paper argues that, in an
economy as vast and varied as India's, there is scope for diverse microfinance approaches to coexist.
Private sector micro financiers need to acquire greater professionalism, and the government, too, can
help by creating a flexible architecture for microfinance innovations, including through a more
enabling policy, legal and regulatory framework. Finally, the paper argues that, while microfinance
can, at minimum, serve as a quick way to deliver finance to the poor, the medium-term strategy to
scale-up access to finance for the poor should be to 'graduate' microfinance clients to formal financial
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institutions. The paper offers some suggestions on what it would take to reform these institutions with
an eye to improving access for the poor.

Robinson, M. (2001)

Has examined that the timing of this book is excellent it has few close substitutes in terms of its
sweeping overview of the terrain, and the revolution is now so advanced that the time is right for a
history, or at least a retrospective. As with any revolution, however, splits have emerged within the
movement. On one side are those who argue that the way forward is to require microfinance
institutions to meet the test of financial sustainability essentially, requiring these institutions to cover
their costs, even if this means that the very poorest of the poor remain under-served. Against this, the
poverty lending approach emphasizes the importance of outreach, especially to the very poorest
borrowers, as a poverty fighting approach.

Gallardo, Joselito (1999)

Has examined that the Bank should maximize opportunities to expand the use of leasing as an
approach to financial intermediation in Bank projects to promote the development of small businesses
and microenterprises. In most developing countries, capital markets are relatively undeveloped and
banks are often unable or unwilling to undertake term lending. Operations in microenterprises and
small businesses are cash-flow-oriented but rarely have organized historical financial records or the
assets needed for collateral for conventional bank financing. Gallardo explores the potential of leasing
as an option to expand small businesses' access to medium-term financing for capital equipment and
new technology. In a lease-financing contract, the lessor-financier retains ownership of the asset, lease
payments can be tailored to fit the cash-flow generation patterns of the lessee-borrower's business, and
the security deposit is smaller than the equity stake required in conventional bank financing. Other
small businesses require medium-term financing to acquire the tools and equipment needed to support
production growth and expansion. Gallardo examines and compares the Bank's experience: Lease
financing was used to promote the development of small businesses in Pakistan, as part of a
microenterprise development loan project. For a Bank-supported alternative-energy project in
Indonesia, a variant of lease financing-the hire-purchase contract-is being used in marketing and
distribution by private distributors of photovoltaic solar home systems. Lease financing was used by
Grameen Trust in Bangladesh to finance the purchase of small tools and equipment and in other
countries to promote the growth of alternative energy systems. This paper-a product of the
Development Research Group-is part of a larger effort in the group to identify appropriate policies for
environmental regulation in developing countries. The study was funded by the Bank's Research
Support Budget under the research project "The Economics of Industrial Pollution Control in
Developing Countries"
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Muhammad Yunus (1998)

Has examined that this approach to poverty reduction at the macro-level is inadequate. The primary
causes of poverty are not lack of human capital or lack of demand for labor. Lack of demand for labor
is only a symptom, not a cause, of poverty. Poverty is caused by our inadequate understanding of
human capabilities and by our failure to create enabling theoretical frameworks, concepts, institutions
and policies to support those capabilities. My main argument is that economics as we know it is not
only unhelpful in getting the poor out of poverty; it may even be a hindrance. In this paper, I would
like to explore those institutions that perpetuate poverty, share my experiences with an effective
poverty alleviation institution, and present my thoughts on the future of poverty alleviation. Before
addressing these points, however, I would like to provide a useful framework to define the concept of
"the poor" more concretely.

Ashta, A. & De Selva, R. (2009)

Hass examined that the relationship between microfinance and religion, and provides future research
directions in this area. Religious institutions often play a crucial role in establishing microfinance
systems, but interactions between microfinance and religion have received little attention of
researchers. Some of the topics addressed by articles reviewed in this paper include the impact of the
Great Irish Famine on Irish loan funds, indigenization within support groups for chronically ill Haitian
women, impact of religion on borrowing patterns of Jordanian micro-entrepreneurs, Islamic
microfinance in Pakistan and Indonesia, spirituality as an asset in a Christian initiative role of religious
leaders in identifying entrepreneurial talent, microfinance and charity in Thailand and the Philippines,
and extensive socio-economic studies in Bangladesh and India.

Ernest Aryeetey (2005)

Has examined that informal finance and microfinance suitable for financing growing small to medium
size enterprises (SMEs) in Sub-Saharan Africa? First, I present the characteristics of informal finance,
focusing on size, structure, and scope of activities. Informal finance has not been very attractive for the
private sector. Indeed, the informal sector has considerable experience and knowledge about dealing
with small borrowers, but there are significant limitations to what it can lend to growing
microbusinesses. Second, I discuss some recent trends in microfinance. While externally driven
microfinance projects have surfaced in Africa, their performance relative to small business finance has
not been as positive as in Asia and Latin America. Third, I introduce some possible steps toward a new
reform agenda that will make informal and microfinance relevant to private sector development,
including focusing on links among formal, semi-formal and informal finance and how these links can
be developed.

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Yunus (2003)

Has examined that count 130 McMaster School for Advancing Humanity on women to spread the
word to their neighbors and friends about the success of these loans. The testimony is expected to
convince others to seek out Grameen for help. Yunus also encourages members to save some of their
money in case they fall on hard times, such as natural disasters, or to use this money for other
opportunities. In 1977, Yunus founded Grameen Bank after working for six months to get a loan from
the Janata Bank. Yunus realized that having groups of people take out a loan was a better plan for
success than giving loans to individuals. He describes the process by which Grameen Bank lends
money. Loan repayments are to be made in very small amounts, and in the first project, Yunus chose a
villager to be in charge of collecting the repayments.

Monique Cohen (2002)

Has examined that the ideas presented in this paper are designed to direct the arena of discourse
towards a more holistic market driven or client focused microfinance agenda. Currently, the debate on
market-driven microfinance is primarily framed by the „problems‟ of competition and dropouts among
established MFIs. The solutions to the problems are defined in terms of more responsive products, the
creation of new products, and the restructuring of existing ones. Appropriate products will not only
benefit the operations of an institution they will also have a positive impact on the wellbeing of the
client, reducing the risk of borrowing and the poor‟s vulnerability. In presenting current thinking on a
client-led agenda, this paper finds itself in a precarious position in the midst of this debate. Client-led
models are still in their infancy, and the fact that this topic is the theme of this special edition of the
Journal of Development Studies is itself an important milestone. When this author began to focus on
clients in microfinance six years ago, the notion that clients deserved a voice in the design and delivery
of services was dismissed out of hand.

