CHAPTER 1

MEANING

Microfinance is a type of banking service that is provided to unemployed or low-income

individuals, or groups who otherwise have no other access to financial services. Ultimately, the goal
of microfinance is to give low-income people an opportunity to become self-sufficient by providing a
way to save money, borrow money and get insurance.

Microfinancing provides options to customers with limited resources to promote participation

in productive activities or to support a small business. While institution participating in the area of
microfinance are most often associated with lending, some microfinance companies offer additional
services, including bank accounts and insurance. Additionally, some institutions provide information
in the areas of financial literacy, such as understanding interest rates and managing financial risks.

Microfinancing is not a new concept. Small microcredit operations have existed since the 18th
century. The first occurrence of micro lending was attributed to the Irish Loan Fund system,
introduced by Jonathan Swift, which sought to improve conditions for impoverished Irish citizens.

MICRO FINANCE

*Micro-entrepreneurs
*Self-employed *Business & Educational loans
*Low income population *Saving
*Excluded population *Micro-insurance
*Remittances

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 CHAPTER 2

DEFINITION

Micro finance is defined as providing micro loan to poorest of the poor (basically those are
neglected by banks, microfinance provides them loan facility), and a source of financial services for
entrepreneurs and small businesses lacking access to banking and related services.

The two main mechanisms for the delivery of financial services to such clients are:

(1) Relationship-based banking for individual entrepreneurs and small businesses; and
(2) Group-based models, where several entrepreneurs come together to apply for loans and other
services as a group.

“MICROFINANCE is an economic development tool whose objective is to assist the poor to

work their way out of poverty. It covers a range of services which include, in addition to the
provision of credit, many other services like saving, insurance, money transfers, counselling, etc.”-
RESERVE BANK OF INDIA

In other words, Microfinance serves as a tool for providing financial services to the low-income
population. , which do not have access to the mainstream financial services.

NABARD has defined microfinance as "provision of thrift, credit and other financial services
and products of very small amounts to the poor in rural, semi urban and urban provided to customers
to meet their financial needs; with only qualification that (1) transactions value is small and (2)
customers are poor."

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 CHAPTER 3

INTRODUCTION

Microfinance is the provision of loans and other financial services to the poor. The
microfinance has evolved due to the efforts of committed individuals and financial agencies to
promote self-employment and contribute to poverty alleviation and provision of social security. India
has been able to develop its own model of microfinance organizations in the form of savings and
credit groups known as the Self Help Group (SHGs), which are bank-linked. These SHGs are mainly
formed and managed by women and this has become an instrument, which has led to women's
empowerment and social change. Most of the microfinance institutions in India attempt to go beyond
savings and credit groups to provide microfinance services in the form of savings and insurance.

Microfinance provides financial services to those whose income is small and unstable. These
people are in need of credit facilities for several reasons.

 Their needs are small and arise suddenly

 The institutional providers of finance namely the banks demand collateral security which they
cannot provide
 Most of the time, they are in needs of funds to meet their consumption demands, for example,
to meet expenses related to education, illness, funerals, weddings for which it is difficult to
obtain institution finance.
 For purpose of investment in income generating activities.

Concept of Self Help Group (SHGs) is the most exciting discovery in the context of
microfinance. The Indian microfinance scene is dominated by SHGs and their linkage with Banks.
Owing to the importance of microfinance and self help groups in the eradication of poverty and in the
empowerment of women.

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 3.1 ORIGIN OF MICRO FINANCING.

 All though neither of the terms microcredit or microfinance were used in the academic
literature before the 1980s or 1990s, the concept of providing financial services to low income
people is much older.
 While emergence of informal financial institutions in Nigeria dates back to the 15th century,
they were first established in Europe during 18th century as a response to the enormous
increase in poverty since the end of the expended European wars. (1618-1648)

3.1.1 Origin in India

In 1720 the first loan fund targeting the poor people was founded in Ireland by the author
Jonathon Swift. Professor Yunus founded his Grameen Bank in 1976 i.e. first
MICROFINACE institution.

 Professor Yunus founded his Grameen Bank in 1976 during a devastating famine in
Bangladesh.
 Today it has 6.6 million borrowers of whom 97% are women.
 This focus on female borrowers in the society where women are frequently forced to take
responsibility for their entire family in one of the features that caught the Nobel Committee’s
attention.

3.1.2 How Does Microfinance work?

One of the major issued faced my developing countries is that of poverty. Countries like India
have yet not fully developed and industrialised and they have low HDI – Human Development Index.

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Hence, they usually struggle with the problem of growing divide between the rich and poor,
economic and gender inequality, illiteracy, higher crime rate and other evils of the society.

The key to solve many of the issues of such a society lies in providing equal opportunity to all
and making each and every segment of the society equally involved in the gains and losses of the
whole country. A small step towards this is a “Microfinance Institution” or MFI.

A microfinance institution is basically an organization which provides financial services to

the poor and disadvantaged households mainly in the rural areas. Its main goal is to make these
services available even to the most remote or poor region of a country; hence they have a wide and
highly branched distribution network.

The need to have such an institution is that most commercial financial institutions that we
have today, like banks, are not able to reach out to this low-income sector public. They usually get
left out and even simple basic financial services like a savings account or formal loaning is not
available to this population resulting in bad practices like hoarding money in the house, informal
money borrowing and lending and other fraudulent practices. It also breeds financial illiteracy. It is
the right of each and every citizen to have access to financial services. With this in mind, the micro
finance institutions came into existence.

Various types of institutions like – NGOs, commercial banks, credit unions, sectors of
government banks and other cooperatives offer microfinance services. Nowadays, “for-profit”
microfinance institutions are also growing. Such institutions in India are called Non-Banking
Financial companies (NBFC).

The structure of microfinance institutions consists of the following hierarchy:

Regional Divisional
MIF officer Officer

Groups Batches Field officer

Individual

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(Head office of the MFI –> Regional officer –> Divisional officer –> Branch officer –> Field officer
–> Batches –> Group –> Individual)

Before selecting a village for setting up a MFI, a thorough evaluation of the village is carried
out, and valuable statistics like the population, demographics, etc. are gathered.

Once the village is decided, an introductory seminar is carried out in the village and
information is given out about the institution, the services it provides, and the mechanism of its
operations.

After this interested women are gathered in groups. A group usually consists of 5 individuals
headed by a leader from the group. When any credit is given to an individual, the remaining members
of the group act as his guarantors, thus, the individuals are careful while forming a group. If a person
defaults from repaying the loan then the entire group is penalized and it is this peer pressure which
enforces loyalty among the individuals, and ensures that the full amount of the loan is repaid in time.

After this, group training programs start and a village centre is created where all the
payments will be collected. A field officer presides over the meetings of the village batches in the
village centre. These meetings are regularly conducted wherein repayments are collected and
discussions on loans and other topics are carried out. However, it must be noted that any borrowing
of loan is done only through the branch officer.
Owing to the high risk of default, borrowing is done only after thorough checks are
conducted. There are specific rules which are followed by all the MFIs before they sanction a loan.
The feature which makes an MFI unique and especially suited to the needs of the low income sector
is that collaterals or securities are not necessarily required for taking a loan. Necessary evaluation and
documentation is done and all care is taken to check the viability of the business and the individual’s
group for repayment of the loans. Beating the high risk of default, the unique structure of such
institutions and their way of functioning, as depicted above, have ensured a minimum default rate and
over 95% of the loans are repaid. This is tremendous success and calls for even more growth.

Due to their performance, microfinance institutions are funded by donors, private equity
funds or even other financial institutions. The method can be improved by inculcating technology in
carrying out the transactions and using it in the best possible way. Point of sales terminals like bank
cards swiping machines or even smartphones go a long way and are preferred over building brick and
mortar stores. Effective use of technology will not only help the institutions in greater penetration,
but it will also transform the processes into simpler, faster and cleaner steps. These institutions are
not only creating value for themselves, they are creating value for the entire country by elevating the
poor and offering them the services that they were earlier deprived of, thus rendering equal
opportunities of success to all.
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 3.2 ROLE AND SIGNIFICANCE OF MICRO-FINANCE

Micro-finance contributes to social and economic development of the nation in the following ways:

1. Poor people cannot access banking services due to their meagre income and inability to handle
banking procedures and documentation. It is through micro-finance that a wide range of financial
services such as deposits, loans, payment services, money transfers and insurance can be provided to
the poor and low income households and their micro-enterprises.

2. Micro-finance institutions, through their NGOs, develop saving habits among poor people. The
financial resources generated through savings and micro credit obtained from banks are utilised to
provide loans and advances to the members of the Self Help Groups (SHGs). Thus, microfinance
institutions help in mobilisation of savings and using the same for the welfare of its members.

3. Loans from the normal banking system require collateral or counter guarantee which poor people
cannot offer and therefore, cannot get loan. Again, high interest rates and procedural and
documentation formalities act as a deterrent to poor people accessing banks for loans. Microfinance
does away with all these obstacles and provides finance to rural and poor population on easy terms.

4. Micro-finance allows the poorer sections of the society to get loans at cheaper rates which helps
them to start their businesses on a small scale, grow their business and get out of poverty and be
independent and self-sufficient. It helps in creating long-term financial independence among the
poorer sections of the society and therefore, promotes self-sufficiency among them.

5. Micro-finance is provided through the intermediation of Self Help Groups (SHGs). More than
50% of the Self Help Groups (SHGs) are formed by women. Now, they have greater access to
financial and economical resources. It is a step towards greater security for women. Thus, micro-
finance empowers poor women economically and socially.

6. Usually, rural sector depends on non-institutional agencies for their financial requirements
whereby they are exploited in numerous ways. Micro-financing has been successful in taking
institutionalised credit to the doorstep of poor in rural areas and have made them economically and
socially sound. This has led to the development of rural population and rural areas.

7. Micro-finance, by providing loans to poor people, helps them to undertake their own small
ventures. Such ventures also generate employment in the rural areas. It also helps them to improve
their entrepreneurial skills and encourage them to exploit new business opportunities. Thus, micro-
finance through self-reliance and employment generation alleviate poverty in rural areas.

8. Micro-finance also contributes to the national objectives of economic growth and social justice.
Due to micro-finance, production of goods and services increases, which in turn increases GDP and
contributes to the economic growth of the country. It also reduces inequalities in the distribution of
income and wealth and thereby contributes to the goals of social justice.

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 CHAPTER 4
THE CONCEPT OF MICROFINANCE IN INDIA

Microfinance is a concept that is helping the poor to avail of an create opportunities for
economic growth. In India, microfinance has fulled the efforts of rural development, women
empowerment and wealth generation by providing small scale savings, credit, insurance and other
financial services to poor and low income households. Microfinance thus serves as a means to
empower the poor and provides a valuable tool to help the economic development process.

The concept of microfinancing and self-employment activities in rural areas has developed
considerably over the last two decades. It is working neither on domain/charity nor on subsidy. It is
basically rotational investment done to motivate the poor to empower themselves and practice the
dictum 'Save for the future and use that resource during the time of need.' Theoretically, microfinance
also known as microcredit or microlending means making provision for smaller working capital loans
to the selfemployed or self-employment seeking poor.’

The term 'microfinance' is often confused with the related term 'microcredit', so much so, that
the two are often treated as synonymous and used interchangeably. While there are certain
similarities between the two terms, there are also certain differences, which require to be classified at
the very start to avoid confusion of time.

The term microcredit refers to a small size loan, to be repaid within a short period of time,
used mostly low income households and micro entrepreneurs for the purpose of income generation
and enterprise development. The mobilization of such credit is restricted to external sources such as
banks and moneylenders.

Microfinance on the hand, provides a greater menu of options whereby the small loan can be
garnered not just from the external sources but also through selfmobilization, by way of saving and
sale of assets. Also, in case of microcredit, due to the definite obligation to repay the loan, a physical
collateral may sometimes be needed. However, the biggest flexibility in the case of microfinance is
the lack of any physical collateral, even in case of loan from the bank. The options available with
microfinance, therefore, are much broader and flexible than the ones available with microcredit.

