Chapter 3

Microfinance Trends, Problems and Prospects

The chapter on microfinance trends, problems and prospects is divided into three
sections. The first section deals with the history and progress of microfinance in India
and Punjab. The second section is related with the various problems in the growth of
microfinance in India. The third section incorporates the prospects of microfinance
programme.

Section-I

3.1 Why Microfinance?

In developing countries, financing to the rural poor through formal financial
services failed to meet the credit requirements of the rural poor people. The main reason
of failure was absence of any recognised employment and hence absence of collateral
with the poor. The high risk and the high transaction costs of banks associated with small
loans and savings deposits are other factors which make them non-bankable. The lack of
loans from formal institutions leaves the poor with no other option but to borrow money
from local money-lenders on huge interest rates. In different countries including India,
efforts have been made by their governments to deliver formal credit to rural areas by
setting up special agricultural banks/rural banks or directing commercial banks to
provide loans to rural borrowers. However, these programmes have also not worked well
due to various reasons. The common reasons found by many researchers are the political
difficulty for governments to enforce loan repayment and the selection of relatively
wealthy and influential people, rather than the poor, for bank loans (Adams et al., 1984;
Adams and Vogel, 1986; World Bank, 1989). Women’s World Banking (1995)
estimated that in most developing countries, the formal financial system reaches to only
top 25 per cent of the economically active population. This leaves the bottom 75 per cent
without access to financial services apart from those provided by money-lenders and
family. Thus, the inability of formal credit institutions to deal with the credit

57
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requirements of poor effectively has led to emergence of microfinance as an alternative

credit system for the poor.
Microfinance scheme provides a wide range of financial services to people who
have little or nothing in the way of traditional collateral. It helps them to build up assets,
survive crises and to establish small business to come out of poverty. Except extending
small loans (micro-credit), microfinance programme provides various other financial and
non-financial services such as savings, insurance, guidance, skill development training,
capacity building and motivation to start income generating activities to enhance the
productivity of credit. This innovative programme is reaching the poor people especially
women and has an impact on their socio-economic development as well as their
empowerment. This programme is becoming popular and emerging as a powerful
instrument for poverty alleviation in many countries of Asia, Africa, Europe and
America.
3.2 Origin of Microfinance
The concept of providing financial services to low income people is very old.
Many informal credit groups have been operating in many countries for several years
like the susus in Nigeria and Ghana, chit funds and Rotating Savings and Credit
Associations (ROSCAs) in India, tontines in West Africa, pasanaku in Bolivia, hui in
China, arisan in Indonesia, paluwagan in Philippines etc. It is believed that initially, the
informal financial institutions emerged in Nigeria dating back in the fifteenth century.
Such type of institutions started establishing in Europe during the eighteenth century
when in 1720 the first loan fund targeting poor people was founded in Ireland (Seibel,
2005).
In 1847, some credit co-operatives were created in Germany which served 1.4
million people by 1910. In 1880s the British controlled government of Madras in South
India tried to use the German experiment to address poverty in India. This effort resulted
in membership of more than nine million poor to credit co-operatives by 1946. During
the same time the Dutch colonial administrators constructed a co-operative rural banking
system in Indonesia which eventually became Bank Rakyat Indonesia (BRI), now one of
the largest Microfinance Institutions (MFIs) of the world (Schwiecker, 2004).
In the 1970s, a paradigm shift started to take place. The failure of subsidised
government or donor driven institutions to meet the demand for financial services in
developing countries led to several new approaches. Bank Dagan Bali (BDB),
 59

established in Indonesia in 1970, was the earliest bank to institute commercial

microfinance (Schwiecker, 2004). In 1973, ACCION International, a USA based NGO,
disbursed its first loan in Brazil at commercial interest rate to start a micro-enterprise.
One year later in 1974, the Self-Employed Women’s Association of India (SEWA)
started a bank to provide loans to poor women. In 1976, Muhammad Yunus, a professor
of Economics at Chittagong University, Bangladesh initiated an experimental research
project of providing credit to the rural poor. He gave a small loan of 856 Taka ($27)
from his pocket to 42 poor bamboo weavers and found that small loans radically changed
the lives of these people and they were able to pay back the loans with interest. The
success of this idea led Yunus to establish Grameen Bank in 1983 in Bangladesh. This
programme showed astonishing growth rates in Bangladesh, particularly during the
1980s and 1990s. It encouraged social innovators and organisations all over the world to
begin experiments with different microfinance delivery methods to bring financial
services to the poor. It is now adopted worldwide in the countries of different continents.
Many international NGOs, such as Foundation for International Community
Assistance (FINCA), Americans for Community Cooperation in Other Nations
(ACCION), Freedom from Hunger, Opportunity International, Co-operative for
Assistance and Relief Everywhere (CARE), Consultative Group for Assisting the Poor
(CGAP), etc. are promoting microfinance programme for creating new businesses and
combating poverty in a sustainable way. Over the past few decades, microfinance has
been experimented in many developing countries. Bank Rakyat Indonesia (BRI) in
Indonesia, Bancosol in Bolivia, Bank for Agriculture and Agricultural Co-operatives
(BAAC) in Thailand, Grameen Bank, and Bangladesh Rural Advancement Committee
(BRAC) of Bangladesh, NABARD in India, Amannah Ikhtiar Malaysia (AIM) of
Malaysia, Agriculture Development Bank of Nepal (ADBN), K-Rep in Kenya and
Mibanco in Peru have yielded encouraging results in alleviating poverty and empowering
the poor through microfinance.
In India, the first initiative to introduce microfinance was the establishment of
Self-Employed Women’s Association (SEWA) in Gujarat. SEWA was registered as a
trade union of self-employed women workers of the unorganised sector in 1972. This
trade union established their bank known as SEWA Bank in 1974. To establish this bank
four thousand union members contributed Rs. 10 each as share capital. Since then this
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bank is registered as a co-operative bank and has been providing banking services to
poor women and has also become a viable financial venture.
In the midst of the apparent inadequacies of the formal financial system to cater
to the financial needs of the rural poor, the first major effort to reach these rural poor was
made by NABARD in 1986-87, when it supported and funded an action research project
on ‘Saving and Credit Management of Self-Help Groups’ of Mysore Resettlement and
Development Authority (MYRADA). For this purpose, a grant of Rs. one million was
provided to MYRADA. The encouraging results were yielded. In 1988-89, NABARD
undertook a survey of 43 NGOs spread over eleven states in India to study the
functioning of the SHGs and possibilities of collaboration between the banks and SHGs
in the mobilisation of rural savings and improving the credit delivery to the poor.
Encouraged by the results of field level experiments in group based approach for lending
to the poor, NABARD launched a pilot project of linking 500 SHGs with banks in 1991-
92 in partnership with non-governmental organisations (NGOs) for promoting and
grooming self-help groups of socio-economically homogeneous members. In order to
meet their credit requirements, in July 1991 RBI issued a circular to the commercial
banks to extend credit to the SHGs formed under the pilot project of NABARD. During
the project period different NGOs like Association of Sarva Seva Farms (ASSEFA),
Madras; People’s Rural Education Movement (PREM), Behrampur; Professional
Assistance for Development Action (PRADAN), Madurai; and Community
Development Society (CDS), Kerala promoted hundreds of groups. The results were
very encouraging. In February 1992, the launching of pilot phase of the SHG- Bank
Linkage Programme (SHG-BLP) could be considered as a landmark development in
banking with the poor.
In order to further promote this programme RBI issued instructions to banks in
1996 to cover SHG financing as a mainstream activity under their priority sector-lending
portfolio. The programme acquired a national priority from 1999 through Government of
India budget announcements. With the support from both the government and the
Reserve Bank of India, NABARD successfully spearheaded the programme through
partnership with various stakeholders in the formal and informal sector. Since the time of
its origin, NABARD provides policy guidance, technical and promotional support
mainly for capacity building of NGOs and SHGs. Realising the potential in the field of
microfinance, the government allowed various private players to provide microfinance in
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the country. These private microfinance providers, commonly known as MFIs, are
various NGOs, Non-banking Financial Companies (NBFCs) and other registered
companies. Many state governments amended/passed their State Co-operative Acts to
use co-operative societies for providing microfinance. These days many public and
private commercial banks, regional-rural banks, co-operative banks, co-operative
societies, registered and unregistered NBFCs, societies, trusts and NGOs are providing
microfinance by using their branch network and through different microfinance delivery
models.
3.3 Meaning and Function of Microfinance
The Asian Development Bank (2000) defines microfinance as the provision of
broad range of services such as savings, deposits, loans, payment services, money
transfers and insurance to poor and low income households and their micro-enterprises.
This definition of microfinance is not restricted to the below poverty line people but it
includes low income households also.
The Task Force [1] terms microfinance as the provision of thrift, credit and other
financial services and products of very small amounts to the poor in rural, semi-urban or
urban areas for enabling them to raise their income levels and improve living standards.
The Task Force emphasises that microfinance will cover not only consumption and
production loans, but also loans for other credit needs such as housing and shelter [2].
The Micro Financial Sector (Development and Regulation) Bill, (2007) defines
microfinance as the provision of financial assistance and insurance services to an
individual or an eligible client either directly or through a group mechanism for an
amount, not exceeding rupees fifty thousand in aggregate per individual for small and
tiny enterprise, agriculture, allied activities (including for consumption purposes of such
individual); or an amount not exceeding rupees one lakh fifty thousand in aggregate per
individual for housing or other prescribed purposes. The eligible clients which may get
financial assistance under this scheme may be landless labourers and migrant labourers;
artisans and micro-entrepreneurs; disadvantaged cultivators of agricultural land including
oral lessees, tenants, and share croppers; and farmers owning not more than two hectares
of agricultural land.
3.4 Delivery Models of Microfinance
The concept of microfinance involves informal and flexible approach to the credit
needs of the poor. There is no single approach or model that fits in all the circumstances.
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Therefore, a number of microfinance models emerged in different countries/states