Shannon Doocy, Dan Norell, ShimelesTeffera, and Gilbert Burnham (2005)

Has examined that Management decision making in MFIs is becoming increasingly tied to collecting
information about social performance. This paper examines the impact of participation in an Ethiopian
microfinance program on indicators of socioeconomic status including wealth, income, and home or
land ownership. A survey assessing these outcomes was conducted in May 2003 in two predominantly
rural sites in Southern Ethiopia and included 819 households. The article discusses management
decisions made as the result of survey findings about socioeconomic status and food security to
increase retention rates and to facilitate client savings. Additionally, the management was prompted to
increase the number of female clients and raise the proportion of female loan officers. This paper
illustrates how data from routine monitoring and evaluation can be linked to MFI management

19

decision making, which ultimately results in providing better microfinance services. Household asset
data indicates that participation in the WISDOM microfinance program did not result in increased
household wealth. Significant differences in household income were not observed between participant
groups in either survey site and client status was not a significant predictor of income in univariate or
multivariate regression models.

John A. Brett. (2006)

Has examined that having borrowed money from a microfinance organization to start a small business,
many women in El Alto, Bolivia are unable to generate sufficient income to repay their loans and so
must draw upon household resources. Working from the women's experience and words, this article
explores the range of factors that condition and constrain their success as entrepreneurs. The central
theme is that while providing the poor access to credit is currently very popular in development circles,
the social and structural context within which some women operate so strongly constrains their
productive activity that they realize a net income loss at the household level instead of the promised
benefits of entrepreneurship. This paper explores the social and structural realities in which women
seek out and accept debt beyond their capacity to repay from the proceeds of their business enterprise.
By examining some of the "hidden costs" of microfinance participation, this paper argues for a shift
from evaluation on outcomes at the institutional level to outcomes at the household level to identify the
forces and factors that condition women's success as micro-entrepreneurs. While there has been much
discussion on the benefits of microcredit lending and increasing critique of it on both ideological and
substantive grounds, there have been few ethnographically informed studies on consequences to users.

NidhiyaMenon (2006)

Has examined that this paper studies the benefits of participation in micro-finance programs, where
benefits are measured in terms of the ability to smooth the effect of seasonal shocks that cause
consumption fluctuations. It is shown that although membership in these programs is an effective
instrument in combating inter-seasonal consumption differences, there is a threshold level of length of
participation beyond which benefits begin to diminish. Returns from membership are modelled using
an Euler equation approach. Fixed effects non-linear least squares estimation of parameters using data
from 24 villages of the Grameen Bank suggests that returns to participation, as measured by the ability
to smooth seasonal shocks, begin to decline after approximately two years of membership. This
implies that membership alone no longer has a mitigating marginal effect on seasonal shocks to per
capita consumption after four years of participation. Such patterns suggest that the ability to smooth
consumption as a function of length of membership, need not accrue indefinitely in a linear fashion.;
Reprinted by permission of Frank Cass & Co. Ltd.

20

CHAPTER 3
INDUSTRY PROFILE

21

The Origin of Microfinance

Although neither of the terms microcredit or microfinance were used in the academic literature nor by
development aid practitioners before the 1980s or 1990s, respectively, the concept of providing
financial services to low income people is much older.
While the emergence of informal financial institutions in Nigeria dates back to the 15th century, they
were first established in Europe during the 18th century as a response to the enormous increase in
poverty since the end of the extended European wars (1618 – 1648). In 1720 the first loan fund
targeting poor people was founded in Ireland by the author Jonathan Swift. After a special law was
passed in 1823, which allowed charity institutions to become formal financial intermediaries a loan
fund board was established in 1836 and a big boom was initiated. Their outreach peaked just before the
government introduced a cap on interest rates in 1843. At this time, they provided financial services to
almost 20% of Irish households. The credit cooperatives created in Germany in 1847 by Friedrich
Wilhelm Raiffeisen served 1.4 million people by 1910. He stated that the main objectives of these
cooperatives “should be to control the use made of money for economic improvements, and to improve
the moral and physical values of people and also, their will to act by themselves.”
In the 1880s the British controlled government of Madras in South India, tried to use the German
experience to address poverty which resulted in more than nine million poor Indians belonging to
credit cooperatives by 1946. During this same time the Dutch colonial administrators constructed a
cooperative rural banking system in Indonesia based on the Raiffeisen model which eventually became
Bank Rakyat Indonesia (BRI), now known as the largest MFI in the world.
EVOLUTION OF MICROFINANCE IN INDIA (1960 TO TODAY)

Microfinance in India emerged as an effort to reach out to the un-banked, lower income segments of
the population

1960 to 1980 1990 2000
Phase 1: Social Banking Phase 2: Financial Systems Phase 3: Financial Inclusion
Approach
1.Nationalization of private 1.Peer-pressure 1.NGO-MFIs and SHGs gaining
commercial banks more legitimacy
2.Expansion of rural branch 2.Establishment of 2.MFIs emerging as strategic
network MFIs,typically of non-profit partners to diverse entities
origins interested in thelow-income
segments

3.Extension of subsidized credit 3.Consumer finance emerged

22

ashighgrowth area

4.Establishment of Rural 4.Increased policy regulation
Regional Banks

5.Establishment of apex 5.Increasing commercialization
institutionssuch as National
Bank for Agricultureand Rural
Development and SmallIndu-
stries Development Bank of
India

Table 3.1
Phase 1: In the 1960‟s, the credit delivery system in rural India was largely dominated by the
cooperative segment. The period between 1960 and 1990, referred to as the “social banking” phase.
This phase includes nationalization of private commercial banks, expansion of rural branch networks,
extension of subsidized credit, establishment of Regional Rural Banks (RRBs) and the establishment
of apex institutions such as the National Bank for Agriculture and Rural Development (NABARD) and
the Small scale Industries Development Board of India (SIDBI).