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 4.1 DIFFERENCES BETWEEN MICROFINANCE AND MACROFINANCE

Microfinance and Macro finance are often confused. Microfinance is an individual-focused,

community-based approach to provide financial services to poor individuals who lack access to the
mainstream finances. Microfinance services include microcredit, micro savings, and micro insurance.
Microfinance aims to make individuals self-sufficient by offering timely funding, helping them learn
skills, and establishing a stable means of livelihood. (See related: An Introduction to Microfinance.)
Macro finance deals with the overall economy at the larger regional or national level. It involves
drafting policies, initiating programs like subsidies, or funding and operating multi-year development
plans with an aim to generate employment. Macro finance aims for overall economic development
more broadly.

MICROFINANCE MACRO FINANCE

Microfinance Starts With A Focus On
Individuals
Microfinance Institutions (MFI), Self-Help
Groups (SHG), And Non-Governmental
Organizations (NGO) Are The Primary Funders
In The Microfinance Sector. However, Public
Sector Banks, For-Profit Organizations, And
Private Consumer Finance Companies Are
Starting To Be Involved As Well.
Macro finance Starts With A Focus On The
Regional Or National Level.
Macro finance Involves Bigger Entities Such As
Governments, Local Authorities, Large
Corporations, Banks, And Established
Businesses.

Micro financing Has The Risk Of Default By
Individuals
Micro Financing Offers Other Social Benefits
Imposed By Terms Of Loan. For Example, The
Load Might Stipulate That Borrowers Save A
Part Of Their Income For The Future Or Spend
No Part Of The Loan On Alcohol.
Macro financing Faces Challenges From Non-
Implementation Of Efficient Policies Or Failed
Programs.
Macro financing, On The Other Hand, Enables
Large-Scale Employment And Development Of
New Sectors And Businesses, But Does Not
Guarantee The Betterment Of An Individual.

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4.2 DIFFERENCE BETWEEN MICROFINANCE AND MICROCREDIT

Sr Characteristics of
Microfinance Microcredit
No. loan

1. Size of loan Small Small

2. Repayment period Short Short

Sources of
3. Both external and internal External
mobilization
Obligation if source is Definite obligation to
4. Repayment
external repay
May or may not be
5. Collateral Not needed
needed
Flexible, consumption Mostly fixed, limited
6. Purpose of use
income generation. scope of deviation.
Usually individual
Mostly group loans trickling
7. Scope of operation loans, though group
down to individuals
loans might be given

Microfinance therefore, refers to the provision of small loans without collateral security, to the
poor and low-income households, whose access to the commercial banks is limited. The institution
that provide such services are microfinance institutions.7 Microfinance is being viewed as a very
powerful tool for uplifting the economic conditions of the asset less poor through group approach that
ensures active participation and involvement of the beneficiaries in effective implementation of the
programme. In India, microfinance programme has a crucial role to play in uplifting more than 30
core people living below poverty line (NABARD, 2005). Poverty means denial of access to the basic
necessities i.e. food, shelter, health and education of human existence. Poverty is characterized by
lower standard of living. As per the poverty line defined by the HRD i.e. earning of a person below $
1 a day, the percentage of BPL population in India comes around 34.9 percent and if it is extended to
$ 2 a day, the percentage of BPL in India comes to 79.9 percent (Human Development Report, 2004).

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 Microfinance has emerged as a needful programme to cater to the needs of the most
underprivileged people i.e. tribal, dalits and women. The major concerns today is ever increasing
poverty and there is urgent need of empowering enabling the most neglected sections of the society
through organized support to all poverty alleviation programmes. Considering the paucity of funds
with poor people, the need of the hour is to provide adequate credit to the needy people to enable
them to undertake entrepreneurial activity, however, small with the help of NGOs and GOs.
Microfinance is expected to play a pivotal role in poverty eradication and employment generation.

Micro financing is a new method to meet the credit requirement in rural areas. Since the bank
borrowing requires collateral and the deprived class does not have any type of such collateral, the
success of Bangladesh Grameen Banks attracted the attention of Indian policy makers towards the
microfinance and microcredit, which are the new entrants in realm of present rural financing.
Microcredit is based on 20 self-help groups which will be technically supported by NGOs and
sponsor bank. In other words, self-help group is a small, economically homogeneous and cohesive
group of rural poor voluntarily coming together to save small amount regularly, agree mutually to
contribute to a common fund and have a collective decision making for providing collateral free
loans on terms and conditions decided by the group. The group will make a project, which will be
supervised and assisted by banks and NGOs. After evaluating the viability of the groups, the banks
further provide sufficient community participation in the development process.

4.3 TRICKLE UP APPROACH OF MICROFINANCE

Most of the developed nations of the world started their growth path from the development
of the agriculture sector. For a long time, it was felt that the growth of developing countries is
dependent on the growth path developed countries, i.e. through the trickle down strategy. This is the
economy theory which advocates letting ultimately trickle down to lower income individuals and the
rest of the economy. In other words, this is a theory of economic development that claims higher
standards of living for the poor will develop gradually with economic growth. The same applied on
the macrolevel in the individual countries, which started believing on the concept of laissez-faire
policy. However, there were countries like India and Israel; which did not believe in the free market
economy and continued with their public expenditure programmes. Along with it, attention was made
to make a self-sustained economy at least from the view point of the agriculture sector. However, it
took a long time to realize that if the gains of development have to go to the poor, then some different
strategy has to be adopted. When the Grameen Bank of Bangladesh started its foray into
microfinance in the middle of 1970s, it was realized that it can definitely be a good way for the
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benefit of the poor then it was the realized that it is not the trickle down approach but it is the trickle
up approach which should be adopted to upgrade the living of the poor. Trickle up would therefore
mean that the benefit should be directly provided to the poor so that they can invest it accordingly for
their own development and would try to improve their living standard. The countries were providing
direct finance earlier also, but since the late 1970s it was realized that if one wants benefits to be
passed to the poor ensuring its true use and accountability, then microfinance is the best alternative.

In the development paradigm, microfinance has evolved as a credit based policy and
programmes to cater to the so far neglected target groups (women, poor, rural, deprived etc.). Its
evolution is based on the concern of all developing countries for empowerment of the poor and
alleviation of poverty. Development organization and policy makers have included access to credit
for poor people as a major aspect of many poverty alleviation programmes. Microfinance
programmes have in the recent past become one of the more promising ways to use scare
development funds to achieve the objectives of the poverty alleviation. The basic idea of
microfinance is simple; if poor people are provided access to financial services including credit, they
may very well be able to start or expand a microenterprise that will allow them to break out of
poverty.

4.4 KEY PRINCIPLES OF MICRO FINANCE

 Poor people need a variety of financial services, not just loans.

 Microfinance is a powerful tool to fight poverty.
 Microfinance means building financial systems that serve the poor.
 Microfinance can pays for itself, and must do so if it is to reach very large numbers of poor
people.
 Microfinance is about building permanent local financial institutions that can attract domestic
deposits, recycle them into loans, and provide other financial services.
 Microcredit is not always the answer. Other kind of support may work.
 Interest rate ceilings hurt people by making it harder for them to get
 The job of government is to enable financial services, not to provide them directly.
 Donor funds should complement private capital, not compete with it.
 The key bottleneck is the shortage of strong institutions and managers.
 Microfinance works best when it measures and discloses its performance.

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 4.4.1 OBJECTIVES OF MICROFINANCE

 Promote socio-economic development at the grass root level through community-based

approach
 Develop and strengthen people’s groups called Self-Help Groups and facilitate sustainable
development through them
 Provide livelihood training to disadvantaged population.
 Promote activities which have community participation and sharing of responsibilities
 Promote programs for the disabled
 Empower and mainstream women
 Promote sustainable agriculture and ecologically sound management of natural resources
 Organize and coordinate networking of grass root level organization
 Get benefits by reducing expenditure and making use of local resources as inputs for
livelihood activities
 Increase the number of wage days and income at household level.

4.4.2 THE IMPORTANT FEATURES OF MICROFINANCE

 Microfinance is a tool for the empowerment of poor women;

 Loans under microfinance programmes are very small;

 Microfinance targets the poor rural and urban households;

 Credit under microfinance follows thrift i.e. mobilize savings and lend the same;

 Low transaction cost due to group lendings;

 Transparencies in operation;

 Short repayment period;

 Simple procedure for reviewing, processing and approving loan applications and delivery
credit;

 Chances of misutilization are rare and there is assured repayment;

 Peer pressure act as the collateral security required for loans;

 Need based loan disbursement;

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  Prompt repayment; an

 There is no ceiling from the RBI in respect of minimum and maximum amounts.

The following are the main features of microfinance services provided by Rashtriya Mahila Kosh
(RMK)

(i) It is a tool for the empowerment of the poorest.

(ii) The higher the income and better the asset position of the borrower, the lower the
incremental benefit from further equal doses of micro-credit is likely to be.
(iii) Delivery is normally through Self Help Groups (SHGs).
(iv) It is essentially for providing selfemployment.

The opportunities of wage employment are limited in developing countries - microfinance

increases the productivity of self-employment in the informal sector of the economy - generally used
for
(a) direct income generation
(b) rearrangement of assets and liabilities for the households to participate in future opportunities
and
(c) consumption smoothing.

Microfinance is not a financing system but a tool for social change, especially for women. It
does not spring from market forces along - it is potentially welfare enchaining there is public interest
in promoting the growth of microfinance - this is what makes it acceptable as valid goal for public
policy.

4.5 PROFILE OF MICROFINANCE IN INDIA

The profile of microfinance in India at present can be traced out in terms of poverty. It is estimated
that 350 million people live below poverty line. The following are some components of microfinance
:-

(a) This translates to approximately 75 million households.

(b) Annual credit demand by the poor in the country is estimated to be about Rs. 60,000 crores.
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(c) A cumulative disbursement under microfinance programmes is only about Rs. 5000 crores.

(d) Total outstanding of all microfinance initiative in India estimated to be Rs. 1600 crores.

(e) Only about 5% of rural poor have access to microfinance.

(f) Though a cumulative of about 20 million families have accepted accessed.

(g) While 10% lending to weaker sections is required for commercial banks; they neither have the
network for lending and supervision on a larger scale or confidence to offer term loan to big
microfinance institutions.

(h) The non poor comprise of 29% of the outreach.

4.6 NEED FOR MICROFINANCE

Microfinance aims at assisting communities of the economically excluded to achieve greater

levels of asset creation and income security at the household and community level. Access to
financial services and the subsequent transfer of financial resources to poor women enable them to
become economic agents of change. Women become economically self-reliant, contribute directly to
the well being of their families, play a more active role in decision making and are able to confront
systematic gender inequalities. Access to credit has been given considered a major poverty
alleviation strategy in India. Micro-credit has given women in India an opportunity to become agents
of change. Poor women, who are in the forefront micro-credit movement in the country use small
loans to jump start a long chain of economic activity.

Microfinance is accessing financial services in an informally formal route, in a flexible,

responsive and sensitive manner which otherwise would not have been possible for the formal system
for providing such services because of factors like high transaction cost emanating from the low scale
of operation, high turnover of clients; frequency of transaction etc. Microfinance and self help group
must be evolved to see that SHGs do not charge high rates of interest from their clients and improve
access to those who cannot sign by their use through thumb impression.

The current literature on microfinance is also dominated by the positive linkages between
microfinance and achievement of millennium development goals (MDGs). Micro-credit Summit
Campaign's 2005 report argues that the campaign offers much needed hope for achieving the
millennium development goals especially relating to poverty reduction. IFAD along with food and
agriculture organization (FAO) and the world food programme (WFP) declared that it will be
possible to achieve the eight MDGs by the establishing deadline of 2015 "if the developing and
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industrialized countries take action immediately by implementing plans and projects, in which micro-
credit could play a major role."