according to the suitability to their local conditions. Broadly, the microfinance delivery
methods can be classified into six groups as follows:
3.4.1 Grameen Bank Model
Grameen Bank model is one of the oldest and most successful models of
microfinance. This model was developed in Bangladesh. In this model microfinance
programme participants are organised into groups of five members. They make
mandatory contribution to group savings and insurance fund. Each member maintains
her individual saving and loan account with the bank and after contributing to the
savings fund for a fixed time the group members receive individual loans from the bank.
But the group is not required to give any guarantee for the loan repayment by its
member. Repayment responsibility solely rests on the individual borrower and there is no
form of joint liability, i.e. group members are not responsible to pay on behalf of a
defaulting member. Loans are provided for six months to one year duration but
repayments are made weekly. Bank staff make periodic visits to the groups, maintain
individual records of group members and facilitate all the financial transactions. This
creates ease in working but hindrance in the empowerment of members.
The members remain dependent on field officers regarding their all group related
activities. Grameen model has been replicated in more than 40 countries in Asia, Africa,
and Latin America with modifications to suit local conditions and cultures. The
programme of BancoSol in Bolivia and most of the solidarity groups in Latin America
follow this methodology. Many MFIs in India have also replicated this model.
3.4.2 Joint Liability Group Model
In this model, 4 to 10 individuals are organised in a group known as a Joint
Liability Group (JLG). The group members can avail bank loans against mutual
guarantee and there is no condition of their own saving fund. All members sign a joint
liability contract, making each one jointly liable for repayment of all loans taken by all
individuals in the group. Thus, only social collateral is provided to the lending
institution. The JLGs are intended primarily to be credit groups and regular savings by
the JLG members are not mandatory. The group exists only because its individual
members are legally bound to one another. In this model, the progress of empowerment
of group members remains very limited. In India these type of groups are generally made
by most of the MFIs because such groups are easy to make as there are very less
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restrictions regarding the utilisation of loan. NABARD is using this model for providing
credit to the tenant farmers, cultivating land either as oral lessees or share croppers, and
small farmers who do not have proper title of their land holding. Many other countries
are also using this model. There were segments within the poor, such as share croppers/
oral lessees/ tenant farmers, who were left out and whose loan requirements were much
larger but who had no collaterals to fit into the traditional financing approaches of the
banking system. To service such clients, Joint Liability Groups (JLGs), an upgradation of
SHG model could be an effective way.
3.4.3 Individual Lending Model
In this method, individuals can get loans without any membership of a group.
This is a straightforward credit lending model in which micro-loans are given directly to
the borrowers. In this model, the financial institutions have to make frequent and close
contact with individual clients to provide credit products customised to the specific needs
of the individual. It is most successful for larger, urban-based, production-oriented
businesses. The model is followed by many financial institutions like the Association for
the Development of Micro-Enterprises (ADEMI) in Dominican Republic, Bank Rakyat
Indonesia, Senegal Egypt, Self-Employment Women’s Association in India, etc.
3.4.4 The Group Approach
The group approach delegates the entire financial process to the group rather than
to the financial institutions. All financial activities like savings, getting loans, repayment
of loans and record keeping are managed at the group level. In this method, 10-20
members are organised to form a group. These group members make regular savings of
fixed amount in a common fund. The amount and frequency of savings is mutually
decided by the group members. After the successful working of such a group for some
months the group is linked to a financial institution for getting credit. The financial
institutions issue loan in the name of group and whole group is considered responsible
for repayment. The amount of loan depends upon the total accumulated amount of saving
of the group. Group members themselves decide about the criteria of dividing the loan
among the group members. With this loan the whole group may jointly start a micro-
enterprise or the members may start their individual businesses. An individual may
also use his loan for consumptive purpose or meeting other priority needs. The peer
pressure in the group helps the timely repayment of loan. These type of group based
credit delivery methods help to empower the group members because they remain
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involved in various group activities. They visit the bank, market and hold group meetings
which help them to increase self-confidence. In India, the group based credit delivery
method known as SHG-BLP is a predominant method of providing microfinance.
Programme Hubungan Bank Danksm (PHBK) project in Indonesia and the Chikola
groups of K-REP in Kenya are also using such group based credit delivery models.
3.4.5 Village Banking Model
This village banking model is an expansion of the group approach. This model
was developed in Bolivia during the mid 1980s by the Foundation for International
Community Assistance (FINCA), a non-profit microfinance organisation. In this model,
a Village Bank is developed by grouping 30 to 100 low-income individuals who seek to
improve their lives through self-employment activities. The bank is financed by internal
mobilisation of members' saving fund as well as loans provided by the sponsoring MFIs.
The MFIs lend capital to the bank, which then lends the money to its members. Members
themselves run the village bank, they choose their members, elect their own officers,
establish their own by-laws, distribute loans to individuals and collect savings and
payments. Loan amounts are linked to the aggregate amount saved by individual bank
members. Loans are repaid weekly in small installments. Thus, village banks have a high
degree of democratic control and independence. The model is used by various MFIs like
Co-operative for Assistance and Relief Everywhere (CARE) in Guatemala; Save the
Children in El Salvador; Burkina Faso in Bolivia, Mali, and Ghana; Freedom from
Hunger and Catholic Relief Services in Thailand and Benin, Opportunity International,
Consultative Group for Assisting the Poor (CGAP), etc.
3.4.6 Credit Unions and Co-operatives
A credit union is a democratic, not-for-profit financial co-operative. It is owned
and governed by its members, who are at the same time the owners and the customers of
their co-operative society. Co-operatives are often created by persons belonging to the
same local or professional community or sharing a common interest. Co-operatives
generally provide their members with a wide range of banking and financial services.
Members participate in all the major decisions and democratically elect officers from
among themselves to monitor the administration of the co-operative. Loans are granted
only to the members. SANASA Development Bank of Sri Lanka is an example of rural
credit co-operative which is successfully working as a microfinance service provider.
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3.5 Institutional Arrangement and Disbursement of Microfinance in India