Phase 2: After 1990, India witnessed the second phase “financial system approach” of credit delivery.
In this phase NABARD initiated the Self Help Group (SHG) - Bank Linkage Bank Linkage program,
which links informal women's groups to formal banks. This concept held great appeal for non-
government organizations (NGOs) working with the poor, prompting many of them to collaborate with
NABARD in the program. This period also witnessed the entry of Microfinance Institutions (MFIs),
largely of non-profit origins, with existing development programs.

Phase 3: In 2000, the third phase in the development of Indian microfinance began, marked by further
changes in policies, operating formats, and stakeholder orientations in the financial services space.
This phase emphasizes on “inclusive growth” and “financial inclusion.” This period also saw many
NGO-MFIs transform into regulated legal formats such as Non-Banking Finance Companies (NBFCs).
Commercial banks adopted innovative ways of partnering with NGO-MFIs and other rural
organizations to extend their reach into rural markets. MFIs have emerged as strategic partners to
individuals and entities interested in reaching out to India's low income client segments.

23

Policy Attention to Microfinance After 2000

1999 --- Official definition of microfinance by RBI

August 2000 --- 'Micro Credit/Rural Credit' included in the list of permitted non-banking financial
company (NBFC) activities considered for Foreign Direct Investment (FDI)

2005 --- MFIs acknowledged for the first time in the Budget Speech by the Finance Minister
“Government intends to promote MFIs in a big way. The way forward, I believe, is to identify MFIs,
classify and rate such institutions, and empower them to intermediate between the lending banks and
the beneficiaries.”

January 2006 --- Announcement of the business correspondent model

February 2006 --- Budget Speech by the Finance Minister promises a formal statutory framework for
the promotion, development and regulation of the microfinance sector

March 2006 --- Comprehensive guidelines by RBI on loan securitization

July 2006 --- RBI master circular allows NGOs involved in microfinance to access External
Commercial Borrowings (ECB) up to USD 5 million (INR 20.25 crores) during a year.

March 2007 --- Finance Minister introduces the “Micro Finance Sector Development and Regulation
Bill 2007” in LokSabha

Entities in Micro Finance:-

Indian Microfinance dominated by two operational approaches:

 SHG
Initiated by NABARD through SHG Bank Linkage Program.
Largest outreach to microfinance clients in the world.
 MFIs
Emerged in the late 1990s to harness social and commercial funds.
Today the number of Indian MFIs has increased and crossed 1000.

SHGs and MFIs disbursement till 2007- USD 3.7 billions
SHGs comprise twenty or fewer members, of whom the majority are women from the poorest castes
and tribes. Members save small amounts of money, as little as a few rupees a month in a group fund.
Members may borrow from the group fund for a variety of purposes ranging from household

24

emergencies to school fees. Banks typically lend up to four rupees for every rupee in the group fund.
Groups pay a reasonable 12-24% annual rate of interest. Nearly 1.4 million SHGs comprising
approximately 20 million women now borrow from banks, which makes the Indian SHG-Bank
Linkage model the largest microfinance program in the world.
MFI is an organization that offers financial services to low income populations. Almost all of these
offer microcredit and only take back small amounts of savings from their own borrowers, not from the
general public. Term refers to a wide range of organizations - NGOs, credit unions, cooperatives,
private commercial banks and non-bank financial institutions.

Microfinance Today

In the 1970s a paradigm shift started to take place. The failure of subsidized government or donor
driven institutions to meet the demand for financial services in developing countries let to several new
approaches. Some of the most prominent ones are presented below.
Bank Dagan Bali (BDB) was established in September 1970 to serve low income people in Indonesia
without any subsidies and is now “well-known as the earliest bank to institute commercial
microfinance”. While this is not true with regard to the achievements made in Europe during the 19th
century, it still can be seen as a turning point with an ever increasing impact on the view of politicians
and development aid practitioners throughout the world. In 1973 ACCION International, a United
States of America (USA) based non-governmental organization (NGO) disbursed its first loan in
Brazil and in 1974 Professor Muhammad Yunus started what later became known as the Grameen
Bank by lending a total of $27 to 42 people in Bangladesh. One year later the Self-Employed
Women‟s Association started to provide loans of about $1.5 to poor women in India. Although the
latter examples still were subsidized projects, they used a more business oriented approach and showed
the world that poor people can be good credit risks with repayment rates exceeding 95%, even if the
interest rate charged is higher than that of traditional banks. Another milestone was the transformation
of BRI starting in 1984. Once a loss making institution channeling government subsidized credits to
inhabitants of rural Indonesia it is now the largest MFI in the world, being profitable even during the
Asian financial crisis of 1997 – 1998.
In February 1997 more than 2,900 policymakers, microfinance practitioners and representatives of
various educational institutions and donor agencies from 137 different countries gathered in
Washington D.C. for the first Micro Credit Summit. This was the start of a nine yearlong campaign to
reach 100 million of the world poorest households with credit for self-employment by 2005.
According to the Microcredit Summit Campaign Report 67,606,080 clients have been reached through
2527 MFIs by the end of 2002, with 41,594,778 of them being amongst the poorest before they took
their first loan. Since the campaign started the average annual growth rate in reaching clients has been
almost 40 percent. If it has continued at that speed more than 100 million people will have access to

25

microcredit by now and by the end of 2005 the goal of the microcredit summit campaign would be
reached. As the president of the World Bank James Wolfensohn has pointed out, providing financial
services to 100 million of the poorest households means helping as many as 500 – 600 million poor
people.

Need for Micro-Finance: The gap between Demand and Supply

Since independence, various governments in India have experimented with a large number of grant
and subsidy based poverty alleviation programmes. These programmes were based on grant/subsidy
and the credit linkage was through commercial banks only.
Hence was adopted the concept of micro-credit in India. Success stories in neighboring countries, like
Grameen Bank in Bangladesh, Bank Rakiat in Indonesia, Commercial & Industrial Bank in Philippines
etc, gave further boost to the concept in India in the 1980s. India thus adopted the similar model of
extending credit to the poorest sector and took a no. of steps to promote micro-financing in the
country. Since the 1950s, various governments in India have experimented with a large number of
grant and subsidy based poverty alleviation programmes. Studies show that these mandatory and
dedicated subsidized financial programmes, implemented through banking institutions, have not been
fully successful in meeting their social and economic objectives:

The common features of these programmes were:-
Target orientation
Based on grant/subsidy, and
Credit linkage through commercial banks.