Credit is vital to the poor for overcoming the inevitable and common imbalance between
income and expenditure. Credit is also crucial to the poor for income generating activities, like
investing in their marginal farms or other small scale selfemployment ventures. Their access to
formal banking channels, however, is limited due to their low resource bases as well as due to the
nature of formal credit institutions. The popularity of the microfinance, self help groups stems from
widespread recognition that formal banking channels are largely ineffective in catering to the credit
needs of the poor.

Tiny savings and loans are generally an unattractive business proposition for formal banking
institutions. In addition to disincentives faced by the banks, there are also problem faced by the poor
in accessing loans from formal banking institutions. For example, to minimize risks, banks demand,
collateral security that the average micro borrower does not possess. Banks also insist on complicated
procedures that are too time consuming and often too complicated for the poor and illiterate. Even in
the implementation of direct lending programmes formal institutions find it difficult to overcome the
problem of targeting. The experience is that the rich and powerful typically manage to corner the
scare loanable funds. Thus formal banking channels remain largely inaccessible to the poor in India.
As a result, the poor continue to be dependent on informal sector lending, paying exorbitant rates or
underselling the product and their labour power to the creditor. It was in response to these limitations
in formal banking channels that micro credit mechanism were innovated.

A quite from the former U.N. Secretary General Kofi Annan's video message on the launch
of the international year of micro credit on 18th November 2004 also shows the significance of
microfinance. "Microfinance has proved its value, in many countries, as a weapon against poverty
and hunger. It really can change people's lives for the better - especially the lives of those who need it
most …. Let us be clear. Microfinance is not charity. It is a way to extend the same rights and
services to lowincome households that are available to everyone else. It is recognition that poor
people are the solution, not the problem. It is a way to build on their energy and vision. It is a way to
grow productive enterprise and so allow communities to prosper."

Types of financial needs:-

 Lifecycle Needs: such as weddings, funerals, childbirth, education, homebuilding,

widowhood, old age.

 Personal Emergencies: such as sickness, injury, unemployment, theft, harassment or death.

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  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.

 Poor people find creative and often joint ways to meet these needs, primarily through creating
and exchanging different forms of non-cash value.

 Including livestock, grains, jewellery and precious metals

4.7 COMPARISON OF MICROFINANCE AND FINANCIAL BANKING

Figure outlines the different features between for banking channels and micro finance
channels. In contract to formal banking, micro-credit is characterized by small size, shorter loan
duration, emphasis on thrift and the absence of collateral security and informal procedures. In
absence of collateral security and formal documents, there can be little legal, however, has proven
even more effective than loan repayment mechanism in the formal banking system. While the
banking system is a purely commercial organization, the lower tiers in the micro finance system are
social organizations and motivated by non-economic objectives.

SR NO. CHARACTERISTICS MICRO FINANCE FORMAL BANK

1. Size of loan Small/tint size of credit Medium/large credit

2. Duration of loan Short duration Medium/large duration

3. Thrift Emphasis on thrift as well as loan Focus on loan only

Enforcement of Group formation and informal

4. Formal procedures
repayment methods
Commercial organization
5. Nature of organization Social organization form
form

6. Motivation Self-help motivated Profit motivated

Access to poor without collateral

7. Outreach Access limited
(all members)

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 4.7.1 MICROFINANCE PRODUCTS.

PRODUCT PURPOSE TERMS INTEREST RATE

Income Generation Income generation, 50 weeks loan paid 12.5% (flat) 24%
Loans.(IGL ) asset development weekly (effective)
Same as IGL, available
50 weeks loan paid 12.5% (flat) 24%
Mid-Term Loan (MTL) at middle (week 25) of
weekly (effective)
IGL
All emergencies such
Emergency Loan (EL) as health, funerals, 20 weeks loan 0% Interest free
hospitalization
Income generation, 1-2 years loan repaid 11% (flat) 23%
Individual Loan (IL)
asset development monthly (effective)

INCOME GENERATIING LOAN.

The Income Generating Loan is used for a variety of activities that generate income for their
families. Clients submit a loan application and based on approval receive the loan after one week.
Loans are paid in 50 equal, weekly instalments. After completion of a loan cycle, the client can
submit a loan application for a future loan. The approach with smaller short-term loan is to avoid
long-term economic problems with bigger loans.

MID TERM LOAN.

The Mid Term Loan is available to clients after 25 weeks of repaying their IGL loan. A client
is eligible for a MTL if the client has not taken the maximum amount of the IGL. The residual
amount can be taken as a MTL. The terms and conditions of the MTL are otherwise exactly the same
as IGL

EMERGENCY LOAN.

The Emergency Loan is available to all clients over the course of a fiscal year. The loan is
interest free and the amount and repayment terms are agreed upon by the MFI and the client on a case
by case basis. The amount is small compared to the income generating products and is only given in

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 times of dire need to meet expenses such as funerals, hospital admissions, prenatal care and other
crisis situations.

INDIVIDUAL LOAN.

The Individual Loan is designed for clients and non-clients that have specific needs beyond
the group lending model. Loans are given to an individual outside of the group lending process.
Amounts are typically higher than that of the income generating loan and repayments are less
frequent. Applicants must complete a strict business appraisal process and have both collateral and a
guarantor.

Microfinance is not panacea from all troubles; this also means that not any poor person can
obtain the loan. In particular, representatives of very poor population, lacking stable income, living
by means of chance earnings, and particularly having debts (in relation to community facilities,
relatives, friends, etc…) cannot be clients of microfinance, since in case of microcredit non-
repayment they will have more debts, becoming poorer. For such people special programs of social
assistance are needed, which are able to support main needs of people living in the poorest dwellings,
lacking garments and food.

There are some restrictions regarding what the money is used for. Usually micro credits
can´t be used for the purposes like:

 Payments of other loans or other debts;

 Production of tobacco and liquor;
 Forming turnover capital of trade and intermediary business;
 Organization or purchasing products for gambling or entertainment services for the population;
 Establishing trading points;
 Purchase of property that´s not used for business.

In the microfinance sector there´s other services expanding as well. The poor need, like all
of us, a secure place to save their money and access to insurance for their homes, businesses and
health. Microfinance institutions are now innovating new products to help meet these needs,
empowering the world’s poor to improve their own lives. Products common used in the microfinance
sector today is:

 Micro savings – A possibility to save money without any minimum balance. Allows people to retain
money for future use or for unexpected costs. In SHGs the members save small amounts of money, as

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 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 emergencies to school fees. As SHGs prove capable of
managing their funds well, they may borrow from a local bank to invest in small business or farm
activities. Banks typically lend up to four rupees for every rupee in the group fund;
 Micro insurance – Gives the entrepreneurs the chance to focus more on their core business which
drastically reduces the risk affecting their property, health or working possibilities. The is different
types of insurance services like life insurance, property insurance, health insurance and disability
insurance. The spectrum of services in this sphere is constantly expanded, as schemes and terms of
providing insurance services are determined by each company individually;
 Micro leasing – For entrepreneurs or small businesses who can´t afford buy at full cost they can
instead lease equipment, agricultural machinery or vehicles. Often no limitations of minimum cost of
the leased object;
 Money transfer – A service for transferring money, mainly overseas to family or friends. Money
transfers without opening current accounts are performed by a number of commercial banks through
international money transfer systems such as Western Union, Money Gram, and Anelik. On the
surface they may seem like small money transfers, but when one considers that such transactions take
place millions of times around the world each week, the numbers start to become impressive.
According to the World Bank, the annual global market for remittances – money transferred home
from migrant workers – is around 167 billion US dollars. The estimated total is closer to 230 billion
dollars if one counts unregulated transactions. Remittances are also an important source of income
for many developing countries including India, China and Mexico, all of which receive over 20
billion dollars each year in remittances from abroad.

4.8 TYPES OF ORGINASATIONS

Microfinance providers in India can be classified under three board categories:

1. Formal,
2. Semiformal,
3. And informal.

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 Informal
Formal organization
organization

Wholesaler lender like Lender, Donar,

NABARD, SIDBI, IDFC investors.

Retail level bank MFIs

*commercial bank *NBFC
*cooperative bank *NGOS

SHGs SHGs\JLGs
Individuals Individuals

FORMAL SECTOR

 The formal sector comprises of the banks such 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 deposits at around Rs. 350billion and of that, around Rs. 250billion has been given as
advances.

SEMIFORMAL 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 values, size, and
capacity. There are over 500 non-government organizations (NGOs) registered as societies,
public trusts, or non-profit companies.

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.

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 CHAPTER 5

PARTICIPANTS IN THE MICROFINANCE SYSTEM

1. National Bank for Agricultural and Rural Development (NABARD)

National Bank for Agricultural and Rural Development (NABARD) NABARD is an apex
institution, accredited with all matters concerning policy, planning and operation in the field of credit
for agriculture and other economic activities in rural area in India. NABARD was established in 1982
as a Development Bank, in terms of the preamble of the Act, "for providing and regulating credit and
other facilities for the promotion and development of agriculture, small scale industries, cottage and
village industries, handicrafts and other rural crafts and other allied economic activities in rural areas
with a view of promoting integrated rural development and securing prosperity of rural areas and for
matters connected therewith or incidental thereto." The corporate mission set by NABARD for
making available microfinance services to the very poor envisages coverage of the one-third of the
rural poor through one millions SHGs by the year 2006-07. The propose targets are given below in the
following table.

Cumulative No. of Bank loan Cumulative bank

No. of new SHG to
SHGs to be linked requirement during credit involved at
Years be linked during
at the end of the the year (Rs. in the end of the year
the year
year million) (Rs. in million)

2002-03 1,25,000 5,85,000 7,909 18,172

2003-04 1,10,000 6,95,000 14,172 32,884

2004-05 1,05,000 8,00,000 28,184 61,068

2005-06 1,00,000 9,00,000 14,256 1,02,234

2006-07 1,00,000 10,00,000 49,588 1,51,912

In November 1998, a high-powered task force on supportive policy and regulatory

framework for microfinance (henceforth referred to as the Task Force) was set up by NABARD at
the instance of RBI. The objective of the task force were among others, to come up with suggestions
for a regulatory framework that brings the operations of the microfinance institutions into the
mainstream, to access the possible role of selfregulatory organization and to explore the need for a
separate legal framework for microfinance

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 2. Reserve Bank of India (RBI)

The earliest reference to micro credit in a formal statement of monetary and credit policy
of RBI was in former RBI President Dr. Bimal Jalan's monetary and credit policy statement of April
1999. The policy attached importance to the work of NABARD and public sector banks in the area of
micro-credit. The banks were urged to make all out efforts for provision of microcredit, especially
forging linkages with SHGs, either at their own initiative or by enlisting support of Non-Government
Organization (NGOs). The microcredit extended by the banks is reckoned as part of their priority
sector lending, and they are free to device appreciation loan and saving products in this regard.
In 1994, the RBI constituted a working group on SHGs. On the recommendation of SHGs would be
reckoned as part of their lending to weaker sections and such lending should be reviewed by banks
and also at the State Level Banker's Committee (SLBC) level, at regular interval. Banks were also
advised that SHGs, registered or unregistered, which engaged in promoting the saving among their
members, would be eligible to open savings bank accounts with banks irrespective of their availment
of credit facilities from banks.

3. Self Help Groups (SHGs)

The origin of SHGs is from the brainchild of Grameen Bank of Bangladesh, which was
founded by Mohammed Yunus, SHG was started and formed in 1975. The establishment of SHGs
can be traced to the existence of one or more problem area around which the consciousness of rural
poor is built and the process of group formation initiated. SHG are considered a new lease of life for
the women in villages for their social and economic empowerment. SHG is a suitable means for the
empowerment of women. Since SHGs have been able to mobilize savings from persons or groups
who were not normally expected to have any 'saving' and also to recycle effectively the pooled
resources amongst the members, their activities have attracted attention as a supportive mechanism
for meeting the credit-needs of the poor (NABARD 2004). The main characteristics of SHG are as
follows:-

a) The ideal size of an SHG is 10 to 12 members (In a bigger group, numbers cannot actively
participate).

b) The group need not be registered.

c) From one family, only one member (More families can join SHGs this way).

d) The group consist of either only men or of only women (Mixed groups are generally not
preferred).