In India, there is a wide variety of institutions in public as well as private sector
which provide microfinance to the poor. These institutions can be broadly divided into
two types. First type is the traditional formal financial institutions, while the second type
is Microfinance Institutions (MFIs). The traditional financial institutions comprise of
commercial banks, regional rural banks and co-operative banks. They provide
microfinance services in addition to their general banking activities and are referred to as
microfinance service providers. On the other hand MFIs are different types of financial
institutions whose main financial activity is providing microfinance only. Many of these
institutions are NGOs, Mutually Aided Co-operative Societies (MACS) and Non-
Banking Financial Companies (NBFCs). In case of traditional financial institutions both
private and public ownership are found but the MFIs are mainly in the private sector.
These financial institutions use a hierarchical network starting from the apex
wholesale level to the retail level financial institutes. The retail level banks and MFIs
borrow funds from apex financial institutions and use their branch network to provide
microfinance at the doorstep of poor people. Some of these apex and retail level financial
institutions have been discussed below:
3.5.1 Apex Financial Institutions
The formal microfinance service providers include a number of apex financial
institutions. Some of them are like National Bank for Agriculture and Rural
Development (NABARD), Small Industries Development Bank of India (SIDBI),
Rashtriya Mahila Kosh (RMK), Friends of Women World Banking (FWWB), Housing
Development Finance Corporation (HDFC), Housing and Urban Development
Corporation Limited (HUDCO), and Rashtriya Gramin Vikas Nidhi (RGVN). They
provide bulk amount of funds to retail level banks and MFIs for on-lending to the poor.
There are different terms and conditions associated with each apex financial institute.
The features of some of these institutions have been highlighted in Table 3.1. In addition
to these apex financial institutions, many MFIs get funds from investors, lenders and
donors also.
3.5.2 Retail Level Banks
At the retail level Commercial Banks, Regional Rural Banks, Co-operative
Banks, and different types of MFIs provide microfinance services. In India, there are
about 60,000 retail credit outlets of the formal banking sector in the rural areas
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Table 3.1: Apex and Wholesale Financial Institutions in India

S. Organisation SIDBI NABARD RMK HUDCO HDFC FWWB RGVN
No. Lucknow Bombay New Delhi New Delhi Bombay Ahmedabad Guwahati
1. Background Micro-credit A Refinance Set up as an Set up in 1970. Provide housing A non-profit A non-profit
scheme started in institution set up in independent Provide loan finance including organisation set up in organisation
1994. New SIDBI 1982. Promoting regd. society by assistance for - to low income 1982 as an affiliate of started in 1990. It
Foundation for linkages of SHGs Govt. in 1993 to construction of groups through Women’s World has started NGO
microcredit set up with banks since provide micro- house for NGOs since 1992. Banking started Support and credit
in Nov. 1998 1992 by Revolving credit to poor economically Started supporting revolving loan fund in and saving
Fund Assistance women weaker sections. MFIs in 1997 1989 programme
2. Borrowers of 1. NGOs 1. NGOs 1. NGOs 1. NGOs 1. NGOs 1. NGOs 1. NGOs
these 2. SHG 2. SHG 2. SHG 2. SHG 2. Co-operatives 2. SHG Federations 2. SHG
Organisations Federations Federations Federations Federations 3. Companies 3. Co-operatives Federations
3. Co-operatives 3. Co-operative 3. Women Dev. 3.Co-operatives 4. NBFCs 3. Associations of
4. Companies Societies Corporations 5. SHGs Entrepreneurs
3. Eligibility for 1. Organisations 1. Registered Organisation Organisation in Proven track 1. Should be working 1. Registered
Borrowing in existence Societies/ working with existence for 3 record as per own with women and with Societies/
for 3 years Trusts women and in years and has criteria minimum one year Trusts
2. Proven track involved in existence for 3 proven track experience in MF involved in
record as per microfinance years with record in 2. Membership of at microfinance
own criteria 2. Proven track proven track microfinance least 800 women 2. Proven track
3. Credit rating record as per record as per as per own with at least 2 lakh of record as per
own criteria own criteria criteria member savings own criteria
4. Interest rate 11-12.5% (i) 7.5% for 1st 8% 9% (i) 9% for housing (i) 12% to SHGs 9%
(per annum) to tier institutions (ii) 12% for micro- (ii) 13.5% to NGOs and
recipient (ii) 9% for 2nd enterprise other forms of MFIs
tier institutions (iii) 14% to NBFCs
5. Maximum No ceiling No ceiling Not greater than 12% (i) 15% for housing As decided by As decided by
interest rates 18% (ii) 24% for Groups Groups
for on-lending (micro-enterprise)
to members
6. Repayment 3-5 years with 3 to 5 years with Short-term: 15 years 1. 15 Years for Varies between one and Negotiable
Period or without one year 6-15 months housing loans five years with
moratorium moratorium Long-term: 2-5 2. 3 years for moratorium of 6
years with micro-enterprise months on principal
moratorium, if loans repayment only.
needed
Source: Tankha (2002)
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comprising 20,571 rural and 12,283 semi-urban branches of commercial banks, 14,142
branches of the Regional Rural Banks and 12,128 branches of district level co-operative
banks. Besides this, there are almost 92,000 co-operative credit societies at the village
level. On an average, there is at least one retail credit outlet for about 4,700 rural people
[2]. These banks used to provide loans directly to SHGs. The commercial banks and
regional rural banks also provide their credit facilities to MFIs for its on-lending to
groups. This is helpful in widening the range of lending institutions.
3.5.3 Microfinance Institutions
Microfinance institutions (MFIs) are the organisations or associations of
individuals that provide financial services to the poor. In India, there is a wide range of
such organisations with diverse legal forms, varying significantly in size, outreach,
mission and credit delivery methodologies. Figure 3.1 represents the hierarchy of
financial institutions for the microfinance disbursement.

Formal Institutions Informal Institutions

Wholesale lenders like

NABARD, SIDBI, RMK, Lenders Investors Donors
HDFC, FWWB, HUDCO

Retail Level Banks Microfinance Institutions (MFIs)

Commercial Banks Non-Profit MFIs (NGOs)

Regional Rural Banks Co-operative MFIs

Co-operative Banks Profit Making MFIs (NBFCs)

SHGs Individual SHGs/JLGs Individual

Figure 3.1: Institutional Arrangement for Microfinance Disbursement in India

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Following the guidelines of RBI all scheduled commercial banks including RRBs
give bulk loans (classified as a priority sector) to MFIs for on-lending to groups and
other small borrowers. At present, both public and private banks are extending
considerable loans to MFIs at interest rate ranging from 8 to 11 per cent per annum.
Legal Forms of MFIs
The MFIs are an extremely heterogeneous group registered as Non-Banking
Financial Companies (NBFCs), societies, trusts and co-operatives. On the basis of their
legal forms, the MFIs in India can be broadly subdivided into three categories: Non-
profit making, Mutual benefit making and profit making MFIs as shown in Table 3.2.

Table 3.2: Legal Forms of MFIs in India

Type of MFI Estimated Legal Acts under
Number which Registered
1. Non-Profit MFIs
(a) NGO-MFIs 400 to 500 Societies Registration
Act, 1860 or similar
Provincial Acts,
Indian Trust Act, 1882
(b) Non-profit 10 Section-25 of The
Companies Companies Act, 1956
2. Mutual Benefit MFIs
Mutually Aided Co- 200 to 250 Mutually Aided Co-
operative Societies operative Societies Act
(MACS) and enacted by State
similarly set up Governments
institutions
3. For Profit MFIs
Non-Banking 06 The Companies Act,
Financial 1956/ Reserve Bank of
Companies (NBFCs) India Act, 1934
Total 700 - 800
Source: Satish (2005)