These programmes:-
Were often not sustainable
Perpetuated the dependent status of the beneficiaries
Depended ultimately on government employees for delivery
Led to misuse of both credit and subsidy and
Were treated at best as poverty alleviation interventions.

Who are the clients of micro finance?
The typical micro finance clients are low-income persons that do not have access to formal financial
institutions. Micro finance clients are typically self-employed, often household-based entrepreneurs. In
rural areas, they are usually small farmers and others who are engaged in small income-generating
activities such as food processing and petty trade. In urban areas, micro finance activities are more

26

diverse and include shopkeepers, service providers, artisans, street vendors, etc. Micro finance clients
are poor and vulnerable non-poor who have a relatively unstable source of income.
Access to conventional formal financial institutions, for many reasons, is inversely related to income:
the poorer you are the less likely that you have access. On the other hand, the chances are that, the
poorer you are, the more expensive or onerous informal financial arrangements. Moreover, informal
arrangements may not suitably meet certain financial service needs or may exclude you anyway.
Individuals in this excluded and under-served market segment are the clients of micro finance.
As we broaden the notion of the types of services micro finance encompasses, the potential market of
micro finance clients also expands. It depends on local conditions and political climate, activeness of
cooperatives, SHG & NGOs and support mechanism. For instance, micro credit might have a far more
limited market scope than say a more diversified range of financial services, which includes various
types of savings products, payment and remittance services, and various insurance products. For
example, many very poor farmers may not really wish to borrow, but rather, would like a safer place to
save the proceeds from their harvest as these are consumed over several months by the requirements of
daily living. Central government in India has established a strong & extensive link between NABARD
(National Bank for Agriculture & Rural Development), State Cooperative Bank, District Cooperative
Banks, Primary Agriculture & Marketing Societies at national, state, district and village level.

The Need in India:-

India is said to be the home of one third of the world‟s poor; official estimates range from 26 to
50 percent of the more than one billion population.
About 87 percent of the poorest households do not have access to credit.
The demand for microcredit has been estimated at up to $30 billion; the supply is less than $2.2
billion combined by all involved in the sector.

Due to the sheer size of the population living in poverty, India is strategically significant in the global
efforts to alleviate poverty and to achieve the Millennium Development Goal of halving the world‟s
poverty by 2015. Microfinance has been present in India in one form or another since the 1970s and is
now widely accepted as an effective poverty alleviation strategy. Over the last five years, the
microfinance industry has achieved significant growth in part due to the participation of commercial
banks. Despite this growth, the poverty situation in India continues to be challenging.
Some principles that summarize a century and a half of development practice were encapsulated in
2004 by Consultative Group to Assist the Poor (CGAP) and endorsed by the Group of Eight leaders at
the G8 Summit on June 10, 2004:

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

27

Microfinance must be useful to poor households: helping them raise income, build up assets
and/or cushion themselves against external shocks.
“Microfinance can pay for itself.”Subsidies from donors and government are scarce and
uncertain, and so to reach large numbers of poor people, microfinance must pay for itself.
Microfinance means building permanent local institutions.
Microfinance also means integrating the financial needs of poor people into a country‟s
mainstream financial system.
“The job of government is to enable financial services, not to provide them.”
“Donor funds should complement private capital, not compete with it.”
“The key bottleneck is the shortage of strong institutions and managers.” Donors should focus
on capacity building.
Interest rate ceilings hurt poor people by preventing microfinance institutions from covering
their costs, which chokes off the supply of credit.
Microfinance institutions should measure and disclose their performance – both financially and
socially.

Microfinance can also be distinguished from charity. It is better to provide grants to families who are
destitute, or so poor they are unlikely to be able to generate the cash flow required to repay a loan. This
situation can occur for example, in a war zone or after a natural disaster.

Financial needs and Financial services:-

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

In Stuart Rutherford‟s recent book The Poor and Their Money, he cites several types of needs:
Lifecycle Needs: such as weddings, funerals, childbirth, education, homebuilding, widowhood,
old age.
Personal Emergencies: such as sickness, injury, unemployment, theft, harassment or death.
Disasters: such as fires, floods, cyclones and man-made events like war or bulldozing of
dwellings.
Investment Opportunities: expanding a business, buying land or equipment, improving
housing, securing a job (which often requires paying a large bribe), etc.

28

Poor people find creative and often collaborative ways to meet these needs, primarily through creating
and exchanging different forms of non-cash value. Common substitutes for cash vary from country to
country but typically include livestock, grains, jewellery and precious metals.
As Marguerite Robinson describes in The Microfinance Revolution, the 1980s demonstrated that
“microfinance could provide large-scale outreach profitably,” and in the 1990s, “microfinance began
to develop as an industry”. In the 2000s, the microfinance industry‟s objective is to satisfy the unmet
demand on a much larger scale, and to play a role in reducing poverty. While much progress has been
made in developing a viable, commercial microfinance sector in the last few decades, several issues
remain that need to be addressed before the industry will be able to satisfy massive worldwide
demand.
The obstacles or challenges to building a sound commercial microfinance industry include:
Inappropriate donor subsidies
Poor regulation and supervision of deposit-taking MFIs
Few MFIs that mobilize savings
Limited management capacity in MFIs
Institutional inefficiencies
Need for more dissemination and adoption of rural, agricultural microfinance methodologies

Role of Microfinance:-

The micro credit of microfinance progamme was first initiated in the year 1976 in Bangladesh with
promise of providing credit to the poor without collateral , alleviating poverty and unleashing human
creativity and endeavor of the poor people. Microfinance impact studies have demonstrated that

1. Microfinance helps poor households meet basic needs and protects them against risks.
2. The use of financial services by low-income households leads to improvements in household
economic welfare and enterprise stability and growth.
3. By supporting women‟s economic participation, microfinance empowers women, thereby
promoting gender-equity and improving household well-being.
4. The level of impact relates to the length of time clients have had access to financial services.