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e) Women's groups are generally found to perform better.

f) Members have the same social and financial background (Members interact more freely this way).

g) Compulsory attendance (Full attendance for larger participation).

Function of SHGs

1) The amount may be small, but savings have to be a regular and continuous habit with all the
members. 'Savings first - credit later' should be the motto of every group member.

2) The savings to be used as loans to members. The purpose, amount, rate of interest etc. to be
decided by the group itself. Enabling SHG members to attain loans from banks, and repaying the
same.

3) Every meeting, the group will discuss and try to find solution to the problem faced by the members
of the group.

4. Micro-finance Institutions (MFIs)

A range of institutions in public sector as well as private sector offers the microfinance
services in India. Based on asset sizes, MFIs can be divided into following categories:-

1) 5-6 Institutions which have attracted commercial capital and scaled up dramatically when last five
years. The MFIs which include SKS, SHARE and Grameen style program but 2000, converted into
for-profit, regulated entities mostly Non-Banking Finance Companies (NBFCs).

2) Around 10-15 institutions with high growth rate, including both news recently form for-profit
MFIs. Some of MFIs are Grameen Koota, Bandhan and ESAF.

3) The bulk of India's 100 MFIs are NGOs struggling to achieve significant growth. Most continues
to offer multiple developmental activities in addition to microfinance and have difficulty accessing
growth trends.

Private MFIs in India, barring a few exceptions, are still fledging efforts and are therefore
unregulated. They secure microfinance clients with varying quality and using different operating
models. Regulatory framework should be considered only after the sustainability of MFIs model as a
banking enterprise for the poor is clearly established.

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 5. Non-Government Organizations (NGOs)

The Non-Government Organizations involved in promoting SHGs and linking them with
the Formal Financial Agencies (FFAs) performs the following functions:-

 Organising the poor people into groups.

 Training and helping them in the organizational, managerial and financial matters.
 Helping them across micro credit and linkage with formal financial agencies.
 Channelizing the group effort for various developmental activities.
 Helping them in availing opportunities, widening the options available for economic
development.
 Helping them in sustaining the group effort independently even after withdrawal of the NGO.

5.1 MODELS OF MICRO FINANCE PRACTICES

The following are the variety of delivery models of microfinance in India.

1. The SHG-Bank Linkage Model :-

The predominant model in the India microfinance context continues to be the SHG linkage model
that accounts for nearly 20 million clients. It started as an Action Research Project in 1989. Under
this model, self help promotion institution usually a NGO, helps groups of 15-20 individuals through
an incubation period after which time they are linked to banks. The SHG had proved their efficacy
overtime but they suffer from a meager resource base which handicapped their capacity to expand the
economic activities of their members. The factors received by the SHG members were the lack of
information, time-consuming and expensive procedures for obtaining bank loans, rigid lending
policies of the banks in respect of unit costs, unit sizes and group guarantee for loans. There are three
linking model in the country.

Model - I : SHG formed and financed by banks :- In this model, the banks play dual role of
promotion of SHGs and also provider of credit to SHGs. Up to March 2005, 21% of SHGs financed
were from this category.

Model - II : SHGs formed by formal agencies other than banks (NGOs and other) but directly
financed by banks :- In this model, the NGOs and other agencies have played the role of facilitator.
Up to March 2005, 72% of SHGs financed were from this category.

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Model - III : SHGs financed by banks using NGOs and other agencies as financial
intermediaries :- In this model, the NGOs and other agencies play the role of financial
intermediation. Up to March 2005, only 7% SHGs financed were from this category. This in 2006-
07, the country witnesses a marked proliferation of SHGs to the extent of 24,76,492. In no less
discouraging terms the bank loans also amounted to Rs. 13,511.86 crores as indicated in the table

Progress of SHG bank linkage in India

New SHGs financed by banks Bank loans – in crores

Year During the

During the Growth Cumulative Growth Cumulative
year
year No. (%) No. (%) Amount
Amount

1992-99 32,992 -- 32,992 57 -- 57

1992-00 81,780 148 1,14,775 136 138 193

2000-01 1,49,050 82 2,63,825 288 112 481

2001-02 1,97,653 33 4,61,478 545 89 1026

2002-03 2,55,882 29 7,17,360 1022.34 87 2048.68

2003-04 3,61,731 41 10,79,091 1855.33 71 3904.21

2004-05 5,39,365 41 16,18,456 2994.25 62 6898.46

2005-06 6,20,109 15 22,38,565 4499.09 50 11397.55

2006-07 2,37,927 -- 24,76,492 2114.31 -- 13511.86

2. Grameen Model :- Potential clients are asked by the MFO to organize themselves into
'groups' of five members which are in turn organized into centers of around five to seven such
groups. The loans for productive purposes are provided by the MFO directly to the members
of small groups on the strength of group insurance. Grameen model is being followed by
India by Association for Sarva Seva Farms (ASSEFA), Activities for Social Alternatives
(ASA) and other financial and technical services limited.
3. Cooperative Model :- This has been initiated by Cooperative Development Forum,
Hyderabad which has relied upon a 'credit union' involving the saving first strategy. It has
built up a network of Women Thrift Groups (WTGs) and Men Thrift Groups (MTGs). They
are registered under Mutually Aided Cooperated Society Act (MACs) and mobilize savings

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 resources from the members and access outside/supplementary resources from the individual
system.
4. Partnership Model :- The partnership model pioneered by ICICI Bank attempted to address
the following key gaps :-
 To separate the risk of the MFI from the risk inherent in the microfinance portfolio.
 To provide a mechanism for banks to incentivize partner. MFIs continually, especially in a
scenario when the borrower entered into a contact directly with the bank and role of the MFI
was closer to that of an agent.
 To deal with the inability of MFIs to provide risk capital in large amounts, this limits the
advances from banks, despite a greater ability of the later to provide implicit capital.

In this model, the MFI collect a service charge from the borrowers to cover its transaction costs and
margins. The lower the defaults, the better the earnings of the MFI as it will not incur any penalty
charges vis-a-vis the guarantee it

5.1.1 Region wise Penetration of SHGs

Andhra Pradesh is the leading state of India in the size of the SHG movement, measuring more than
three standard deviation above the mean, i.e. 279 households participating in SHGs for every 1000
households. Orissa, Pandicherry, Tamil Nadu and Karnataka formed the second leading group, with
more than one standard deviation above the mean. Himachal Pradesh, Kerala, Assam, Rajasthan,
West Bengal and Maharashtra formed an intermedia group with ratios within standard deviation of
the mean with 94, 85, 82, 65, 51 and 56. The other states had one unit of standard deviation below the
mean. In Uttaranchal and Jharkhand, there were less than 32 households participating in SHGs for
every 1000. In Jammu and Kashmir, Haryana, Punjab and Arunachal Pradesh, there were less than
ten households participating in SHGs for every 1000 of the total households.

5.1.2 Rectifying Regional Skew

The SHG-Bank Linkage Programme (SBLP) expanded by 37 percent in 13 priority states which
account for 67 percent of the rural poor. These states were identified by NABARD in 2005 for
special efforts and location-specific strategies. Growth was particularly rapid in Maharashtra (72
percent). As a result, the western region (Maharashtra and Gujrat) experienced the fastest growth
(65%) of all the groups, and its share in the total number of groups linked is now only 5 percent
points behind its share of the total number of poor, the region which have the most catching up to do

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are the centers (Chhattisgarh - 33 percent, Madhya Pradesh - 24 percent, Uttar Pradesh - 23 percent)
and eastern (Bihar - 57 percent, Jharkhand - 21 percent, Orissa - 30 percent, West Bengal - 33
percent) regions, whose share of groups lag behind their share the poor by 21 and 11 percentage point
respectively. Growth in the east region was 33 percent about the same as overall national growth of
31 percent, and well below the previous year's growth of 48 percent, in the central region was only 24
percent. Despite relatively rapid growth in priority states, the programme continues to remain heavily
skewed in favour of south, while the share of the south in linked groups came down marginally
during the year.

Asmitha :- Provides rural women access to financial resources in the form of collateral free small
loans for income generation and livelihood promotion. This enables them to set-off small start up
business as a result, low-income women become economic agents intrinsic to development rather
than simply homeworkers.

Bandhan :- Bandhan was set up to address the dual objective of poverty alleviation and women
empowerment. The microfinance activities are carried on by Bandhan Financial Services Pvt. Ltd.
(BFSPL), incorporated under the companies Act, 1956 and also registered as a Non-Banking
Financial Company (NBFC) with the Reserve Bank of India.

Cashor India :- The mission is to identify and motivate poor women in the rural area and deliver
financial services to them.

Hand in Hand :- It is a development organization whose objective is to eliminate poverty by

creating enterprises and jobs. Focussing on help self-help, we take a holistic approach that combines
microfinance and support for women to start enterprises with work in four other areas that matter
most to poor communities : education and child labour elimination, health and sanitation, a
sustainable local environment and information technology access. With currently more than 4,50,000
members in Tamil Nadu, Karnataka and Madhya Pradesh, who have collectively started more than
2,50,000 micro enterprises, our goal is to create 1.3 million jobs by 2013. Supported by international
offices in the UK and Sweden, we are now taking our model to South Africa, Afghanistan and Latin
America.

5.2 Micro Credit India :-

Today MFIs works primarily with women. Through its field staff, MFI helps them to form Self Help
Groups (SHGs), trains them in good financial practice, facilitates access to micro credit loans, equip
them with business skill and facilities access to new markets for their products.
MYRADA :- MYRADA is a non-governmental organization managing rural development
programmes in 3 states of South India and providing on-going support including deputations of staff

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to programmes in 6 other states. It also promotes the self help affinity strategy in Cambodia,
Myanmar and Bangladesh.

Saadhana :- Saadhana is a non-profit organization established in the year 2001 to reach out the
urban and rural poor women with the specific mandate to catalyze the 'endeavour of the poor for self-
sufficiency'.

Samrudhi :- Samrudhi's mission is to empower the poor and underprivileged to become

economically self-reliant by providing cost effective and need based financial services in a
financially sustainable manner.

SKS India :- launched in 1998, SKS microfinances is one of the fastest growing microfinance
organizations in the world. SKS also offers interest-free loans for emergencies as well as life
insurance to its members. Its NGO using SKS foundation runs the ultra poor program. SKS currently
has microfinance branches in 19 states across India. SKS aims to reach members 15 millions by
2012. In the last year alone, SKS microfinance has achieved nearly 170% growth, with 99% on-time
repayment rate.

Spandana :- Spandana is one of the largest and fastest growing microfinance organizations in India,
with 1.2 million active borrowers in March 2008, up from 520 borrowers in 1998-99, its first year of
operation (Mix Market 2009). From its birth place in Guntar, a dynamic city in Andhra Pradesh, and
several others. The basic Spandana product is the canonical group loan product, first introduced by
the Grameen bank. A group is comprised of 6 to 10 women and 25-45 groups form a center.

5.3 MICROFINANCE COMPANIES

Microfinance companies are registered in two regulatory set up; Non Banking financial Companies
(NBFC) under reserve bank of India or companies act. Many microfinance companies are registered
in our country as NBFC. NBFCs are collecting savings and utilising their funds for loans and other
activities. The micro finance institutions including BASIX, Asmitha, SKS and Janasree microfinance
Kerala is registered as NBFC. NBFC is working by forming SHGs and direct lending model exists.
Melegam committee appointed by RBI to study about regulatory measures of microfinance
recommended separate structure for microfinance NBFCs. Other form of microfinance is registered
as companies act. Most of this type of institutions is introduced as individual microfinance
institutions working to make profits. In the last 117 decade the number microfinance companies
registered in India had increased several times due to this sector developed as a business model
instead of social service.