The table exhibits that the number of registered MFIs in India are estimated to be
around 700-800 as no published data is available on private MFIs operating in the
country. Majority of the MFIs are operating on small-scale with clients ranging between
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500 to 1500 per MFI and not more than 10 MFIs have an outreach of 1 lakh
microfinance clients.
(i) Non-profit Making MFIs
The non-profit making MFIs include NGOs and non-profit making companies.
The table provides that a large number of NGOs have undertaken the task of financial
intermediation without any profit. Majority of these are registered as trusts or societies.
These NGOs are not formally regulated and they are prohibited by RBI from taking
collected savings of their clients or deposits from the public. The bye-laws of these
institutions are generally restrictive in allowing any commercial operations. The
companies registered under Section-25 of the Companies Act are also non-profit
companies. The activities of these companies are restricted to charity or other social
purposes. Section-25 companies are formally recognised and regulated by the RBI.
These companies, being non-profit in character, can not take group savings of their
clients.
(ii) Mutual Benefit MFIs
The mutual benefit MFIs are the Mutually Aided Co-operative Societies
(MACS). These are registered under the State Co-operative Societies Act and are not
regulated by RBI.
(iii) For Profit MFIs
For profit MFIs include Non-Banking Financial Companies (NBFCs). The MFIs
in India which are larger in size belong to this category. These companies are registered
under the Companies Act, 1956; and are regulated by RBI. These companies can deposit
the savings of their clients with them. NBFCs, along with Section-25 companies, account
for about 80 per cent of microfinance outreach in India, both in terms of clients served as
well as loan portfolios. Some of the large NBFCs in the field of microfinance are:
Sanghamitra, BASIX, SHARE Microfin Ltd., Indian Association for Savings and Credit
(IASC), Cashpor, etc.
3.6 Microfinance Delivery Models in India
In India, microfinance is provided through the SHG-Bank Linkage Model (SHG-
BLM) and Microfinance Institution (MFI) Model. The SHG-BLM developed by
NABARD is widely prevalent throughout the country. In this model, the informal SHGs
are credit linked with the formal banking system. On the other hand, MFI model is used
by the various MFIs which emerge to reach the rural poor people in the areas not served
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by the formal banking sector. These MFIs provide financial services to the individuals or
to the groups like SHGs, JLGs and Grameen groups.
Self-Help Groups (SHGs) and their Functioning
SHGs are small, informal and homogeneous groups of 10 to 20 members each.
These groups are formed by the bank officials, NGOs and various other institutions at the
village level. Members of almost equal economic and social status are chosen to
minimise any mutual conflict. Each such group is given a name and each group has a
head, cashier and secretary, democratically elected by the group members to manage the
group affairs. The members are encouraged to make a voluntary thrift on regular basis.
The group members mutually decide about the amount and frequency for individual
savings to be deposited in the group account. They use this pooled resource to make
small interest bearing loans to their members within the group. This process, known as
inter-loaning, gradually builds financial discipline among the group members and they
learn to handle resources of a size that is much beyond their individual capacities. The
SHG members begin to understand that resources are limited and have a cost. Once the
groups show this mature financial behaviour (generally after six months of group
formation), banks are encouraged to provide loan to the SHG in certain multiples (three
to four times) of their accumulated savings. The bank loans are given without any
collateral and at specified interest rates. Banks find it easier to lend money to the groups
rather than providing small funds to individual members. The peer pressure ensures
timely repayments and replaces the collateral for the bank loans. Generally, the banks
charge between 9-10 per cent rate of interest per annum from the SHGs. The group
members themselves decide the terms of loans and the criteria of dividing the loan
among the group members. If only some of the group members use the whole loan then
they have to pay interest to the group account also. The rate of interest is mutually
decided by the group members. The group gets the second loan from the bank only after
repaying the first loan successfully and so on. The conceptual thinking behind SHG
initiative is that the mutual help within the participants of the programme can be a
powerful vehicle in the upward socio-economic transition of the poor.
3.6.1 SHG-Bank Linkage Model
SHG-Bank Linkage Model (SHG-BLM) is developed in India to provide
microfinance with the help of vast rural network of the formal financial sector. In this
model, the informal SHGs are credit linked with the formal financial institutions. The
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SHG-BLM has emerged as a dominant model in terms of number of borrowers and loans
outstanding. This model is flexible, independence creating, and imparts freedom of
saving and borrowing according to the requirements of group members. Due to
widespread rural bank branch network, the SHG-BLM is very suitable to the Indian
context. Microfinance movement started in India with the introduction of SHG-Bank
Linkage Programme (SHG-BLP). The programme uses SHGs as an intermediation
between the banks and the rural poor to help in reducing transaction costs for both the
banks and the rural clients. Banks provide the resources and bank officials/NGOs/
government agencies organise the poor in the form of SHGs. Under this programme,
loans are provided to the SHGs with three different methodologies:
Model I: SHGs Formed and Financed by Banks: In this model, banks
themselves take up the work of forming and nurturing the groups, opening their savings
accounts and providing them bank loans.
Model II: SHGs Formed by Agencies Other than Banks, but Directly
Financed by Banks: In this model, NGOs and other formal agencies in the field of
microfinance facilitate organising, forming and nurturing of SHGs and train them in
thrift and credit management. The banks directly give loans to these SHGs.
Model III: SHGs Financed by Banks Using Other Agencies as Financial
Intermediaries: This is the model where the NGOs take on the additional role of
financial intermediation along with the formation of group. In areas where the formal
banking system faces constraints, the NGOs are encouraged to form groups and to
approach a suitable bank for bulk loan assistance. This method is generally used by most
of the NGOs having small financial base.
Table 3.3 shows the SHGs linked to banks and the amount of loans disbursed
under the three models. It shows that the microfinance programme in India is dominated
by Model II. It is found that up to March 2006, 20.1 per cent of the total credit linked
SHGs are formed under Model I; and these groups are provided 14.4 per cent of the total
bank loans disbursed under the programme. Approximately seventy-four per cent of the
total SHGs are formed under Model II. These groups are provided 80.7 per cent of the
total loans. The share of Model III is relatively small. Approximately six per cent of the
total SHGs financed with 4.9 per cent of the total loan fall under this category.
 72

Table 3.3: Model-wise Bank Linkage of SHGs in India (up to March 2006)
2004 2005 2006
Model Number Bank Number Bank Number Bank
Type of SHGs Loans (in of SHGs Loans (in of SHGs Loans (in
('000) Rs. Crore) ('000) Rs. Crore) ('000) Rs. Crore)

218 550 343 1,013 449 1,637

Model I
(20.0) (14.0) (21.2) (14.7) (20.1) (14.4)

777 3,165 1,158 5,529 1,646 9,200

Model II
(72.0) (81.0) (71.6) (80.1) (73.5) (80.7)

84 189 117 356 143 561

Model III
(8.0) (5.0) (7.2) (5.2) (6.4) (4.9)

1,079 3,904 1,618 6,898 2,238 11,398

Total
(100) (100) (100) (100) (100) (100)
Source: NABARD Data
Note: The figures given in parentheses indicate percentages of SHGs and bank loans.

3.6.2 MFI Model

The MFI model has also gained momentum in India in the recent past. MFI
model is found worldwide whereas the SHG-BLM model is an Indian model. In MFI
model MFIs borrow large amount of funds from the apex financial institutions, donors
and banks for on-lending to the individuals or groups. These MFIs provide financial
services to the individuals or to the groups like SHGs, JLGs and Grameen groups.
3.6.3 SHG vs. MFI Model
Some features of both the models have been compared on the basis of type of
group in Table 3.4. An important difference between SHG-BLM and the other groups
(Grameen and Joint liability groups) is that in the former the loan is a single loan to the
group as a whole, which is then divided by the group member, whereas in Grameen and
Joint liability groups the MFIs provide loans to individual members, although
disbursement and collection are facilitated by the group mechanism. In this way, there is
limited participation of group members in Grameen and JLGs. Therefore, individual
lending results in less empowerment of its clients as compared to the SHG-BLM.
 73

Table 3.4: Features of Microfinance Delivery Approaches

MFI Model
Feature SHG Model Individual
Grameen
Banking
Type of Clients Primarily women Primarily women Women/Men
Usually 5
10-20 members per
Group Size members per Individual Clients
group
group
Services and
Services Services and credit Credit
credit
Credit Delivery In the name of group Individual Individual
Organise (group
Organise, Guide and
Role of field staff dependent on Organise
Facilitate
staff)
Record keeping By group By field staff By field staff

Group Meetings Monthly Weekly No meetings

Meetings with
Monthly Weekly Unscheduled
officials
Amount of Rs. 20-100 per
Rs. 5-25 per week Flexible
Saving month
Initial loan 3-4 times of group
Rs. 2000-5000 Rs. 5000-150000
amount saving
Varies largely Generally, more
Interest rate 9-11 per cent between MFIs than Grameen
(12-30 per cent) model
Effect on
Empowerment of High Low Very low
members
Source: Own compilation.

Table 3.5 shows the number of individuals who are provided microfinance loans
under the SHG-BLM as well as the MFI model. It is important to note that in some of the
southern states the microfinance programme has reached the saturation point; and the
MFIs are competing to find the new eligible clients. In this situation, same individuals
are getting loans under both the models from different MFIs. So, the table also shows the
data adjusted for this overlap. The table reveals that up to March 2007, 48.06 million
individuals are covered under the microfinance programme out of which 79.11 per cent
are formed under SHG-BLM and 20.89 per cent under the MFI model. The programme
 74

outreach increases to 59.21 million by March 2008. But the data adjusted for the overlap
shows that 54.87 million individuals are covered under the microfinance programme by
March 2008.

Table 3.5: Microfinance Outreach in India (in millions)

Number of People Covered Growth in

Type of Model
Up to March 2007 Up to March 2008 Outreach

38.02 45.20
SHG-BLM 7.18
(79.11) (76.34)
10.04 14.01
MFI Model 3.97
(20.89) (23.66)
48.06 59.21
Total 11.15
(100) (100)
Total Adjusted
44.97 54.87 9.90
for Overlap
Source: Srinivasan (2009)
Note: The figures given in parentheses indicate percentages of people covered under microfinance
programme.