1.1 Strategic Policy Initiatives

Some of the most recent strategic policy initiatives in the area of Microfinance taken by the
government and regulatory bodies in India are:
Working group on credit to the poor through SHGs, NGOs, NABARD, 1995
The National Microfinance Taskforce, 1999
Working Group on Financial Flows to the Informal Sector (set up by PMO), 2002
29

Microfinance Development and Equity Fund, NABARD, 2005
Working group on Financing NBFCs by Banks- RBI

1.2 Activities in Microfinance

Microcredit: It is a small amount of money loaned to a client by a bank or other institution.
Microcredit can be offered, often without collateral, to an individual or through group lending.
Micro savings: These are deposit services that allow one to save small amounts of money for future
use. Often without minimum balance requirements, these savings accounts allow households to save in
order to meet unexpected expenses and plan for future expenses.
Micro insurance: It is a system by which people, businesses and other organizations make a payment
to share risk. Access to insurance enables entrepreneurs to concentrate more on developing their
businesses while mitigating other risks affecting property, health or the ability to work.
Remittances: These are transfer of funds from people in one place to people in another, usually across
borders to family and friends. Compared with other sources of capital that can fluctuate depending on
the political or economic climate, remittances are a relatively steady source of funds.

1.3 Legal Regulations

Banks in India are regulated and supervised by the Reserve Bank of India (RBI) under the RBI Act of
1934, Banking Regulation Act, Regional Rural Banks Act, and the Cooperative Societies Acts of the
respective state governments for cooperative banks.
NBFCs are registered under the Companies Act, 1956 and are governed under the RBI Act. There is
no specific law catering to NGOs although they can be registered under the Societies Registration Act,
1860, the Indian Trust Act, 1882, or the relevant state acts. There has been a strong reliance on self-
regulation for NGO MFIs and as this applies to NGO MFIs mobilizing deposits from clients who also
borrow. This tendency is a concern due to enforcement problems that tend to arise with self-regulatory
organizations. In January 2000, the RBI essentially created a new legal form for providing
microfinance services for NBFCs registered under the Companies Act so that they are not subject to
any capital or liquidity requirements if they do not go into the deposit taking business. Absence of
liquidity requirements is concern to the safety of the sector.

30

Development Process through Micro Finance

Donors and Banks Micro-Finance Governmentand Banks

Implementing Organisations

Individual Awareness/Promotional Work Individual

Promotion and Formation of
SHGs

Micro Enterprise Consolidation of SHGs Micro Enterprise

Savings

Consumption Needs Credit Delivery Production Needs

Recovery

Follow-up Monitoring

Income Generation
Farm Related (Sustainable & Growth Non-Farm Related
Oriented)

Self-Sustainability of SHGs

Economic Empowerment
through use of Micro-Credit as
an entry point for overall
Empowerment

Figure 3.1

31

Micro-finance interventions through different organisations

National Government Funded Donors/Bilateral
Financial Banks
Programmes Projects
Institutions

Implementing Organisations

Resource/Support Indirectly
Organisations engaged in
Directly engaged in Micro-Finance
Micro-Finance

Individuals

SHGs

Members

Figure 3.2

32

Microfinance in India

At present lending to the economically active poor both rural and urban is pegged at around Rs.7000
crores in the Indian banks‟ credit outstanding. As against this, according to even the most conservative
estimates, the total demand for credit requirements for this part of Indian society is somewhere around
Rs.2,00,000 crores.

Microfinance changing the face of poor India
Micro-Finance is emerging as a powerful instrument for poverty alleviation in the new economy. In
India, micro-Finance scene is dominated by Self Help Groups (SHGs) - Banks linkage Programme,
aimed at providing a cost effective mechanism for providing financial services to the 'unreached poor'.
In the Indian context terms like "small and marginal farmers", " rural artisans" and "economically
weaker sections" have been used to broadly define micro-finance customers. Research across the globe
has shown that, over time, microfinance clients increase their income and assets, increase the number
of years of schooling their children receive, and improve the health and nutrition of their families.
A more refined model of micro-credit delivery has evolved lately, which emphasizes the combined
delivery of financial services along with technical assistance, and agricultural business development
services. When compared to the wider SHG bank linkage movement in India, private MFIs have had
limited outreach. However, we have seen a recent trend of larger microfinance institutions
transforming into Non-Bank Financial Institutions (NBFCs). This changing face of microfinance in
India appears to be positive in terms of the ability of microfinance to attract more funds and therefore
increase outreach.
In terms of demand for micro-credit or micro-finance, there are three segments, which demand
funds. They are:

At the very bottom in terms of income and assets, are those who are landless and engaged in
agricultural work on a seasonal basis, and manual labourers in forestry, mining, household
industries, construction and transport. This segment requires, first and foremost, consumption
credit during those months when they do not get labour work, and for contingencies such as
illness. They also need credit for acquiring small productive assets, such as livestock, using
which they can generate additional income.

The next market segment is small and marginal farmers and rural artisans, weavers and those
self-employed in the urban informal sector as hawkers, vendors, and workers in household
micro-enterprises. This segment mainly needs credit for working capital, a small part of which
also serves consumption needs. This segment also needs term credit for acquiring additional
productive assets, such as irrigation pumpsets, borewells and livestock in case of farmers, and
equipment (looms, machinery) and worksheds in case of non-farm workers.
33

The third market segment is of small and medium farmers who have gone in for commercial
crops such as surplus paddy and wheat, cotton, groundnut, and others engaged in dairying,
poultry, fishery, etc. Among non-farm activities, this segment includes those in villages and
slums, engaged in processing or manufacturing activity, running provision stores, repair
workshops, tea shops, and various service enterprises. These persons are not always poor,
though they live barely above the poverty line and also suffer from inadequate access to formal
credit.

Well these are the people who require money and with Microfinance it is possible. Right now the
problem is that, it is SHGs' which are doing this and efforts should be made so that the big financial
institutions also turn up and start supplying funds to these people. This will lead to a better India and
will definitely fulfill the dream of our late Prime Minister, Mrs. Indira Gandhi, i.e. Poverty.
One of the statements is really appropriate here, which is as:
“Money, says the proverb makes money. When you have got a little, it is often easy to get more. The
great difficulty is to get that little.”Adams Smith.
Today India is facing major problem in reducing poverty. About 25 million people in India are under
below poverty line. With low per capita income, heavy population pressure, prevalence of massive
unemployment and underemployment, low rate of capital formation, misdistribution of wealth and
assets , prevalence of low technology and poor economics organization and instability of output of
agriculture production and related sectors have made India one of the poor countries of the world.