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 5.4 MICROFINANCE NGO’s.

With the growing scarcity of donor funds for microfinance on lending, most microfinance
NGOs is now faced with the challenge of finding funds from commercial sources or from deposits of
their member-clients. Because deposits are considered a cheaper source of funds than commercial
loans, the in ability of NGOs to mobilize deposits legally poses a significant internal challenge.
Lack of legal identity stemming from weak ownership andgovernance structures poses the greatest
challenge to microfinance NGOs in accessing funds to provide microfinance on a commercial basis.

Commitment to balancing social and commercial objectives is also an important internal

challenge faced by most microfinance NGOs. Most microfinance NGOs, therefore, remain small and
weak and dependent on fresh infusions of subsidized funds for their survival. Related to constrain
stemming from small size and weak capacity, many microfinance NGOs face the constraint of poor
access to appropriate system and support services.

Moreover inadequate management system and the lack of capacity to undertake market
research as two major constraints curtailing their growth. Although computerization of system has
been identified as essential to the growth of MFIs, there still appears to be a supply problem in terms
of affordable, commercially available, off-the-shelf software packages that suit the system and
information requirements of MFIs.

Market research is a relatively new concern for more MFIs, prompted by increased client
exit (heightened drop-out rates) and the desire to improve repayment performance. Given the strong
recent interest in undertaking market research, the need to build this capacity in MFIs is great,
especially in microfinance NGOs, which face limited funding to support their increased lending.

5.4.1 NGO’S INVOLVED IN MICROFINANCE.

 CDF (Co-operative Development Foundation) in Andhra Pradesh

 LHWRF (Lupin Human Welfare Research Foundation) in Rajasthan

 UPLDC (Uttar Pradesh Land Development Corporation) in Uttar Pradesh

 Group Enterprise Development Project of EDI (Entrepreneurship Development Institute of

India) in Nagaland.

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 CHAPTER 6

LEGAL FRAMEWORK OF MICROFINANCE INSTITUTION IN

INDIA

Institutional microfinance is defined to include microfinance services provided by both

formal and semi-formal institutions. Microfinance institutions are defined as institutions whose major
business is the provision of microfinance services. Actually microfinance represents more than
microcredit as it refer to savings products, to insurance, to pawns and remittances in sum to a much
wider range of financial. Two overlapping categories of microfinance initiatives are poverty lending
and micro banking poverty lending programmes and institution often offer savings and insurance
services as well. The objective of the poverty lending programmes is to give higher priority to social
outreach than financial sustainability, through an organization may strive for both. The main focus of
micro-banking on the other hand, is income promotion by MFI and a drive for financial sustainability
as a permanent financial intermediary. There are a host of microfinance institution in India. They
assume paramount importance in the context of pension reform as they have the ability to mobilize
large amount of savings from people who are beyond the purview of formal sector mechanism.

There are four types of structure as follows:

Microfinance
institution in
India.

Charitable Banking
Co-operatives Companies
Institution Institution

1. Microfinance Institutions as Charitable Institutions:

These are societies registered under Societies Registration Act, 1860 and trusts registered
under Trust Act, 1882. They work on grants. They are not able to handle funds of SHGs or acts as an
intermediary beyond a level. They are not allowed to raise equity and mobilize deposits. These
structural restrictions limit the availability of capital to these MFIs. Often these institutes are found to
services on foreign grants.

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 2. Micro-finance Institutions as Cooperatives :

Cooperatives have legal sanction to work as financial intermediaries. The activities of state
co-operatives are restricted in the state. Their activities are heavily controlled by the controlling
authority, Registrar of the cooperative societies and the state government. National co-operatives
need lesser government control than state cooperatives for multi-state operations. Cooperatives are
allowed to raise share, to mobilize deposits. No tax is charged on cooperatives. They can get foreign
debt but are not allowed to raise foreign equity. The New Generation Cooperative Act (for example,
Mutually Aided Co-operative Societies Act, 1995, in Andhra Pradesh) has become landmark
legislation. It has been used by other organizations and as well as by associations like SHGs,
Grameen Joint liability groups. According to this Act, there is less government control on mutually
aided cooperative societies but they can be incorporated within a state only. Presently, cooperative
societies in nine states (Andhra Pradesh, Jharkhand, Bihar, Jammu & Kashmir, Madhya Pradesh,
Chhattisgarh, Orissa, Karnataka and Uttaranchal) are registered under this new Act. This Act reduces
the role of registrar, gives greater flexibility in savings mobilization and fund utilization and allows
the cooperatives to set up subsidiary organization.

3. Microfinance Institution as Companies :

MFIs have to have Rs. 2 crore as its initial funds if these are operating as Non-Banking
Financial Companies (NBFC). These MFIs are required to obtain a registration certificate from RBI
(under section 45-1A of the RBI Act) after satisfying the initial conditions. They are allowed to
mobilize deposits after satisfying conditions stipulated by RBI. After two years of their operations,
they have to obtain minimum investment grade or other specified credit rating for fixed deposits from
any one of the RBI recognized credit rating agencies at least once a year. They are then required to
forward it to the RBI along with the annual returns. They are allowed to collect foreign equity up to
51% of US $ 0.5 million; more than 51% to 75% of US $ 5 million and 100% of US $ 50 million.

A NBFC is also exempted from RBI registration if it does not deliver credit of more than
Rs. 50,000 for a business enterprise and Rs. 25,000 for meeting the cost to raise the level of income
of a poor person. This NBFC is licenced under section 25 of the Companies Act, 1956. It is not
allowed to accept public deposits. Recently seven categories of NBFCs are exempt from RBI
registration Housing finance companies, Mutual benefit financial companies (Niches), Insurance
companies are important in these exempted categories.

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 4. Microfinance Institutions as Banking Institutions :

The MFIs who are operating as banks are registered under RBI but it is very difficult to
obtain this registration. These institutions are regulated by RBI on daily affairs. To set up a MFI as a
bank, it would require initial capital from Rest. 100 to 300 cores. For local area bank the amount is
Rs. 5 core. Local area banks are permitted to operate on three contiguous districts in a state. These
are also highly management and technology intensive to achieve sustainability. These MFIs are
permitted to deliver credit to mobilize savings and to give insurances (under the registration of
IRDA).

6.1 MICRO-ENTERPRISES

Since independence out success in the development sectors are only moderate. Unemployment and
poverty still pose major challenges for us, especially in rural areas. It all happened irrespective of the
high opportunities of employment generation lies in agriculture sector and rural non-farm sectors
(RNFS). Microenterprises can play an important role in improving the quality of life and poverty
alleviation. Microenterprises, whether in the informal or organized sectors, provide opportunities for
gainful employment while preserving the social structure. Microfinance can play an important role to
meet credit needs of rural poor. According to Singh (2002), "In India, the need for microfinance is
higher as the demand for credit to start micro-enterprises by the poor people could not be met by the
institutional initiatives of rural finances up to large scale. Due to the failure of percolation theory of
social development, poor people are highly dependent on the institutional source of credit. Growth of
microfinance in India has been in response to the failure of institutional initiatives of rural credit and
exploitation attached with informal system of credit." NGOs in India acted very promptly for the
growth of microfinance sector as it provides spaces to the poor people to use their on savings for
credit linkages and finally starting the viable enterprises.

The term 'micro-enterprise' refers to a very small-scale, informally organized business activity
undertaken by poor people.

6.1.1 Need and Importance of Micro-Enterprise:-

Micro-enterprise is a proven way to strengthen viable small businesses resulting increased

households income and savings and this alleviating economic poverty.

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 Mentioning the importance of micro and small enterprises (MSEs) in India, "Micro and
small enterprises (MSEs) constitute an important segment of the Indian economy. Besides providing
employment to nearly 25 million persons, mostly belonging to the lower rung of socio-economic
strata in the society, the sectors help the process of economic diversification, utilization of otherwise
dormant resources, balanced regional development, production of and demand for wage goods,
equitable distribution of income, and widening the base of entrepreneurial supply."

Promotion of micro-enterprises is a viable and effective strategy for achieving significant

gains in income and assets for poor and marginalized people. The microenterprise programs helps
people to build human, financial and social capital for the development of micro-businesses that will
improve people wellbeing. NGOs are playing important role as catalyst in helping the rural
unemployed persons to acquire training through MEDPs (Micro-Enterprise Development
Programmes) so that they can become self employed by starting their enterprise in RNFS. Moreover,
they can also become job providers instead of job seeker. Thus institutionalization of MEDPs through
NGOs can be an alternative approach of rural development in India.

Entrepreneurship Development Programme (EDP) means a programme of

entrepreneurship development designed to help a person in strengthening her/his entrepreneurial
motive and in acquiring skill and capabilities necessary for playing his/her entrepreneurial role
effectively. To make EDP successful and effective, the role of the NGOs has significant important in
terms of identification of place or location, promotional activities, selection of potential
entrepreneurs, entrepreneurial training, monitoring and follow up mechanism.

Micro entrepreneurship through microfinance has become a modern economic weapon for
the poor to fight against poverty and employment. But it has long way to become successful. Many
programmes from IRDP to SGSY were started by the government enthusiastically but they were not
able to achieve their objectives. The reason behind this is poor follow up, lack of management and
participation from the government as well as people. No programme can never ever get its ultimate
result unless and until there is coordination and cooperation between government and beneficiaries.

6.2 MICRO-INSURANCE

Micro-insurance can boost resources for the rural poor, governments, and private sector. The entire
economy gains as the insurance industry matures further, as well. There is robust need for micro
insurance in India's poverty reduction strategy. With insurance, the vulnerable can prepare for an
adverse event before it occurs, instead of being paralysed by shocks afterwards. Micro insurance also
increase the likelihood that the poor eat well, have health access, and send their children to school,
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since they would not have to save as much for emergencies. Potential clients would typically earn
around $ 2 a day or even less.

Six key areas, which need to be addressed to propel micro-insurance is –

1. Demand and Supply, 4. Distribution and outreach,

2. Product Design, 5. Procedure,
3. Pricing, 6. Regulation.

6.2.1 Lack of Insurance Services

Poor people are vulnerable to financial shocks. A small change in their earning patterns due to natural
calamities, health problems, death of earning member etc. can push them to destitute. So, a provision
of insurance under the microfinance programme is very essential to help the poor to cross the poverty
line. But, in reality, the current microfinance programme in India is just focused on regular saving
and micro-credit. SHG-BLP developed by NABARD is also providing saving and credit services
mainly and the provision of insurance is very less. However, some of the MFIs have started
providing insurance services but the efforts are still at an experimental stage. A research report by
Invest India Market Solutions Pvt. Ltd. (IIMS, 2007) indicates that the penetration of life insurance is
only 12 per cent among the rural poor and 19 per cent among the urban low-income population. The
penetration ratio for insurance in India was estimated at 4.80 in 2006, whereas for Asia it was 6.60

and for Europe at 8.30 (Srinivasan, 2009). So, in India the provision of insurance services is at the
initial stage and this integral part of the microfinance programme is still neglected.

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 CHAPTER 7

IMPACT AND CHALLENGES OF MICROFINANCE IN INDIA

7.1 IMPACT OF MICROFINACE ARE AS FOLLOWS:

 Financial Inclusion
 SHARE, SKS and Spandana serve more than 1.5 million families, most of them were very
poor from when they started accessing micro-financial services.
 MFI’s achieved an overall growth of customer’s base of 10.8%.
 Borrowing base increased.
 Increases of personal income.
 Empowerment of women.
 Improvement in nutrition.
 Increased education of the borrower’s children.
 Pressure on bank institution to improve

7.2CHALLENGES OF MICROFINANCE & MFIs IN INDIA:

Poor people do not live in a static environment of poverty. Many millions of people get out of
poverty by successfully embracing new farming technologies, investing in new business
opportunities, or by locating new jobs. At the same time, large numbers of people fall back into
poverty due to financial setbacks, health problems, and other shocks. If available at critical moments,
effective tools for savings, payment, credit, and insurance can help households capture an
opportunity to climb out of poverty or weather a crisis or emergency without falling deeper into
poverty.

