A Study of Micro-Finances of Public Sector Banks

MurtAza Barot Email Id: murtaza58@yahoo.co.in

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I. Introduction: In recent years, microfinance has gained growing recognition as an effective tool in improving the quality of life and living standards of poor people. This recognition has given rise to a movement that now has a global outreach and has penetrated in the remote rural areas, besides slums and towns. The United Nations Year of Microfinance in 2005 and the Nobel Peace Prize to Mohammed Yunus and performance of Grameen Bank till 2008 have given considerable public recognition to microfinance as a development tool.1 The Microfinance Summit in the 2006-meeting in Halifax celebrated the milestone of 100 million borrowers reached. Nevertheless, microfinance still reaches only a fraction of the world's poor. Hence, there is a supply challenge in the industry.

Micro finances are often defined as financial services for poor and low-income clients. In practice, the term is often used more narrowly to refer to loans and other services from providers that identify themselves as micro financers. These institutions commonly tend to use new methods developed over the last 30 years to deliver very small loans to unsalaried borrowers, taking little or no collateral. These methods include group lending and liability, pre-loan savings requirements gradually increasing loan sizes and an implicit guarantee of ready access to future loans if present loans are repaid fully and promptly. More broadly micro finance refers to a movement that envisions a world in which low-income households have permanent access to a range of high quality financial services to finance their income producing activities, build assets, stabilise consumption and protect against risks.

Typical micro finance clients are poor and low-income people who do not have access to other formal financial institutions. Micro finance clients are usually self-employed and household based entrepreneurs. Micro enterprises include small retail shops, street vending, artesian manufacturers and service providers in rural areas. Micro finance is the extension of very small loans to the unemployed, to poor entrepreneurs and to others living in poverty that is not considered bankable. Due to the success of micro finance, many in the traditional banking industry have begun to realise that these finance borrowers should more
1

Arup Roy, November 2011, Micro-Finance Performance of Public Sector Banks in the NER of India, Journal of Applied Management and Computer Science, Volume 4, ISSN No (0976 0458).

correctly be categorised as pre-bankable, thus micro finance is increasingly gaining credibility in the main stream. These loans are for short periods that are repaid quickly and made available at interest rates that keep the programme sustainable and viable.

II.

Statement of the Problem: The proposed research project deals with the nature and scope of micro finance of public sector

banks. A vast majority of Indian population comprises of poor, many of whom live below poverty line. Some of them are incapable of earning even the basic necessities of life. Banking services and loaning facilities are beyond the ken of many of these people. Against this background, it is worthwhile to analyse the policy framework for micro-finance and its implementation by a public sector bank under the title A Study of Micro Finances of Public Sector Bank.

III.

Importance of the Study: The research would be helpful to the small entrepreneurs as they lack information about micro

finances. It would help them to know various schemes and grants provided by the financial institutions relating to micro finance. As it is helpful to the weaker sections of the society; it can be used as a tool for the eradication of poverty. It can also be useful to the other researchers who aspire to work on micro finance. The findings of the research will also be helpful in highlighting the weaknesses in the present policy framework and will make suggestions for the revamping of the system.

IV.

Inter-disciplinary Relevance: The present research is related to Commerce, Trade, Finance, Banking and Entrepreneurship, as

micro finance assists the small entrepreneurs by granting them loans, which will help them to establish and expand their business. It is considered to be the best source of funds by banks as these finances are being granted for a short period to people of limited means. It can also be used for the overall economic growth and development.

V.

Review of Literature: Harper, Berkhof and Ramakrishna (2005) examined the spread of the cooperative-SHG linkage

across states, the relationship between commercial success of cooperative banks, the extent of the linkage established and the impact of such linkages on performance. They found that when the Self-Help Group Initiative was launched to provide the poor with access to formal financial services, it was somehow expected that cooperatives would step in to provide these services. Already existing small local level institutions with their readily available support structure as seen in the case of the agricultural credit

societies were ideally placed to serve as outlets for financial services to SHGs, given their numbers and reach. Despite these advantages, agricultural credit societies and cooperative banks have thus far played a limited role in the programme of linking SHGs to formal financial institutions. It was also reported that microfinance markets being generally insensitive to interest rates (as access is more important than cost), PACS could increase the interest rates to a sustainable level for its SHG customers.2

Recent studies suggest that the failure of RRBs is manifested in the undifferentiated financial instruments offered to the market (Institute for Development Policy and Management, 2002) and the constraining attitudes of bank employees (Department for International Development, 2002). Given that the market orientation of RRBs is seen to be a critical determinant of success in microfinance provision, greater understanding of the implementation of the marketing concept in this context is a highly desirable research direction. Moreover, if a market-led approach to new financial service development and delivery is to be implemented within these MFIs, then the factors that influence the extent and nature of market orientation within Indian RRBs require further investigation. 3