Present Scenario of India:

India falls under low income class according to World Bank. It is second populated country in the
world and around 70 % of its population lives in rural area. 60% of people depend on agriculture, as a
result there is chronic underemployment and per capita income is only $ 3262. This is not enough to
provide food to more than one individual. The obvious result is abject poverty, low rate of education,
low sex ratio, exploitation. The major factor account for high incidence of rural poverty is the low
asset base. According to Reserve Bank of India, about 51 % of people house possess only 10% of the
total asset of India .This has resulted low production capacity both in agriculture (which contribute
around 22-25% of GDP) and Manufacturing sector. Rural people have very low access to
institutionalized credit (from commercial bank).

Poverty alleviation programmes and conceptualization of Microfinance:

There has been a continuous effort of planners of India in addressing the poverty. They have come up
with development programmes like Integrated Rural Development progamme (IRDP), National Rural
Employment Programme (NREP), Rural Labour Employment Guarantee Programme (RLEGP) etc.

34

But these progamme have not been able to create massive impact in poverty alleviation. The
production oriented approach of planning without altering the mode of production could not but result
of the gains of development by owners of instrument of production. The mode of production does
remain same as the owners of the instrument have low access to credit which is the major factor of
production. Thus in Nineties National bank for agriculture and rural development(NABARD) launches
pilot projects of Microfinance to bridge the gap between demand and supply of funds in the lower
rungs of rural economy. Microfinance the buzzing word of this decade was meant to cure the illness of
rural economy. With this concept of Self Reliance, Self Sufficiency and Self Help gained momentum.
The Indian microfinance is dominated by Self Help Groups (SHGs) and their linkage to Banks.
Deprived of the basic banking facilities, the rural and semi urban Indian masses are still relying on
informal financing intermediaries like money lenders, family members, friends etc.

Distribution of Indebted Rural Households: Agency wise

Credit Agency Percentage of Rural Households
Government 6.1
Cooperative Societies 21.6
Commercial banks and RRBs 33.7
Insurance 0.3
Provident Fund 0.7
Other Institutional Sources 1.6
All Institutional Agencies 64.0
Landlord 4.0
Agricultural Moneylenders 7.0
Professional Moneylenders 10.5
Relatives and Friends 5.5
Others 9.0
All Non Institutional Agencies 36.0
All Agencies 100.0

Table 3.2

Self Help Groups (SHGs)

Self- help groups (SHGs) play today a major role in poverty alleviation in rural India. A growing
number of poor people (mostly women) in various parts of India are members of SHGs and actively
engage in savings and credit (S/C), as well as in other activities (income generation, natural resources
management, literacy, child care and nutrition, etc.). The S/C focus in the SHG is the most prominent
35

element and offers a chance to create some control over capital, albeit in very small amounts. The
SHG system has proven to be very relevant and effective in offering women the possibility to break
gradually away from exploitation and isolation.

How self-help groups work

NABARD (1997) defines SHGs as "small, economically homogenous affinity groups of rural poor,
voluntarily formed to save and mutually contribute to a common fund to be lent to its members as per
the group members' decision".
Most SHGs in India have 10 to 25 members, who can be either only men, or only women, or only
youth, or a mix of these. As women's SHGs or sangha have been promoted by a wide range of
government and non- governmental agencies, they now make up 90% of all SHGs.
The rules and regulations of SHGs vary according to the preferences of the members and those
facilitating their formation. A common characteristic of the groups is that they meet regularly
(typically once per week or once per fortnight) to collect the savings from members, decide to which
member to give a loan, discuss joint activities (such as training, running of a communal business, etc.),
and to mitigate any conflicts that might arise. Most SHGs have an elected chairperson, a deputy, a
treasurer, and sometimes other office holders.
Most SHGs start without any external financial capital by saving regular contributions by the
members. These contributions can be very small (e.g. Rs.10 per week). After a period of consistent
savings (e.g. 6 months to one year) the SHGs start to give loans from savings in the form of small
internal loans for micro enterprise activities and consumption. Only those SHGs that have utilized their
own funds well are assisted with external funds through linkages with banks and other financial
intermediaries.

Micro Finance Models

1. Micro Finance Institutions (MFIs):
MFIs are an extremely heterogeneous group comprising NBFCs, societies, trusts and
cooperatives. They are provided financial support from external donors and apex institutions
including the RashtriyaMahilaKosh (RMK), SIDBI Foundation for micro-credit and NABARD
and employ a variety of ways for credit delivery.
Since 2000, commercial banks including Regional Rural Banks have been providing funds to
MFIs for on lending to poor clients. Though initially, only a handful of NGOs were “into”
financial intermediation using a variety of delivery methods, their numbers have increased
considerably today. While there is no published data on private MFIs operating in the country,
the number of MFIs is estimated to be around 800.

36

Legal Forms of MFIs in India

Types of MFIs Estimated Legal Acts under which Registered
Number*

1. Not for Profit MFIs 400 to 500 Societies Registration Act, 1860 or
similar Provincial Acts
a.) NGO - MFIs
Indian Trust Act, 1882

b.) Non-profit Companies 10 Section 25 of the Companies Act, 1956

2. Mutual Benefit MFIs 200 to 250 Mutually Aided Cooperative Societies
a.) Mutually Aided Cooperative Act enacted by State Government
Societies (MACS) and similarly
set up institutions

3. For Profit MFIs 6 Indian Companies Act, 1956

a.) Non-Banking Financial Reserve Bank of India Act, 1934
Companies (NBFCs)

Total 700 – 800
Table 3.3
2. Bank Partnership Model
This model is an innovative way of financing MFIs. The bank is the lender and the MFI acts as
an agent for handling items of work relating to credit monitoring, supervision and recovery. In
other words, the MFI acts as an agent and takes care of all relationships with the client, from first
contact to final repayment. The model has the potential to significantly increase the amount of
funding that MFIs can leverage on a relatively small equity base.
A sub - variation of this model is where the MFI, as an NBFC, holds the individual loans on its
books for a while before securitizing them and selling them to the bank. Such refinancing
through securitization enables the MFI enlarged funding access. If the MFI fulfills the “true sale”
criteria, the exposure of the bank is treated as being to the individual borrower and the prudential
exposure norms do not then inhibit such funding of MFIs by commercial banks through the
securitization structure.