Worldwide, approximately 2.5 billion people do not have a formal account at a financial
institution, according to the World Bank’s Global Financial Inclusion Database. As a result, most
poor households operate almost entirely in the cash economy, particularly in the developing world.
This means they use cash, physical assets (such as jewellery and livestock), or informal providers
(such as money lenders and payment couriers) to meet their financial needs—from receiving wages
to saving money for fertilizer. However, these informal mechanisms tend to be insecure, expensive,
and complicated to use. And they offer limited recourse when major problems arise, such as a serious
illness in the family. Following are some issues in MFIs in providing microfinance which become a
challenge for them and ultimately pausing sustainable development:
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1. Low Outreach:
In India, MFI outreach is very low. It is only 8% as compared to 65% in Bangladesh.
2. High Interest Rate:
MFIs are charging very high interest which the poor find difficult to pay.
3. Negligence of Urban Poor:
It has been noted that MFIs pay more attention to rural areas and largely neglect the urban
poor. Out of more than 800 MFIs across India, only six are currently focusing their attention
on the urban poor.
4. Client Retention:
Client retention is an issue that creates a problem in growing the MFIs. There is about 28%
client retention in the MFIs.
5. Loan Default:
Loan default is an issue that creates a problem in growth and expansion of the organization
because around 73% loan default is identified in MFIs.
6. Low Education Level:
The level of education of the clients is low. So it creates a problem in the growth and
expansion of the organization because its percentage is around 70% in MFIs.
7. Language Barrier:
Language barrier makes communication with the clients (verbal and written) is an issue that
creates a problem in growth and expansion of the organization because around 54% language
barrier has been identified in MFIs.
8. Late Payments:
Late payments are an issue that creates a problem in growth and expansion of the
organization because late payments are around 70% in MFIs.
9. Geographic Factors:
The Geographic factors make it difficult to communicate with clients of far-flung areas
which create a problem in growth and expansion of the organization. MFIs are basically
aimed to facilitate the BPL population of the country but due to lack of infrastructure in those
areas it becomes difficult to reach them.
10. Debt Management:
Clients are uneducated about debt management. 70% of the clients in MFIs are unaware of
the fact that how to manage their debt.

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 7.3 Factor’s Contribution to the Slow Growth of Microfinance.

Internal Factor’s External Factor’s

 High Transaction Cost  Uneven Population Density
 Lack of access to Funding  Regional Disparity
 Loan Collection Method  Deserving Poor are Still not Reached
 Fraud  Low Depth of Outreach
 Unregulated Microfinance Institutions
 Lack of Insurance Services

7.4 MEASURES TO OVERCOME CHALLENGES

The following are some measures to overcome the challenges faced by MFIs in providing
microfinance services to have a sustainable development.

1. Proper Regulation

When the microfinance was in its nascent stage and individual institutions were free to bring in
innovative operational models, the need for a regulatory environment was not a big concern.
However, as the sector completes almost two decades of age with a high growth trajectory, an
enabling regulatory environment is needed that protects interest of stakeholders as well as promotes
growth.

2. Field Supervision

In addition to proper regulation of the microfinance sector, field visits can be adopted as a medium
for monitoring the conditions on ground and initiating corrective action if needed. This will keep an
eye on the performance of ground staff of various MFIs and their recovery practices. This will also
encourage MFIs to abide by proper code of conduct and work more efficiently. However, the
problem of feasibility and cost involved in physical monitoring of this vast sector remains an issue in
this regard.

3. Encourage Rural Penetration

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It has been seen that instead of reducing the initial cost, MFIs are opening their branches in places
which already have a few MFIs operating. Encouraging MFIs for opening new branches in areas of
low microfinance penetration by providing financial assistance will increase the outreach of the
microfinance in the state and check multiple lending. This will also increase rural penetration of
microfinance in the state.

4. Complete Range of Products

MFIs should provide complete range of products including credit, savings, remittance, financial
advice and also non-financial services like training and support. As MFIs are acting as a substitute to
banks in areas where people don’t have access to banks, providing a complete range of products will
enable the poor to avail all services.

5. Transparency of Interest Rates

As it has been observed that, MFIs are employing different patterns of charging interest rates and a
few are also charging additional charges and interest free deposits (a part of the loan amount is kept
as deposit on which no interest is paid). All this make the pricing very confusing and hence the
borrower feels incompetent in terms of bargaining power. So a common practice for charging interest
should be followed by all MFIs so that it makes the sector more competitive and the beneficiary gets
the freedom to compare different financial products before buying.

6. Technology to Reduce Operating Cost

MFIs should use new technologies and IT tools & applications to reduce their operating costs.
Microfinance institutions should be encouraged to adopt cost-cutting measures to reduce their
operating costs. Also initiatives like development of common MIS and other software for all MFIs
can be taken to make the operation more transparent and efficient.

7. Alternative sources of Fund

In absence of adequate funds the growth and the reach of MFIs become restricted and to overcome
this problem MFIs should look for other sources for funding their loan portfolio. Various alternative
sources of fund for the MFIs may be by getting converted to for-profit company i.e. NBFC, Portfolio
Buyout, and Securitization of Loans etc

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 7.5 PROBLEMS AFFECTING MICROFINANCE INSTITUTIONS

It is understood from previous discussions that although there have been various successful stories
about microfinance institutions helping the poor, they face with many problems. Many researchers
pointed out the problems faced by this sector. Important among them are the following

1. Ethical Reasons:
Microfinance Institutions can be often viewed as a profit making organization. The desire to
make MFIs an industry, commercialize micro-lending or enable them to be a profit making
institutions should not distract them from one important aspect for which they are formed in
the first place: social service by enabling poor to work on profit making projects or small
businesses. Many a times, the lack of this aspect can lead the microfinance institutions to
behave similar to the local moneylenders. Corruption is another ethical problem. Many MFIs
in India or elsewhere in world suffer from corruption at various levels: corruption in the MFI
itself, corruption 123 in the Micro Enterprises, these MFIs support or corrupt channels,
officials or individual service providers.
2. Managerial Reasons:
One of the major problems which the MFIs can resolve is managerial problems. Managerial
problems are a major factor and they have more effects than any other problems discussed.
Poor record keeping and lack of managerial capacity are the major problems. For office
bearers and group members, record keeping seems like a waste of time. Lack of record
keeping can have its share of problems including increase in defaulters.
3. Legal Reasons:
Microfinance Institutions can be viewed as a social organization helping the poor and a profit
organization too. In many countries, profit organizations are registered under different set of
acts and non-profit organizations come under different legislations. These legalities
sometimes create complications. But a charitable institution is not allowed to indulge in to
money lending. The above case was a lack of a legislation especially serving microfinance
institutions. There are some random acts which prohibit the growth of microfinance
institutions and delimit their impact.

4. “Unfortunate” Reasons:
Sometimes microfinance institutions have to face problems which cannot be resolved. These
problems arise in cases when something “unfortunate” happens to a person or a community.

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 A flood or famine can kill the hopes of farmers to pay their loans. Personal plights are another
reason which might affect the MFI.
5. Other Reasons:
There are various other factors for the failure of MFI. They can be listed as follows: Lack of
vision is a factor which pushes new MFIs in to extinctions. MFIs need trained staff to operate.
In several cases, drop out of trained staff is very high which reduces the reach of an MFI.
Furthermore, the “dropping out” rate is more than the “coming in” rate. MFIs serve society
but they are also a profit-making institution. In many cases, MFIs achieve a lot of success in
their programs in initial period, but they fail to maintain the same record in the long run
because of lack of proper commercial orientation, thus making them unsustainable.

CHAPTER 8.

MICROFINANCE AND WOMEN EMPOWERMENT

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 organised groups. Although
no ‘magic bullet’, they are potentially a very significant contribution to gender equality and women's
empowerment, as well as pro-poor development and civil society strengthening. Through their
contribution to women’s ability to earn an income these programmes have potential to initiate a series
of ‘virtuous spirals’ of economic empowerment, increased well-being for women and their families
and wider social and political empowerment. Micro finance services and groups involving men also
have potential to question and significantly change men's attitudes and behaviours as an essential
component of achieving gender equality.

Majority of microfinance programmes focus women with a view to empower them. There are
varying underlying motivations for pursuing women empowerment. Some argue that women are
amongst the poorest and the most vulnerable of the underprivileged and thus helping them should be
a priority. A more feminist point of view stresses that an increased access to financial services
represent an opening/opportunity for greater empowerment. Such organizations explicitly perceive
microfinance as a tool in the fight for the women’s rights and independence. Finally, keeping up with
the objective of financial viability, an increasing number of microfinance institutions prefer women
members as they believe that they are better and more reliable borrowers.

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 8.1 PROBLEM AND CHALLENGES

Surveys have shown that many elements contribute to make it more Difficult for women
empowerment through micro businesses. These elements are:
 Lack of knowledge of the market and potential profitability, thus making the choice of
business difficult.
 Inadequate book-keeping.
 Employment of too many relatives which increases social pressure to share benefits.
 Setting prices arbitrarily.
 Lack of capital.
 High interest rates.
 Inventory and inflation accounting is never undertaken.
 Credit policies that can gradually ruin their business (many customers cannot pay cash; on the
other hand, suppliers are very harsh towards women).

8.2 WHAT DOES MICROFINANCE MEAN FOR US?

The development and growth of the microfinance market affects more than just those who are
engaging in or contemplating microfinance services. Here's how it may affect us:

 As an investor: Return-focused institutional investors are now making microfinance-related

investments. In addition, major ratings agencies are rating microfinance transactions. For
example, Morgan Stanley issued a microfinance backed bond, which contained tranches and
was rated "AA" by S&P
This shows that microfinance is beginning to provide investment opportunities for all
investors. The Micro Banking Bulletin reports that 63 of the world's top MFIs have
an average return (after adjusting for inflation and after taking out subsidies programs
received) of about 2.5% of total assets. Local and regional banks are generally the first to
integrate microfinance investments into their portfolios, while large international banks
currently prefer to provide financing to other banks, MFIs or NGOs. As mentioned earlier,
even consumer finance companies may have exposure to microfinance activities. As an
investor, you may wish to look to see whether the companies you are investing in have
exposure to microfinance and if so, whether the risk-return characteristics of those activities
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 appeal to you. Visit the MIX market for current information on the supply, demand and
facilitation of capital within the microfinance market.

 As an individual: Some believe that we are living in a time when poverty may be eradicated.
Studies support that belief. According to the Virtual Library on Microcredit, during an eight-
year period, among the poorest in Bangladesh with no credit service of any type, only 4%
pulled themselves above the poverty line. But with individuals and families with microcredit
from an MFI, more than 48% rose above the poverty line. What poverty eradication means to
you as an individual depends largely upon your personal philosophy. You might welcome it
as a key achievement in the history of humanity. You also might celebrate the possibility that
we each can all buy and sell to one another. Individuals who seek to be a part of this poverty
eradication phenomenon may now loan money to a micro-entrepreneur in another part of the
world through the non-profit online service Kiva

 As a finance professional: Microfinance requires highly specialized financial knowledge as

well as a unique combination of skills, such as knowledge of social science, local languages
and customs. New careers are emerging to fit these unique demands. For finance
professionals, this means that new careers are opening up for those who have this unique
combinations of skills and experiences. Moreover, traditional career roles are blurring as
microfinance brings together professionals with varied backgrounds to work in collaborative
teams. For example, development professionals (such as people who have worked for
the Asian Development Bank or other development agencies) can now be found working side
by side with venture capitalists. A wide range of microfinance career opportunities can be
found at Microfinance Gateway.

8.3 INTEREST FREE FINANCE INSTITUTIONS IN KERALA

The ‘Interest Free Financial Institutions’ in Kerala are considered as microfinance ventures because
its size of operation are micro level. These institutions 135 mainly provide loans to poor and needy
people without interest on a systematic repayment basis. The capital is mobilized by accepting
donations and saving deposits.