Table 3.6 shows the region-wise spread of microfinance programme under SHG-
BLM and MFI models. The table shows that up to March 2008 approximately 45 million
people are provided with microfinance under SHG- BLM and 14 million under the MFI
model. Perusal of table shows that the programme is mainly concentrated in the southern
region. Approximately 48 per cent and 55 per cent of the people who are provided
microfinance under these two models belong to the southern region of India. However
the spread of the programme is limited in the north and north-eastern region. Out of the
total microfinance outreach in India approximately 5 per cent and 3 per cent of the
clients belong to north and north-eastern region, respectively. The spread of the
microfinance programme is shown separately for the Punjab state. The table shows that
the programme outreach is very limited in Punjab and there are just 0.2 per cent of the
total microfinance clients of India. The table also shows that in Punjab the microfinance
programme is expanded only through the SHG-BLM and there are no MFI clients.
Therefore, the present study is concentrated mainly on the SHG bank linkage programme
of Punjab.
 75

Table 3.6: Region-wise Spread of Microfinance Programme (up to 2008)

Cumulative Number of Number of Total
S.
Region Number of SHG MFI Microfinance
No.
SHGs Members Clients Clients
1. Northern 2,30,740 29,99,620 1,13,102 31,12,722
Region (6.63) (6.63) (0.80) (5.25)
Punjab 8965 (0.26) 116545 (0.26) Nil 116545 (0.20)
2. North Eastern 1,19,857 15,58,141 1,75,589 17,33,730
Region (3.45) (3.45) (1.25) (2.92)
3. 6,72,201 87,38,613 34,75,622 1,22,14,235
Eastern Region
(19.33) (19.33) (24.70) (20.60)
4. 4,05,707 52,74,191 10,14,202 62,88,393
Central Region
(11.67) (11.67) (7.21) (10.61)
5. 3,74,561 48,69,293 15,85,681 64,54,974
Western Region
(10.77) (10.77) (11.27) (10.89)
6. Southern 16,74,811 2,17,72,543 77,04,449 2,94,76,992
Region (48.15) (48.15) (54.77) (49.73)
34,77,965 4,52,13,545 1,40,68,645 5,92,82,190
Total
(100) (100) (100) (100)
Source: Srinivasan (2009)
Note: The figures given in parentheses indicate percentages of SHGs and microfinance members.

3.7 Progress of SHG-Bank Linkage Programme in India

Initially, there was a slow progress in the programme up to 1999 as only 32,995
groups were credit linked during the period 1992 to 1999. Since then the programme is
growing rapidly. Table 3.7 shows the total number of SHGs credit linked with banks and
the bank loan disbursed to these groups from 1992-93 to 2007-08. The table shows that
255 SHGs were given Rs. 2.9 million of bank loans during the period 1992-93. In 1999-
2000 the number increased to 1,14,775 with bank loans of Rs. 1,929.8 million. This
cumulative number of credit linked SHGs has increased to about 34.78 lakh and the
amount of bank loan given to these groups increased to Rs.2,22,680 million up to March
2008. Microfinance through SHGs has reached to such a position in India that it is
acknowledged as the biggest microfinance programme in the world. The data reveals that
though the cumulative number of SHGs provided with bank loans increases but the rate
of growth is relatively slow as compared to the previous years. The table also shows that
the rate of growth of SHGs and bank loans disbursed to them is negative during the year
 76

2007-08. One of the reasons may be that the programme has rapidly expanded in the
southern states of India and has reached a saturation point in some of these states.

Table 3.7: Number of SHGs linked to Banks in India (1992-93 to 2007-08)

New SHGs Financed by Banks Bank loans (in Rs. Milllion)
Year Number Growth Cumulative Amount Growth Cumulative
% Number % Amount
1992-93 255 - 255 2.90 - 2.9

1993-94 365 43 620 3.60 24 6.5

1994-95 1,502 312 2,122 18.00 400 24.5

1995-96 2,635 75 4,757 36.10 101 60.6

1996-97 3,841 46 8,598 57.80 60 118.4

1997-98 5,719 49 14,317 119.20 106 237.6

1998-99 18,678 332 32,995 333.10 179 570.7

1999-2000 81,780 231 1,14,775 1,359.10 308 1,929.8

2000-01 1,49,050 82 2,63,825 2,879.20 113 4,809.0

2001-02 1,97,653 33 4,61,478 5,454.00 89 10,263.0

2002-03 2,55,882 29 7,17,360 10,224.00 87 20,487.0

2003-04 3,61,731 41 10,79,091 18,555.00 81 39,042.0

2004-05 5,39,385 49 16,18,476 29,938.00 61 68,980.0

2005-06 6,20,089 15 22,38,565 44,990.00 50 1,13,970.0

2006-07 6,86,408 11 29,24,973 66,437.00 48 1,80,407.0

2007-08 5,52,992 -19 34,77,965 42,273.00 -36 2,22,680.0

Source: NABARD Annual Reports.

Figure 3.2 shows the progress of SHG-BLP in India from 1999 to 2008. A least
square trend line is used to graphically represent the trend of total number of SHGs under
this model. The linear trend line indicates that there is steady increase in the number of
credit linked SHGs over a period of 10 years. The value of R2 is 0.9155, which
represents a good fit of the line to the data.
 77

No. of Credit Linked SHGs Linear Trend Line

2
R = 0.9155
800
700
No. of SHGs (in '000) 600
500
400
300
200
100
0
1992-99

1999-00

2000-01

2001-02

2002-03

2003-04

2004-05

2005-06

2006-07

2007-08
Year

Figure 3.2: Progress of SHG-Bank Linkage Programme in India

3.7.1 Regional Spread of SHG-BLP

Table 3.8 shows the spread of SHG bank linkage programme in different six
regions of India, i.e. northern region, north-eastern, eastern, central, western and southern
region. Northern region includes the states of Punjab, Haryana, Himachal Pradesh,
Jammu & Kashmir and Rajasthan. North-eastern region covers Assam, Sikkim, Tripura,
Meghalaya, Arunachal Pradesh, Mizoram and Nagaland states. Eastern region covers
Bihar, West Bengal, Jharkhand, Orissa, Andaman & Nicobar Islands. Central region
includes Madhya Pradesh, Chhattisgarh, Uttaranchal and Uttar Pradesh. Western region
includes Goa, Gujarat and Maharashtra states. Southern region includes Andhra Pradesh,
Karnataka, Kerala, Tamil Nadu and U.T. of Pondicherry.
The table clearly reveals that the SHGs are mainly concentrated in southern
region. The main reason of this is the prevalence of voluntary organisations in the spread
of linkage banking programme. The largest MFIs of India, such as SHARE, Spandana,
CDF, MYRADA, SKS and PREM are also concentrated in southern region. The spread
of microfinance programme is almost negligible in the north-eastern states. But the table
shows that the microfinance programme is gradually developing in all the regions. The
 78

share of southern states in the number of groups linked to the banks is declining, while
the share of other regions is improving. The table further provides that over the time
period from 2001-08 there is a positive growth of the SHG-BLP in all the regions, except
the southern part. The share of southern states in the total credit linked SHGs is 48.2 per
cent in 2008 as compared to 71.2 per cent in 2001. In the year 2008, the share of northern
region in the total credit linked SHGs was 6.6 per cent, share of north-eastern region was
3.4 per cent and the share of eastern, central and western regions was 19.3, 11.7 and 10.8
per cent respectively.