A recent survey conducted by Weiss and Montgomery in 2004 among 518 microfinance institutions in Africa, Latin America, Eastern Europe and Asia reveal that the majority of the microfinance borrowers are served by institutions in South and East Asia. The largest microfinance institutions are found in countries such as Bangladesh, India, Indonesia and Thailand. Bank Rakyat in Indonesia serves over 3.3 million clients; Grameen Bank, ASA and BRAC, all located in Bangladesh, have 4 to 5 million active borrowers. In India, large microfinance institutions are SHARE (8,14,000 active borrowers) and Spandana (7,72,000 borrowers). Surprisingly, the extension of services of microfinance institutions to poor people (outreach) in the most populated countries in Asia, such as India and China, is relatively low. 4

Harper, M. (2002), Promotion of Self Help Groups under the SHG Bank Linkage Programme in India An Assessment, NABARD.

Institute for Development Policy and Management (2002), Microfinance and the poverty of financial services: How the poor in India could be better served, Working Paper No. 56, Institute for Development Policy and Management, University of Manchester, Manchester.

Weiss, J and H Montgomery (2004): Great Expectations: Microfinance and Poverty Reduction in Asia and Latin America, Oxford Development Studies, Vol 33, Nos 3 -4, pp 391-416.

VI. Objectives of the Study: Micro finance is enabling, empowering, and bottoms up tool to poverty alleviation that has provided considerable economic and non-economic externalities to low-income households in developing countries. It is being hailed as a sustainable tool to combat poverty. The following are some of the objectives of research: (a) To understand the nature and scope of micro-finance and its significance from economic point of view. (b) To evaluate various schemes of banks for small entrepreneurs and gauge the extent to which these schemes have benefited these entrepreneurs. (c) To examine the responses of beneficiaries towards these schemes and analyse the problems faced by them in obtaining these finances. (d) To make suggestions and recommendations related to micro finances to make them more effective in achieving their objectives.

VII.

Research Methodology:

Universe: The research proposal shall be considered as a pilot study to critically evaluate the role of micro finance in meeting the requirements of small entrepreneurs and other needy groups with a special reference to a public sector bank, i.e. State Bank of India (SBI). The research will be confined to the Dahanu branch of SBI. The branch has 350 operating accounts under micro-finance facility with the financial assistance of Rs 30 to 35 lakhs on an average, with an average disbursement of Rs. 20 lakhs.

Sample: The views and opinions will be collected from various sources such as customers who availed micro-finance, bank officials and those who are likely to tap micro-finance in near future. Of the 350 beneficiaries, who availed micro-finances, a sample of 10% beneficiaries, i.e. about 35 beneficiaries, will be selected to tap their views and opinions about the scope and structure of the present micro-finances schemes and its implementation.

Method of Data Collection: Primary sources would constitute questionnaire and opinionnaire. Also, secondary sources such as libraries, journals, research reports, newspapers, internet, RBI bulletins, etc. will be used to generate more information on the issue of micro-finance.

Expected Contribution: The research will be helpful to the adivasi people residing in the region as they require finance for starting cottage industries, to the fishermen, farmers and to the small entrepreneurs, who cannot start their own business for the lack of finance and other constraints. The research will also analyse critically the procedure involved in availing such finances and will make suggestions for simplifying the same so that more and more needy people can avail the benefit of the same.

VIII.

Limitations of the Study: A number of researchers and academicians have often raised doubts about the effectiveness of the

micro finance scheme and its importance as a means for poverty alleviation. Therefore, there is a necessity of exploring this area in deep in order to get insight into the effectiveness of micro finance scheme of the RBI and its success rate in fulfilling the requirements of persons with limited means. However, the field of micro finance is vast and beyond the capacity of individual researcher to explore. Hence, considering the time and cost constraints, the present study is restricted to the State Bank of Indias Dahanu branch.

IX.

References:

1. Arup Roy, November 2011, Micro-Finance Performance of Public Sector Banks in the NER of India, Journal of Applied Management and Computer Science, Volume 4, ISSN No (0976 0458). 2. Harper, M. (2002), Promotion of Self Help Groups under the SHG Bank Linkage Programme in India An Assessment, NABARD. 3. Institute for Development Policy and Management (2002), Microfinance and the poverty of financial services: How the poor in India could be better served, Working Paper No. 56, Institute for Development Policy and Management, University of Manchester, Manchester. 4. Weiss, J and H Montgomery (2004): Great Expectations: Microfinance and Poverty Reduction in Asia and Latin America, Oxford Development Studies, Vol 33, Nos 3-4, pp 391-416. 5. The Commercialization of micro finance (Drake, Deborah and Elizabeth -Rhyne.) 6. www.scribd.com 7. www.planetd.org 8. www.google.com

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