These institutions invest a part of these deposit amounts in productive ventures and distribute the
profit share to the depositors. Its functions mainly based on charity as it provides temporary advances
for emergencies and necessities. These region based indigenous arrangements which are familiar in

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different names like ‘paraspara sahaya nidhi’ (mutual help fund) or ‘palisha rahitha nidhi’ (interest
free fund). There is an umbrella NGO to coordinate, guide and supervise these institutions, known as
INFACC. According to the official records presently there are 390 establishments registered with
INFACC. The total capital of all these institutions accounts for Rs 10 Crore. They are allowing loans
for needy people for small trades, house repairing, cultivation, self employment projects, medical
treatment, and durable consumption purposes. The self employment projects include production of
Note books, Umbrellas, school bags, School uniforms and other textiles. Other short run loans are
also provided to individuals for various purposes on personal or asset guarantee. As per the
experience of INFACC, the repayment rate is more than 99%. (Hussein 2008)31 . Though the
number of institutions registered in INFACC is 390, there are many such unregistered institutions
functioning in Kerala. These indigenous institutions play a crucial role in the socio‐economic life of
Kerala. The role, performance and impact of such institutions in the society and economy are not
looked into. (Ramzan 2008)32

From the discussions in this chapter got an idea about functioning of microfinance institution in
India, its limitations, problems and we discussed interest free microfinance as an alternative and
solution for these problems. And also familiarized the growth of interest free micro ventures in the
country especially Kerala. Next 136 chapter is specialized for theoretical framework and operational
methods of interest free institutions.

8.4 TECHNICAL INNOVATIONS

In order to improve the quality of microfinance services some technical innovations may be
introduced. A number of electronic devices are being used in different countries to expand the
outreach and to improve the microfinance functioning. Some of these devices are mobile phones,
ATMs, processor cards, computers etc.

Mobile phone provides the rural poor borrowers with the communication facility. ATMs are
helpful to facilitate saving, payment and loan transactions in the remote rural areas where it is
difficult to open bank branches. Processor cards are used to keep the record of group activities such
as savings, loans and other financial transactions. It helps to reduce paper work and saves time for the
bank officials. A computer with an operator helps the illiterate group members to maintain the
records of group financial activities. These computers can also be used to provide important
information related to weather conditions, crop inputs, product prices, land records etc. in the

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villages. Though some of such projects have been started by NABARD on pilot basis, but there is
enough scope to use such innovative techniques in microfinance sector in India.

8.4.1 SCHEMES TO SUPPORT MFIS

MFIs are meant to play an important role in reaching the poor people who are not served
by the formal financial institutions. But most of these institutions are restricted by 97 RBI to collect
savings from their members and raise public funds. As these institutions do not publish their annual
financial reports, it is difficult to determine their financial health. Therefore, the formal financial
institutions also hesitate to provide loans to these institutions. As a result, they face paucity of funds
which becomes a hurdle in expanding the microfinance programme. To tackle this problem, some
schemes may be adopted to provide support and help for the capacity building of MFIs for the
expansion of microfinance programme.

8.4.2 PROSPECTS OF MICROFINANCE

Microfinance programme has witnessed phenomenal growth in India in the past years. Studies show
that this programme is helping the poor in many ways. However, the focus of most of the
microfinance service providers has remained on expanding the outreach of microfinance programme
with little attention on the depth, quality and viability of the financial services. Besides removing
these problems there is a lot which can be done in this field to make this programme more effective.
Some future prospects in this field are discussed below:

8.4.3 GROWTH PROSPECTS

Microfinance programme has a wider prospect to expand both the outreach and depth of services
provided. According to Ghate (2008), microfinance programme has covered just 16.5 million of the
total 75 million poor households. So, there is an ample scope to cover these unreached poor people.
Also, the average loans provided to the SHG members under both the SHG-BLM and MFI models
range between Rs. 3,500 to 5,000 which can meet the liquidity requirements only and are not
sufficient to help a member to start productive activities. So far the government has been succeeded
in providing only Rs. 2,000 crore annually against a demand of over Rs. 50,000 crore by the 75
million poor households (Ghate, 2007). Hence, there is a vast unmet demand in the rural and urban
sectors, and there is ample scope for the growth of different kinds of MFIs and microfinance service
providers. In order to expand the microfinance

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 CHAPTER 9.

WHY MICRO FINANCING?

 Traditionally, banks have not provided financial services to clients with little or no cash
income.

 There is a break-even point in providing loans or deposits below which banks lose money on
each transaction they make. Poor people usually fall below it.

 Because of these difficulties, when poor people borrow they often rely on relatives or a local
moneylender, whose interest rates can be very high.

 Microfinance has been growing rapidly.

 The industry has been growing rapidly and there have been concerns that the rate of capital
flowing into microfinance is a potential risk unless managed well.

9.1 IS MICROFINANCE CHARITY\DONATION?

Donations\charity is when a company or an individual gives a certain amount of money for a good
cause, usually the money goes towards charities. Unlike with micro loans, it is not easy to make sure
that donations are actually going to the specific charity. Once the money is handed over, that's it. It's
never seen again. There is no link between the person who gave the money and the people who are
going to receive it.

9.1.2 HOW DO CHARITIES HELP?

Microfinance organizations generally provide financial services - particularly loans, savings, and
insurance - to people who are unable to obtain these services via traditional banking.

Microfinance is different from how it is usually presented. We feel that much discussion of
microfinance - particularly micro lending - is clouded by commonly held, appealing myths that have
little or no basis in reality. Discusses and debunks myths including "microfinance has been shown to
reduce poverty," "microfinance has been shown to work best when targeting women," and
"microfinance donations get lent out again and again, and thus leveraged far more than other
donations."

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 One point we feel most donors are particularly misled on is the question of how people use, and
benefit from, micro-loans. Micro lending is often presented as a way to help people escape poverty
by giving them the capital to start or expand small businesses. However, the reality appears more
complex: it appears that loans are often used for food, visits to the doctor, and other consumption.
This isn't a bad thing - the poorest people in the world face considerable financial uncertainty, and
loans may empower them to manage their own lives.

9.1.3 What are the challenges of finding a great microfinance charity?

There does not appear to be strong direct evidence that microfinance improves clients' incomes (or
other measurable aspects of well-being), and the highest-quality studies of microloans in particular
do not appear to show strong effects.

Most micro lending institutions do report data on their interest rates and repayment rates, and one
take on microfinance is that when clients are taking out loans at relatively high interest rates and
paying them back, this itself is evidence that the clients are being empowered. However, in
examining micro lending organizations, we have generally seen high dropout rates (i.e., many clients
seem to pay back their loans but drop out of the program), and have seen some reasons to be
concerned that loans can do harm as well as good to the borrowers

Previously, we examined microfinance organizations using a set of critical questions both

about micro lending and micro savings. In searching for institutions with strong answers to these
questions, we found that:

 The large U.S. microfinance charities were rarely clear about their value-added.

 To the extent that we were able to obtain and review due diligence on partners (most of which is
unfortunately confidential), it seemed focused on financial performance, with much weaker
examination of social impact-related questions

 There is an argument for focusing on financial performance over social impact, in the hopes of
creating self-sustaining microfinance institutions and reaching as many people as possible. However,
we have concerns about mixing donations with for-profit enterprises, with the possible result that
donations end up padding profits (concept; example). We found that organizations hoping to use
donations to start for-profit microfinance institutions are (perhaps for good reasons) rarely were
willing to share substantive information about their track record.

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Another obstacle to finding great microfinance charities is the fact that telling oversimplified stories,
and using oversimplified numbers, seems so widespread in the sector. See our posts on the potential
difficulty of understanding a microfinance institution's true interest rates and repayment rates.

We have done substantial investigation of microfinance organizations and have not seen it pay off in
finding outstanding giving opportunities, so for the time being we have de-prioritized this area
(though we may revisit it at a later point).

9.1.4 Giving to microfinance organizations

In a research process conducted from 2009-2011, we identified microfinance organizations to

contact, completed in-depth reviews of promising organizations and identified the Small
Enterprise Foundation (SEF) as a standout organization. SEF is a microfinance institution operating
primarily in the Limpopo province of South Africa. SEF demonstrated a strong focus on collecting
the information necessary to assess its social impact, including

(a) Data on how many clients are dropping out of the program, and

(b) Data on whether SEF is succeeding in its attempt to target people with very low incomes. We also
had a positive impression of SEF when we visited its operations in South Africa.

That said, we have concerns about SEF's social impact, particularly regarding its substantial dropout
rates, and we have not followed up on its progress since early 20

9.1.5 MICRO FINANCE OR DONATIONS

Each method are good ways to aid people who are financially struggling. It's up to individuals who
want to be a part of making a difference to people's lives choose how they want to help. For people
that want to feel like they are part of a borrower's business and achievements, they can lend small
amounts. For people that feel like they've enriched people's lives by donating to those who have lost
their possessions due to an earthquake, hurricane and other disasters, they can continue to donate. Of
course, people can certainly choose to do both.

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 CHAPTER 10

FRAUD CASES

Frauds to the tune of Rs 2 cr in SKS Microfinance in FY 2013. (Dec 15, 2013, 01.48 PM IST)

HYDERABAD: SKS Microfinance witnessed financial frauds to the tune of Rs 2.1 crore during FY
2013 and is taking a slew of measures to prevent its employees from indulging in such offences.
Investigations are in progress and services of employees involved in the fraud have been terminated
and the company is in the process of taking legal action, according to the company's latest annual
report.
"We (auditors) have been informed that during the year there were instances of cash embezzlements
in the company aggregating Rs 1,27,62,403; loans given to non-existent borrowers on the basis of
fictitious documentation created by the employees of the company aggregating Rs 83,32,870 and
misappropriation of cash by an external party, amounting to Rs 4,55,000," company auditors S R
Batliboi and Co said in their comments. Responding to the auditors' comments, SKS said cash
embezzlement is 0.04 per cent of disbursement during the year and to mitigate this risk to a large
extent the management has put in place several preventive control measures.

SKS' action plan includes procuring indemnity bond from every field staff, with personal guarantee
of a third person, besides ensuring that every bank transaction (deposit/ withdrawal) to be executed
by a minimum of two employees, comprising a bank signatory and a confirmed staff, the company
has informed. The net impact of frauds comes to around 0.06 per cent (vis-a-vis 0.51 per cent over
last year) of the total amount disbursed by the company during FY13.

"Company is working towards further reducing this percentage by making process improvements,
obtaining adequate insurance cover and by increasing engagements and opportunities for direct
contact with members," the only listed micro-lender said.

During the year under review, it has recovered an amount of Rs 1.4 crore against a fraud amount
written off in previous years, SKS said.To prevent risk of loans to non-existent borrowers/ fictitious
borrowers, SKS said it ensures that all loans disbursed pass through a checker control system,
wherein loans processed by a 'sangam manager' are first approved by a branch manager or an
assistant branch manager. During FY 2012, some of the employees of SKS had swindled Rs 15.8
crore of company's money by way of fraudulent methods. The auditors of the firm had then reported
that they were informed that cash embezzlement by employees stood at 2.5 crore and loans given to
non-existent borrowers were Rs 13.3 crore.

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 CHAPTER 11.

RECENT NEWS ABOUT MICROFINANCE

11.1 BSE ALLOWS BROKING, MICRO-FINANCE COMPANIES TO LIST ON

SME PLATFORM
Apr 30, 2017, 12.25 PM IST

NEW DELHI: Leading stock exchange BSE has allowed broking and micro-finance companies to get
listed on its small and medium enterprise (SME) platform, a move that will encourage such entities to
tap the IPO route.

The new norms will provide these companies easy access to capital, enhanced visibility, growth
opportunities and exit route for existing shareholders.

Earlier, such companies were not permitted to list on BSE's SME platform.

Now, the exchange has decided to allow broking companies and micro-finance companies to get
listed on the SME platform of BSE.