3. Banking Correspondents
The proposal of “banking correspondents” could take this model a step further extending it to
savings. It would allow MFIs to collect savings deposits from the poor on behalf of the bank. It
would use the ability of the MFI to get close to poor clients while relying on the financial
strength of the bank to safeguard the deposits. This regulation evolved at a time when there were

37

genuine fears that fly-by-night agents purporting to act on behalf of banks in which the people
have confidence could mobilize savings of gullible public and then vanish with them. It remains
to be seen whether the mechanics of such relationships can be worked out in a way that
minimizes the risk of misuse.

4. Service Company Model
Under this model, the bank forms its own MFI, perhaps as an NBFC, and then works hand in
hand with that MFI to extend loans and other services. On paper, the model is similar to the
partnership model: the MFI originates the loans and the bank books them. But in fact, this model
has two very different and interesting operational features:

The MFI uses the branch network of the bank as its outlets to reach clients. This allows the
client to be reached at lower cost than in the case of a stand–alone MFI. In case of banks
which have large branch networks, it also allows rapid scale up. In the partnership model,
MFIs may contract with many banks in an arm‟s length relationship. In the service company
model, the MFI works specifically for the bank and develops an intensive operational
cooperation between them to their mutual advantage.
The Partnership model uses both the financial and infrastructure strength of the bank to
create lower cost and faster growth. The Service Company Model has the potential to take
the burden of overseeing microfinance operations off the management of the bank and put it
in the hands of MFI managers who are focused on microfinance to introduce additional
products, such as individual loans for SHG graduates, remittances and so on without
disrupting bank operations and provide a more advantageous cost structure for microfinance.

Bank Led Model

The bank led model was derived from the SHG-Bank linkage program of NABARD. Through this
program, banks financed Self Help Groups (SHGs) which had been promoted by NGOs and
government agencies.
ICICI Bank drew up aggressive plans to penetrate rural areas through its SHG program. However,
rather than spending time in developing rural infrastructure of its own, in 2000, ICICI Bank announced
merger of Bank of Madura (BoM), which had significant presence in the rural areas of South India,
especially Tamil Nadu, with a customer base of 1.9 million and 87 branches. Bank of Madura's SHG
development program was initiated in 1995. Through this program, it had formed, trained and initiated
small groups of women to undertake financial activities like banking, saving and lending. By 2000, it
had created around 1200 SHGs across Tamil Nadu and provided credit to them.

38

Partnership Models

A model of microfinance has emerged in recent years in which a microfinance institution (MFI)
borrows from banks and on-lends to clients; few MFIs have been able to grow beyond a certain point.
Under this model, MFIs are unable to provide risk capital in large quantities, which limits the advances
from banks. In addition, the risk is being entirely borne by the MFI, which limits its risk-taking.
This model aimed at synergizing the comparative advantages and financial strength of the bank with
social intermediation, mobilization power and infrastructure of MFIs and NGOs. Through this model,
ICICI Bank could save on the initial costs of developing rural infrastructure and micro credit
distribution channels and could take advantage of the expertise of these institutions in rural areas.
Initially, ICICI Bank started off by lending to MFIs and NGOs in order to provide the necessary
financial support to their activities. Later, ICICI Bank came up with a plan where the NGO/MFI
continued to promote their microfinance schemes, while the bank met the financial requirements of the
borrowers.

TYPES OF ORGANIZATION

These organizations are classified in the following categories to indicate the functional aspects covered
by them within the micro finance framework. The aim, however, is not to "typecast" an organization,
as these have many other activities within their scope:
Microfinance providers in India can be classified under three broad categories: formal, semiformal,
and informal.
Formal Sector

The formal sector comprises of the bankssuch as NABARD, SIDBI and other regional rural
banks (RRBs). They primarily provide credit for assistance in agriculture and micro-enterprise
development and primarily target the poor. Their deposit at around Rs.350 billion and of that,
around Rs.250 billion has been given as advances. They charge an interest of 12-13.5% but if
we include the transaction costs (number of visits to banks, compulsory savings and costs
incurred for payments to animators/staff/local leaders etc.) they come out to be as high as 21-
24%.

Semi - formal Sector

The majority of institutional microfinance providers in India are semi-formal organizations
broadly referred to as MFIs. Registered under a variety of legal acts, these organizations greatly
differ in philosophy, size, and capacity. There are over 500 non-government organizations

39

(NGOs) registered as societies, public trusts, or non-profit companies. Organizations
implementing micro-finance activities can be categorized into three basic groups.

I. Organizations which directly lend to specific target groups and are carrying out all
related activities like recovery, monitoring, follow-up etc.
II. Organizations who only promote and provide linkages to SHGs and are not directly
involved in micro lending operations.
III. Organizations which are dealing with SHGs and plan to start micro-finance related
activities.

Informal Sector

In addition to friends and family, moneylenders, landlords, and traders constitute the informal
sector. While estimates of their importance vary significantly, it is undeniable that they
continue to play a significant role in the financial lives of the poor. These are the organizations
that provide support to implementing organizations. The support may be in terms of resources
or training for capacity building, counseling, networking, etc. They operate at state/regional or
national level. They may or may not be directly involved in micro-finance activities adopted by
the associations/collectives to support implementing Organizations.

Grameen Bank

The Grameen Model which was pioneered by Prof MuhammedYunus of Grameen Bank is perhaps the
most well-known, admired and practiced model in the world. The model involves the following
elements.

Homogeneous affinity group of five
Eight groups form a Centre
Centre meets every week
Regular savings by all members
Loan proposals approved at Centre meeting
Loan disbursed directly to individuals
All loans repaid in 50 installments

The Grameen model follows a fairly regimented routine. It is very cost intensive as it involves building
capacity of the groups and the customers passing a test before the lending could start. The group
members tend to be selected or at least strongly vetted by the bank. One of the reasons for the high
cost is that staff members can conduct only two meetings a day and thus are occupied for only a few

40

hours, usually early morning or late in the evening. They were used additionally for accounting work,
but that can now be done more cost effectively using computers. The model is also rather meeting
intensive which is fine as long as the members have no alternative use for their time but can be a
problem as members go up the income ladder.
The greatness of the Grameen model is in the simplicity of design of products and delivery. The
process of delivery is scalable and the model could be replicated widely. The focus on the poorest,
which is a value attribute of Grameen, has also made the model a favourite among the donor
community.
However, the Grameen model works only under certain assumptions. As all the loans are only for
enterprise promotion, it assumes that all the poor want to be self-employed. The repayment of loans
starts the week after the loan is disbursed – the inherent assumption being that the borrowers can
service their loan from the ex-ante income.