Table 3.8: Region-wise Cumulative Growth in SHGs Linked to Banks

Cumulative Number of SHGs Linked to Banks
Region March March March March March March March March
2001 2002 2003 2004 2005 2006 2007 2008
Northern 9,012 19,321 34,923 52,396 86,018 1,33,097 1,82,018 2,30,740
Region (3.4) (4.2) (4.9) (4.9) (5.3) (5.9) (6.2) (6.6)

North-
477 1,490 4,069 12,278 34,238 62,517 91,754 1,19,857
eastern
(0.2) (0.3) (0.6) (1.1) (2.1) (2.8) (3.1) (3.4)
Region

Eastern 22,252 45,892 90,893 1,58,237 2,65,628 3,94,351 5,25,881 6,72,289

Region (8.4) (9.9) (12.7) (14.7) (16.4) (17.6) (18.0) (19.3)

Central 28,851 48,181 81,583 1,27,009 1,97,365 2,67,915 3,32,729 4,05,707

Region (10.9) (10.4) (11.4) (11.8) (12.2) (12.0) (11.4) (11.7)

Western 15,543 29,318 42,180 54,815 96,266 1,66,254 2,70,447 3,74,561

Region (5.9) (6.4) (5.9) (5.1) (6.0) (7.4) (9.2) (10.8)

Southern 1,87,690 3,17,276 4,63,712 6,74,356 9,38,941 12,14,431 15,22,144 16,74,811

Region (71.2) (68.8) (64.5) (62.4) (58.0) (54.3) (52.1) (48.2)

2,63,825 4,61,478 7,17,360 10,79,061 16,18,456 22,38,565 29,24,973 34,77,965

All India
(100) (100) (100) (100) (100) (100) (100) (100)

Source: NABARD Annual Reports

Note: The figures given in parentheses indicate percentages of credit linked SHGs.

Figure 3.3 exhibits the percentage of credit linked SHGs for different regions
over three time periods, i.e. 2002, 2005 and 2008. The figure highlights that the
 79

percentage share of SHGs in all the regions is almost increasing, while the percentage
share of the southern part is decreasing.

Mar-02 Mar-05 Mar-08

Percentage Share of SHGs 80
70
60
50
40
30
20
10
0
Northern N-Eastern Eastren Central Western Southren
Region

Figure 3.3: Region-wise Spread of SHG-Bank Linkage Programme

3.7.2 Role of Banks

Various public and private sector banks such as commercial banks, RRBs and co-
operative banks are involved in providing microfinance to the SHGs. Table 3.9 shows
the share of these agencies in the total credit linked SHGs and in the total loans
disbursed.

Table 3.9: Agency-wise Number of SHGs Financed

Up to March 2006 Up to March 2007
Agency No. of SHGs Bank Loan No. of SHGs Bank Loan
Financed (in Rs. Million) Financed (in Rs. Million)
1. Commercial 11,88,040 69,874.5 15,94,787 1,13,975.6
Banks (53) (61) (55) (63)
7,40,024 33,221.5 9,10,807 50,310.1
2. RRBs
(33) (29) (31) (28)
3. Co-operative 3,10,501 10,879.5 4,19,379 16,121.7
Banks (14) (10) (14) (09)
22,38,565 1,13,975.5 29,24,973 1,80,407.4
Total
(100) (100) (100) (100)
Source: NABARD Annual Reports.
Note: The figures given in parentheses indicate percentages of SHGs and bank loans.
 80

The table reveals that 55 per cent of the total credit linked SHGs received loans
from commercial banks, 31 per cent from RRBs and the remaining 14 per cent from the
co-operative banks up to March 2007. Commercial banks contributed 63 per cent of the
total amount of loans disbursed to the SHGs, while RRBs and co-operative banks shared
approximately 28 per cent and 9 per cent of the total loans amount.
The SHG bank linkage has become a part of business for all the 27 public sector
and 20 private sector commercial banks. NABARD data of SHG-BLP up to March 2006
shows that State Bank of India credit linked the highest number of SHGs (3,92,494),
followed by Andhra Bank (1,13,466) and Indian Bank (96,460), (not shown in the table).
The regional rural banks also finance SHGs in a significant way. All the 159 RRBs in the
country are participating in the SHG-BLP. Maximum number of SHGs have been linked
by Pandiyan Grameen Bank in Tamil Nadu and Pondicherry (45,672) followed by
Srivishakha Grameen Bank (35,875) and Nagarjuna Grameen Bank (27,879) both in
Andhra Pradesh. Up to March 2006, as many as 337 central co-operative banks were
involved in SHG-BLP. Maximum number of SHGs have been linked by Hooghly Co-
operative Bank (18,015) in West Bengal followed by South Canara Co-operative Bank
(10,851) and Hassan Co-operative Bank (10,389) both in Karnataka.
3.7.3 Recovery Status of Bank Loans
The success of any scheme is gauged from the criteria of the recovery status of
bank loans. If the members of the scheme are net gainers then they will like to return
loans at regular intervals in order to gain more funds. Table 3.10 shows the recovery
status of the banks loans given to the SHGs as reported by 290 and 329 commercial
banks, RRBs and co-operative banks by the end of March 2007 and 2008 respectively.
The data up to March 2008 clearly shows that 46.5 per cent of the banks reported above
95 per cent loan recovery rate. Approximately, twenty-one per cent of the banks showed
the loan recovery rate between 80 to 94 per cent. About twenty-three per cent of the
banks recovered 50 to 79 per cent of the loans given to SHGs under the microfinance
programme and just 8.8 per cent of the banks reported that the loan recovery rate is less
than 50 per cent. Therefore, it can be said that recovery of loans given under
microfinance programme is very good, which is quite essential for programme
sustainability. It may also be interpreted that the microfinance scheme is working well
for both SHG members as well as the funding institutions.
 81

Table 3.10: Recovery Status of Bank Loans Given to SHGs

(For the Years 2007 and 2008)
Agency Year No. of Banks Recovery Status of Bank Loans Given to
Reported SHGs
Recovery 95 % and Less than
80-94 % 50-79 %
Data Above 50 %
36 11 15 10
2007 -
Commercial (100) (30.6) (41.7) (27.7)
Banks 33 18 06 09
2008 -
(100) (54.5) (18.2) (27.3)
73 20 35 13 05
2007
Regional (100) (27.4) (47.9) (17.9) (6.8)
Rural Banks 70 22 25 17 06
2008
(100) (31.4) (35.7) (24.3) (8.6)
181 76 55 35 15
2007
Co-operative (100) (42.0) (30.4) (19.3) (8.3)
Banks 226 113 39 51 23
2008
(100) (30.0) (17.3) (22.6) (10.2)
290 107 105 58 20
2007
(100) (36.9) (36.2) (20.0) (6.9)
Total
329 153 70 77 29
2008
(100) (46.5) (21.3) (23.4) (8.8)
Source: Srinivasan (2009) and Reserve Bank of India (2008)
Note: The figures given in parentheses indicate percentages of banks.

3.8 Microfinance in Punjab

Microfinance programme in Punjab is relatively a new concept. The programme
was started in India in the year 1992 but in Punjab it was started in 1998-99 and it gained
momentum only after the year 2000. In Punjab, microfinance is provided only through
the SHG-BLP. SHGs are formed by bank officials, aanganwadi workers, social workers
and by the NGOs. These groups are provided loans by the formal financial institutions.
However, the progress of this programme is very limited in Punjab as compared to many
other states in India.
3.8.1 Microfinance Status and Outreach in Punjab
Table 3.11 provides the total number of credit linked SHGs in Punjab. It is
evident that up to the year 2000, there were only 19 credit linked SHGs in Punjab. But
after this, there is a steady progress of the programme. Up to the year 2005, 3,091 SHGs
were provided approximately Rs. 146 million of bank loans. The number of credit linked
SHGs increased to 8,965 with the bank loan of Rs. 620 million up to March 2008. The
table also shows the bank loan disbursed per SHG. The loan amount per group was Rs.
69,158 in the year 2008 showing a constant increase during the period 2001 to 2008.
 82

Table 3.11: Number of SHGs Linked to Banks in Punjab

Cumulative Cumulative Banks Loans
Year Number of Bank Loans per SHG
SHGs (in Rs. Million) (in Rs.)
Up to March 1999 01 0.04 40,000
2000 19 1.02 53,684
2001 90 2.65 29,444
2003 842 40.00 47,506
2005 3,091 145.76 47,156
2006 4,561 238.86 52,370
2007 6,454 356.60 55,253
2008 8,965 620.00 69,158
Source: NABARD Data

The district-wise detail of credit linked SHGs up to March 2006 is shown in

Table 3.12. The table shows that the districts with highest number of SHGs are:
Jalandhar, Fatehgarh Sahib and Hoshiarpur. However, the district-wise disbursement of
loan is the highest in Fatehgarh Sahib, Faridkot and Jalandhar districts.