Spelling out listing criteria for broking firms, BSE said these entities should have net tangible assets
of at least Rs 3 crore in the latest audited financial results. Besides, post issue paid up capital of the
company should be at least Rs 3 crore.

The firms are required to have net worth -- comprise of equity, reserves and surplus -- of minimum
Rs 15 crore and aggregate profit before tax of Rs 5 crore in two consecutive years out of 3 immediate
preceding financial years.

The extraordinary income will not be considered for the purpose of profits.

For micro-finance companies, they should have a book value of at least Rs 100 crore and with a
client base of 10,000 and more and it should not have accepted public deposit.

Besides, the companies should have a net worth and post paid-up capital of at least Rs 3 crore. Also,
such firms are required to have net tangible assets of at least Rs 3 crore as per the latest audited
financial results.

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Listing will help these companies to enter capital markets and finally migrate to the main board
platform.

BSE launched its SME platform for small and medium enterprises in March 2012. Since then, it has
been receiving a very positive response and 179 companies have already got listed in this segment.
Of these, 27 firms have shifted to the main board.

The platform provides an opportunity to SME entrepreneurs to raise equity capital for growth and
expansion. It also provides an immense opportunity for investors to identify and invest in good SMEs
at an early stage.

11.2 WILL MICROFINANCE COMPANIES BE YOUR NEXT BET AMID

MARKET EXUBERANCE?
Jul 27, 2017, 09.27 PM IST

MUMBAI: Microfinance could well be your next big bet even as investors struggle to chart out their
next course of action after the broader index Nifty hit a record high on Wednesday.

Shares of Ujjivan Finance, Equitas Holdings and Satin Creditcare have not participated in the latest
rally, eroding shareholders’ value by up to 1.5 per cent in the past two days as they are yet to recover
from the effects of last November’s demonetisation.

But those stocks, available at cheap valuation, may double your investment returns in the next three
years amid the government's drive for financial inclusion, a key to the country’s much cherished
double digit economic growth.

“While the government's push for financial inclusion will offer huge opportunities for such
companies, Digital India will help them lower input costs, thus improve margins,” said Sanjiv
Bhasin, EVP-Markets & Corporate Affairs, IIFL group. The demonetisation impact has impaired the
prospect of these companies. Their receivables are scattered all across the rural belt, but the negative
effect will get over by September or so,” he said, adding “Investors could see their investment returns
doubling in three-four years’ time.”

In the past three trading sessions, the broader index Nifty 50 hit a record high, crossing the figure of
10,000. On Thursday, it closed at 10,020.
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Between Tuesday and Thursday this week, Ujjivan and Equitas shares fell 1.3-1.5 per cent while the
broader sector index Nifty Bank rose 1.63 per cent.

Though Satin CreditCare (micro finance company) stock rose 2.38 per cent to close at Rs 305 on
Thursday, it was way below its 52-week high at Rs 716.

For those three companies including Ujjivan, Equitas, Satin Creditcare price-to-book value -- a
measure of stock valuation ranges between 1.90 times and 2.51 times – is considered cheap or
reasonable to start investing in.

These companies are run by efficient management with an additional feather in their cap: a small
banking licence. A banking licence will trigger a change in their usual operations. It needs to be seen
how some of these MFIs that got banking licence manage the transition to their new avatars.

"Overall collection efficiency has improved in the micro finance industry with demonetization shock
fading away, said Vishal Rampuria, analyst at HDFC Securities. "It needs to be seen how some of
these MFIs that has converted into banks(Including SFB) manage the transition to their new avatars.

"Micro finance companies will take another one or two quarters to get rid of all negative impact as
some loan write offs are still expected." "Investors can invest in the sector with long term view after
getting clarity on the potential losses."

11.3 INDIAN MICROFINANCE LOANS GREW 26% IN Q1

Aug 23, 2017, 01.36 PM IST

NEW DELHI: The business of Indian non-banking finance companies-microfinance institutions

(NBFCs-MFIs) has grown 26 per cent during the first quarter of the current fiscal over the same
quarter of last year, according to a latest industry report.

"NBFCs-MFIs have registered 26 per cent growth year-on-year in the first quarter (Q1) of financial
year (FY) 2017-18," the Microfinance Institutions Network (MFIN) -- the self-regulatory body of the
Reserve Bank-regulated NBFCs-MFIs -- said in a statement here on Tuesday, releasing its latest
Micrometer report on the industry.

"The size of the microfinance industry stood at Rs 106,823 crore in Q1 FY18. NBFC-MFIs' share in
the micro credit business stands at 31 per cent with loan portfolio of Rs 32,820 crore," it said.
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Banks have become the largest provider of micro-credit with a loan outstanding of Rs 38,486 crore
and 36 per cent share, it added.

"There has been a decline of debt funding by 20 per cent year-on-year," the report said.

"The increase in loan amount disbursed registered 21 per cent growth year-on-year," MFIN Chief
Executive Ratna Vishwanathan said.

The report, however, said that due to delay in repayments after the demonetisation of high-value
currency last November, there was a sudden deterioration in portfolio quality.

"Portfolio at risk numbers have also seen improvement which shows that NBFC-MFI business is
slowly returning to normalcy. However, we will have to wait for another few quarters as we expect it
to come back to pre-demonetisation level of under one per cent by that period," Vishwanathan said.

NBFC-MFIs witnessed a growth of 19 per cent in number of clients, which stands at 2.08 crore
towards the end of the first quarter of this fiscal, MFIN said.

Over half the total disbursements during the quarter in question came from five states -- Karnataka,
Bihar, Maharashtra, Odisha and West Bengal, it added.

11.4 MFI INVESTORS HAVE TO WAIT A WHILE TO REAP BENEFITS OF

DIGITISATION
Aug 25, 2017, 10.08 AM IST

KOLKATA: Private equity investors seeking to earn handsome return from India’s microfinance
sector may need to be patient as the process of digital transformation in microfinance companies is
likely to take time to show dividend and may not be tangible immediately.

“The investors may need to be patient during the period of transition and leverage their experience to
support MFIs to undergo a smooth transition,” said MicroSave, a Lucknow-based global financial
inclusion consulting firm.

Investors generally tend to measure the success of their investment based on the growth of portfolio,
profitability of the MFIs and consequently their return on investments.

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“It is yet to be established with certainty whether implementation of cash-lite models for
disbursement and repayment will lead to cost savings for MFIs,” said MicroSave in a study that
examined the progress and preparedness of digital payment among the bottom of the pyramid
customers.

The study was commissioned by Microfinance Institutions Network (MFIN) and was funded by
German bank KfW and Small Industries Bank of India. It covered experience of 36 MFIs.

It found that while one group of MFIs believes that in the long run, savings from cash management
and rationalisation of staff will lead to savings, the other group believes that the cost for digital
payments today is more than the cost they incur in cash management, hence it may not be
sustainable.

The MFI sector has total equity at Rs 6,940 crore with 56 per cent being invested by overseas
investors, according to MFIN data.

Institutions are choosing to go cash-lite toimprove operational efficiency and help mitigate risk. The
value proposition for customers to adopt cash-lite is currently limited but is evolving.

“There seems to be a need for a better pricing model from banks and other payments service
providers to ensure sustainability of cash-lite interventions,” MicroSave said. Currently, the MFIs
may not have enough influence on negotiating better pricing deals with payment service providers,
despite having the potential to offer large volumes.

In the fourth quarter of FY 2016-17, about 40 per cent of total disbursements and 5 per cent of total
repayments of the MFIs covered were reported to be cash-lite. The proportion of cash-lite operations
for individual loans (including both disbursements and repayments) was higher than those for JLG
loans.

The progress in digital payment is also facing challenges due to low literacy and lack of IT
infrastructure. Lack of adequate levels of physical and internet connectivity coupled with the lack of
a reliable business correspondent network further slow down cash-lite adoption.

“Investors may also need to invest in building the ecosystem to support cash-lite adoption,” the study
observed.

Page 54 of 57
 11.5 OVER 60% OF MFIS ADOPT CASHLESS DISBURSEMENT: MFIN
Aug 28, 2017, 17:17 IST

Mumbai, Aug 28 () More than 60 per cent microfinance institutions have gone cashless for loan
disbursals in their bid to improve operational efficiency, says an industry report.
"In fiscal 2017, over 60 per cent MFIs disbursed loans through cashless means of which nearly 88 per
cent were through NEFT/IMPS. However, in the fourth quarter of fiscal 2017 which was the note ban
period, only 39 per cent disbursements were cash-lite transactions," according to a report by the
industry lobby Microfinance Institutions Network (MFIN).
The report said the rise in MFIs' cashless payment models are largely attributed to benefits of risk
mitigation and increased operational efficiency that includes improved cash management practises,
increased safety and staff productivity.
"Demonetisation and government's push to adopt digital transactions have helped in MFIs' transition
to cashless modes. It has also helped in increasing awareness about non- cash transaction methods
among the beneficiaries even in rural areas," MFIN CEO Ratna Vishwanathan said.
However, in the fourth quarter of FY17, only 39 per cent of disbursements were cash-lite, it said
without attributing any reasons for the fall.
While MFIs are increasingly going cashless for disbursements, only 5 per cent of repayments are
happening through cashless modes by customers, the report said.
It said while 88 per cent of the total cashless disbursements were through NEFT/IMPS by MFIs in
2016-17, repayments through cheques constituted 50 per cent and 33 per cent in ECS.
Other transaction methods that were used by both MFIs and clients included Aadhar enabled
payments, mobile wallet and pre-paid cards.
"Usage of Aadhar payment bridge system (APBS) for disbursements has been quite low (4 per cent)
in 2016-17 but it may prove to be suitable for MFIs in the long run with its low transaction cost and
faster roll out benefits," the report said.
Similarly, Aadhar enabled payment systems (AEPS) and UPI may provide quicker, safe and secure
transactions to customers for repayments along with easier adoption.
It said while the adoption rate of cashless transactions is increasing, infrastructure and connectivity
problems still adversely affect the growth. Another major challenge is that for a typical MFI client
both income and expenditure avenues are through cash. HV BEN NRB

Page 55 of 57
 CHAPTER 12.

CONCLUSION

India is land of villages. According to the father of the nation, Mahatma Gandhi, India can
globally be visible only when its rural sectors shine. He was the one to propagate the village and
cottage sector so that rural economy can grow and become prosperous. But, all this is only on paper.
Now the time come to restrict the entry of microfinance into urban sector to promote rural marks and
provide better, speedy and affordable financing schemes. InfoTech application in microfinance is
laudable and with emerging computer and communication technologies, it can be made as simple tool
for rural folks to adopt and availed the finance for the proposed project to make the rural economy a
dream. So the rural economy candefinitely contribute to the growth the of national economy with the
adoption of mixing InfoTech with microfinance

Microfinance has come a long way despite doubts expressed and criticism launched
about its viability, impact, and poverty fighting capacity. The pioneers in the field and the PR
actioners at large with their commitment, determination, and innovations have not only demonstrated
its power and success, but also accelerated its growth. The task of building a poverty-free world is yet
to be finished. There are still over 1.2 billion people living in extreme poverty on this planet. They
are not living in one country or region but spread all over the world.

Fortunately, there is an increasing awareness about the power of microfinance, and the need to suppo
rt its growth. Many players have committed themselves to its promotion. Governments are taking an
increasing interest in it. More banks, both national and international are coming forward with
different support packages. NGO-MFI partnerships are on the increase. New instruments are being
used to solve the problem of funding. It is expected that in the coming years more ideas, innovations,
costsaving devices, and players will continue to reinforce the microfinancemovement and increase
its expansion.

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 CHAPTER 13

REFERENCE

Website

 http://en.wikipeda.org/wiki/microfinance.
 www.investopedia.com/term/m/microfinance.asp
 http://www.finmarketguru.com/microfinance-institutions-work/
 economictimes.indiatimes.com

NEWSPAPER

Times of India

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