SKS Microfinance(CEO-VikramAkula)

Many companies say they protect the interests of their customers. Very few actually sit in dirt with
them, using stones, flowers, sticks, and chalk powder to figure out if they will be able to repay a $20
loan at $1 a month. With this approach, this company has created its own loyal gang of over 2 million
customers.
Its borrowers include agricultural laborers, mom-and-pop entrepreneurs, street vendors, home based
artisans, and small scale producers, each living on less than $2 a day. It works on a model that would
allow micro-finance institutions to scale up quickly so that they would never have to turn poor person
away.

Its model is based on 3 principles-

1. Adopt a profit-oriented approach in order to access commercial capital- Starting with the pitch
that there is a high entrepreneurial spirit amongst the poor to raise the funds, SKS converted
itself to for-profit status as soon as it got break even and got philanthropist Ravi Reddy to be a
founding investor. Then it secured money from parties such as Unitus, a Seattle based NGO
that helps promote micro-finance; SIDBI; and technology entrepreneur VinodKhosla. Later, it
was able to attract multimillion dollar lines of credit from Citibank, ABN Amro, and others.
2. Standardize products, training, and other processes in order to boost capacity- They collect
standard repayments in round numbers of 25 or 30 rupees. Internally, they have factory style
training models. They enroll about 500 loan officers every month. They participate in theory
classes on Saturdays and practice what they have learned in the field during the week. They

41

have shortened the training time for a loan officer to 2 months though the average time taken
by other industry players is 4-6 months.
3. Use Technology to reduce costs and limit errors- It could not find the software that suited its
requirements, so it they built their own simple and user friendly applications that a computer-
illiterate loan officer with a 12th grade education can easily understand. The system is also
internet enabled. Given that electricity is unreliable in many areas they have installed car
batteries or gas powered generators as back-ups in many areas.

Scaling up Customer Loyalty

Instead of asking illiterate villagers to describe their seasonal pattern of cash flows, they encourage
them to use colored chalk powder and flowers to map out the village on the ground and tell where the
poorest people lived, what kind of financial products they needed, which areas were lorded over by
which loan sharks, etc. They set people‟s tiny weekly repayments as low as $1 per week and health
and whole life insurance premiums to be $10 a year and 25 cents per week respectively. They also
offer interest free emergency loans. The salaries of loan officers are not tied to repayment rates and
they journey on mopeds to borrowers‟ villages and schedule loan meetings as early as 7.00 A.M. Deep
customer loyalty ultimately results in a repayment rate of 99.5%.

Leveraging the SKS brand

Its payoff comes from high volumes. They are growing at 200% annually, adding 50 branches and
1,60,000 new customers a month. They are also using their deep distribution channels for selling soap,
clothes, consumer electronics and other packaged goods.

Marketing of Microfinance Products:-

1. Contract Farming and Credit Bundling
Banks and financial institutions have been partners in contract farming schemes, set up to
enhance credit. Basically, this is a doable model. Under such an arrangement, crop loans can be
extended under tie-up arrangements with corporate for production of high quality produce with
stable marketing arrangements provided – and only, provided – the price setting mechanism for
the farmer is appropriate and fair.
2. Agri Service Centre – Rabo India
Rabo India Finance Pvt. Ltd. has established agri-service centres in rural areas in cooperation
with a number of agri-input and farm services companies. The services provided are similar to
those in contract farming, but with additional flexibility and a wider range of products
including inventory finance. Besides providing storage facilities, each centre rents out farm

42

machinery, provides agricultural inputs and information to farmers, arranges credit, sells other
services and provides a forum for farmers to market their products.
3. Non Traditional Markets
Similarly, Mother Dairy Foods Processing, a wholly owned subsidiary of National Dairy
Development Board (NDDB) has established auction markets for horticulture producers in
Bangalore. The operations and maintenance of the market is done by NDDB. The project, with
an outlay of Rs.15 lakh, covers 200 horticultural farmers associations with 50,000 grower
members for wholesale marketing. Their produce is planned with production and supply
assurance and provides both growers and buyers a common platform to negotiate better rates.
4. ApniMandi
Another innovation is that of The Punjab Mandi Board, which has experimented with a
„farmers‟ market‟ to provide small farmers located in proximity to urban areas, direct access to
consumers by elimination of middlemen. This experiment known as "ApniMandi" belongs to
both farmers and consumers, who mutually help each other. Under this arrangement a sum of
Rs.5.2 lakh is spent for providing plastic crates to 1000 farmers. Each farmer gets 5 crates at a
subsidized rate. At the mandi site, the Board provides basic infrastructure facilities. At the farm
level, extension services of different agencies are pooled in. These include inputs subsidies,
better quality seeds and loans from Banks. ApniMandi scheme provides self-employment to
producers and has eliminated social inhibitions among them regarding the retail sale of their
produce.

Commercial banksas Microfinance Vehicles
Commercial banks recently have stepped into the realm of microfinance. They have taken tentative but
very important steps toward distributing Microfinance loans to the poor. One advantage of these
institutions is that they bring in the risks management practices that they regularly use in their
commercial operations risk management practices that they regularly use in their commercial
operations. The other important aspect they bring in is the professional credit appraisal practices that
are used in their normal operations. These important features combined with a mission to provide the
poor entrepreneurs will enhance the social lives and they can run their business effectively with proper
access to credit. In some cases, successful microfinance NGOs have transformed themselves into for
profit commercial banks (BancoSol of Bolivia is a prime example of a microfinance NGO that has
successfully transformed itself into a for-profit commercial bank). This transformation from a not-for-
profit institution into for-profit organization has increased the focus of these organizations on financial
self-sufficiency. This transformation has been possible because commercial banks have entered this
arena bringing in key concepts like self-sufficiency, proper credit appraisal and risk management
practices. But there are some issues that have to be dealt with by the banks before embarking on the
Microfinance journey.
43

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