Table 3.12: District-wise Credit Linked SHGs in Punjab (up to March 2006)

S. No. Name of the Number of Credit Bank Loan

District Linked SHGs (in Rs. Million)
1. Amritsar 370 22.77
2. Bathinda 184 5.88
3. Faridkot 375 25.14
4. Fatehgarh Sahib 584 30.87
5. Ferozepur 122 3.64
6. Gurdaspur 155 12.00
7. Hoshiarpur 492 20.29
8. Jalandhar 595 25.04
9. Kapurthala 190 12.58
10. Ludhiana 130 6.77
11. Mansa 54 3.22
12. Moga 265 22.55
13. Muktsar 94 3.92
14. Nawanshahr 234 8.33
15. Patiala 184 9.72
16. Ropar 340 18.86
17. Sangrur 193 7.31
Total 4,561 238.86
Source: NABARD Annual Reports.
 83

As discussed earlier, there are three different microfinance delivery models in

SHG-BLM. Table 3.13 shows the number of SHGs and total amount of loans financed
under different bank linkage models in Punjab in 2006. The perusal of table shows that
similar to India, Model II of SHG-BLP has a major share (86 per cent) in credit linked
SHGs of Punjab. It is found that 13 per cent of the SHGs are formed under Model I,
whereas just 1 per cent of the total credit linked groups are formed under Model III.
Total percentage shares of bank loans disbursed among the SHG members of Models I,
II and III are 13, 86 and 1 per cent respectively.

Table 3.13: Model-wise Credit Linked SHGs in Punjab

(Up to March 2006)
SHG Bank Number of SHGs Bank Loans
Linkage Model (in Rs. Million)
589 30.63
Model I
(13) (13)
3,945 206.24
Model II
(86) (86)
27 1.99
Model III
(01) (01)
4,561 238.86
Total
(100) (100)
Source: NABARD Annual Reports.
Note: The figures given in parentheses indicate percentages of SHGs and bank loans.

The various institutions which provide finance through SHG-BLP in Punjab are
commercial, regional rural and co-operative banks. Table 3.14 shows the share of
different financial institutions in financing the SHGs in Punjab.

Table 3.14: Agency-wise Number of SHGs Financed

Up to March 2006 Up to March 2007
Agency Number Bank Loans Number Bank Loans
of SHGs (in Rs. Million) of SHGs (in Rs. Million)
Commercial 2,301 120.59 3,596 196.15
Banks (51) (51) (56) (55)
Regional 560 33.61 805 48.39
Rural Banks (12) (14) (12) (14)
Co-operative 1,700 84.66 2,053 112.06
Banks (37) (35) (32) (31)
4,561 238.86 6,454 356.60
Total
(100) (100) (100) (100)
Source: NABARD Annual Reports.
Note: The figures given in parentheses indicate percentages of SHGs and bank loans.
 84

It is found that up to March 2006, 51 per cent of the total credit linked groups
were provided finance through commercial banks, 12 per cent through RRBs, and 37 per
cent through co-operative banks. The share of commercial banks in the total amount of
loan disbursed in Punjab is 51 per cent as compared to 14 per cent and 35 per cent of
RRBs and co-operative banks respectively. In 2007, 56 per cent of the total SHGs were
financed by commercial banks and the loans given to these SHGs were 55 per cent of the
total loans up to March 2007. RRBs and co-operative banks financed 12 per cent and 32
per cent of the total credit linked SHGs with 14 per cent and 31 per cent share in the total
amount of loans given up to March 2007.
NABARD data up to March 2006 shows that in Punjab three RRBs, Faridkot-
Bathinda Grameen Bank, Malwa Grameen Bank and Punjab Grameen Bank are involved
in financing SHGs. Out of total 560 credit linked SHGs, maximum number of SHGs
have been linked to Punjab Grameen Bank (407) followed by Malwa Grameen Bank
(110) and Faridkot-Bathinda Grameen Bank (43) (not shown in the table). On the other
hand, nineteen co-operative banks are involved in financing the SHGs and they have
linked total 1,700 SHGs up to March 2006. Out of these 1,700 groups the maximum
number of groups (345) have been financed by co-operative bank of Fatehgarh Sahib
followed by Faridkot (302) and Jalandhar (215).
3.8.2 Penetration of Microfinance in Punjab
The present study also analyses the progress of the microfinance programme in
Punjab vis-à-vis India. For this purpose, a Microfinance Penetration Index (MPI) and a
Microfinance Poverty Penetration Index (MPPI) have been calculated. MPI measures the
population outreach and MPPI measures the poverty outreach of microfinance in the
state in comparison to the whole country. MPI is calculated by dividing the percentage
share of the state in the total microfinance outreach in India with the percentage share of
the state in the total population of India. MPPI is calculated by dividing the percentage
share of the state in total microfinance outreach with the percentage share of the poor
population. If the value of index is equal to 1, it indicates that the microfinance outreach
is proportional to the population and poverty outreach in the country. But the score less
than 1, shows the poorer performance of the state in the population and poverty outreach.
Table 3.15 shows that the calculated values of MPI and MPPI for Punjab are 0.09 and
0.28 respectively. These low values show that in Punjab the penetration of microfinance
 85

programme is very less in terms of population outreach as well as poverty outreach as

compared to the country as a whole.

Table 3.15: Calculation of MPI and MPPI for Punjab

Particulars India Punjab
Number of People Covered Under
2,92,82,190 1,16,545
Microfinance up to March 2008
Percentage Share of Microfinance Coverage (I) 100 0.20
Total Population ('000) 11,01,318 25,839
Percentage Share of Population (II) 100 2.35
Number of Poor People (Lakh) 3,017 21.63
Percentage Share of Poor Population (III) 100 0.72
Value of MPI (I/II) 1 0.09
Value of MPPI (I/III) 1 0.28
Source: Calculated on the basis of secondary data up to March 2008.

Table 3.16 shows the ranking of some of the states on the basis of MPI and
MPPI. The table shows that Andhra Pradesh, Tamil Nadu, Karnataka, Kerala, Orissa and
Himachal Pradesh find a place among the top 5, while the states such as Jammu &
Kashmir, Punjab, Haryana, Bihar, Gujarat, Madhya Pradesh and Jharkhand have very
low penetration of microfinance with the index score being 0.35 or less. Therefore, there
is a need for some innovative measures to be undertaken to enhance the coverage of
microfinance programme in these states.

Table 3.16: Ranking of Select States Based on MPI and MPPI

Name of the State MPI Name of the State MPPI
Top 5
Andhra Pradesh 3.03 Andhra Pradesh 5.27
Orissa 2.68 Himachal Pradesh 3.33
Tamilnadu 2.18 Tamilnadu 2.66
Karnataka 2.15 Karnataka 2.37
Kerala 1.29 Kerala 2.36
Last 5
Jammu & Kashmir 0.08 Bihar 0.20
Punjab 0.09 Haryana 0.26
Haryana 0.13 Madhya Pradesh 0.27
Bihar 0.30 Punjab 0.28
Gujarat 0.35 Jharkhand 0.29
Source: Calculated on the basis of secondary data up to March 2008.
 86

Section-II

3.9 Problems of Microfinance Programme in India

No doubt, microfinance programme has shown impressive achievements, but a
number of questions arise: Did this programme reach the underprivileged? Whether
everyone in need of microfinance intervention had been reached by any of the agencies?
Even if everyone had been reached, did they get the required quantum of assistance to
have sustainability? These questions are still very inconvenient to be answered because
there are certain problems associated with this programme. Some of the main problems
have been discussed in the following paragraphs.
3.9.1 Deserving Poor are Still not Reached
The microfinance delivery models are not exclusively focused on those who are
below the poverty line or very poor. Though the programme is spreading rapidly but with
a slow progress in targeting the bottom poor households. About 50 per cent of SHG
members and only 30 per cent of MFI members are estimated to be below the poverty
line. According to Ghate (2008), approximately 75 million households in India are poor
and about 22 per cent of these poor households (i.e. 16.5 million) are currently receiving
microfinance services. The present study also shows that just 19 per cent of the
programme participants were BPL at the time of joining microfinance programme.
Therefore, it can be said that substantial groups of poor population have been excluded
from availing the benefits of the programme. It may be due to a variety of reasons on
both the sides, i.e. institutional and borrower.
The SHG-BLP has no explicit social or economic benchmarks for inclusion of
members in the groups to be credit linked. Lack of specific benchmarks for group
membership lead to inadequate poverty targeting. It is also found that the microfinance
promoting institutions are also biased while selecting the programme members. In order
to run the groups successively and to achieve higher repayment rates, they generally
select the non-poor people as programme beneficiaries. A study by Hulme and Mosley
(1996) also shows that the staff members of microfinance institutions prefer to exclude
the core poor since lending to them is seen as extremely risky. The study also finds that
the core poor are often not accepted in group lending programmes by other group
 87

members because they are seen as a bad credit risk. Kirkpatrick & Maimbo (2002) and
Mosley (2001) also found various organisational problems, such as saving requirements,
the minimum amount of the loan that needs to be accepted etc. which restrict the poor
people to join the microfinance programme. Many critics concluded that microfinance
does not reach the poorest of the poor (Scully, 2004), or that the poorest are deliberately
excluded from microfinance programmes (Simanowitz, 2001).
In spite of the various institutional barriers, various psychological problems
relating to the poor people restrict them to join the programme. The extreme poor often
lack self-confidence so they hesitate to join a group where they have to deal with the
other group members, bank officials and other promoting institutions. The core poor are
generally too risk averse to borrow for investment in the future. They will therefore
benefit only to a very limited extent from microfinance schemes.
3.9.2 Regional Disparity
It has been observed that the microfinance programme is mainly run by formal
financial institutions with the help of SHGs. As a result, microfinance programme is
progressing in those areas of the country where there is tremendous growth of formal
financial institutions. Microfinance institutions were expected to reach those areas where
the formal banking system failed to reach and the poor people have to depend on the
money-lenders in order to meet their financial requirements. But actually, many big
MFIs are activate in those states where the banking network is very strong. In the
southern states, such as Andhra Pradesh, Tamil Nadu, Karnataka and Kerala, the spread
of SHG bank linkage programme as well as the MFI programme is very large. But the
north and north-eastern region is almost neglected. Table 3.17 shows that in the southern
India the spread of commercial bank branch network is the highest (27.94 per cent) and
these states cover 48.15 per cent of the country’s total SHG members and 54.77 per cent
of the MFI members. So, approximately 50 per cent of the total microfinance programme
beneficiaries belong to these four south Indian states. In contrast to this, in the north-
eastern region of India, bank branch network is very limited and the coverage of
microfinance programme is just 2.93 per cent. The table also shows the region-wise
branch network and the microfinance members covered under SHG-Bank Linkage and
MFI model in these different regions. The table reveals that the microfinance activity had
expanded in those regions where the banking network is strong.
 88

Table 3.17: Branch Network, SHGs and Microfinance Delivered (As on 31.03.08)
No. of Number of Members
S.
Region Bank SHG MFI
No. Total
Branches Members Members
1. North-eastern Region 2,051 15,58,141 1,75,589 17,33,730
(2.67) (3.45) (1.25) (2.93)
2. Western Region 11,839 48,69,293 15,85,681 64,54,974
(Gujarat, Maharashtra, Goa) (15.40) (10.77) (11.27) (10.89)
Eastern Region
3. (Orissa, West Bengal, Bihar, 13,017 87,38,613 34,75,622 1,22,14,235
(16.93) (19.33) (24.70) (20.60)
Jharkhand, A&N)
Northern Region
4. (HP, Rajasthan, Punjab, 13,175 29,99,620 1,13,102 31,12,722
(17.13) (6.63) (0.80) (5.25)
Haryana, J&K, Delhi)
Central Region
5. (UP, MP, Chattisgarh, 15,328 52,74,191 10,14,202 62,88,393
(19.93) (11.67) (7.21) (10.61)
Uttarakhand)
6. Southern Region(AP, Kerala, 21,481 2,17,72,543 77,04,449 2,94,76,992
TN, Karnataka, Pondicherry) (27.94) (48.15) (54.77) (49.72)
Total 76,891 4,52,13,545 1,40,68,645 5,92,82,190
(100) (100) (100) (100)
Source: Srinivasan (2009) and Report on the Working of RBI [3].
Note: The figures given in parentheses indicate percentages.

Figure 3.4 shows the region-wise percentages and trend lines related to bank
branch network and the microfinance programme outreach under SHG bank linkage and
MFI model.

Bank Branches SHG Members MFI Members

Bank Branch Trend Line SHG Members Trend Line MFI Members Trend Line

60
50
Percentage

40
30
20
10
0
North- Western Eastern Northern Central Southern
Eastern
Region

Figure 3.4: Region-wise Bank Branch Network and Outreach of Microfinance

 89

The figure highlights that all the three trend lines are upward sloping which
indicate region-wise positive trend of bank branch network as well as the microfinance
programme outreach under both the models. Karl Pearson coefficient of correlation is
calculated to find out the relationship between the bank branch network and the
microfinance programme outreach. The value of correlation coefficient between bank
branch network and microfinance programme outreach under SHG-Bank Linkage and
MFI model is 0.788 and 0.729 respectively. The positive and high values of these
correlation coefficients show that spread of microfinance programme is highly positively
correlated with the spread of bank branch network.
3.9.3 Limited Spread in Poorer States
The coverage of microfinance programme is comparatively low in the states
which have a larger share of the poor. Table 3.18 shows the seven poorest states of India
and the microfinance outreach in these states.

Table 3.18: Microfinance Outreach in Seven Poorest States of India

Up to 2006 Up to 2007 Up to 2008
Poverty
No. of No. of No. of
S. Top Seven % Bank Bank Bank
Credit Credit Credit
No. Poor States (2004- Loans Loans Loans
05) Linked Linked Linked
(Million) (Million) (Million)
SHGs SHGs SHGs
1,80,896 4,754.65 2,34,451 8,028.92 3,07,591 11,948
1. Orissa 46.4
(8.08) (4.17) (8.02) (4.45) (8.84) (5.38)
46,221 1,052.19 12,339 2,012.47 93,410 3,051
2. Bihar 41.4
(2.06) (0.92) (2.47) (1.12) (2.69) (1.37)
31,291 337.81 41,703 556.25 60,763 1,413
3. Chhattisgarh 40.9
(1.40) (0.30) (1.43) (0.31) (1.75) (0.64)
30,819 1,114.60 37,317 1,506.56 42,605 1,931
4. Jharkhand 40.3
(1.38) (0.98) (1.28) (0.84) (1.22) (0.87)
17,588 891.86 21,527 1,274.75 24,679 1,642
5. Uttaranchal 39.6
(0.79) (0.78) (0.74) (0.71) (0.71) (0.74)
Madhya 57,125 1,666.86 70,912 2,166.09 83,336 3,040
6. 38.3
Pradesh (2.55) (2.15) (2.42) (1.20) (2.40) (1.37)
1,61,911 5,153.54 1,98,587 6,932.02 2,36,929 8,913
7. Uttar Pradesh 32.8
(7.23) (4.52) (6.79) (3.84) (6.81) (4.00)
Total 5,25,851 14,971.51 6,76,836 22,477.06 8,49,313 31,938
54.5 (23.49) (13.14) (23.14) (12.46) (24.42) (14.37)
(Seven states)
22,38,565 1,13,975.43 29,24,973 1,80,407.42 34,77,965 2,22,265
Total in India (100) (100) (100) (100) (100) (100)
Source: NABARD Data.
Note: The figures given in parentheses indicate percentages of SHGs and bank loans.
 90

Unfortunately, these seven states, i.e. Orissa, Bihar, Chhattisgarh, Jharkhand,

Uttaranchal, Madhya Pradesh (MP) and Uttar Pradesh (UP) are lagging behind in
microfinance programme. These states hold approximately 54.5 per cent of the total poor
in India and have only 24.42 per cent of the total SHGs of India. The SHGs of these
seven states have received Rs. 31,938 million bank loans which is only 14.37 per cent of
the total loans disbursed to the SHGs in India up to 2008. If the number of MFI members
are also included along with the SHG members, then the share of these seven states
further reduces to just 23.60 per cent of total microfinance outreach in India (not shown
in the table).
On the other hand, Table 3.19 shows that the number of poor people in three
southern states, i.e. Andhra Pradesh (AP), Tamil Nadu (TN) and Karnataka is only 13.61
per cent of the total poor of the country. But 43.86 per cent of the total credit linked
SHGs in the country are concentrated in these three states. They have more than 66 per
cent of the total bank loans disbursed to SHGs in India. If the number of MFI members is
also included along with the SHG members then these three states have 45.78 per cent
share of total microfinance outreach in India (not shown in the table). The reasons for
this skewed distribution of microfinance programme may be the intense support
extended by the state governments, local culture and practice, and concentration of MFIs.

Table 3.19: Microfinance Outreach in Southern India

Up to 2006 Up to 2007 Up to 2008
Poverty
Top 3 States No. of No. of No. of
S. % Bank Bank Bank
in Providing Credit Credit Credit
No. (2004- Loans Loans Loans
Microfinance Linked Linked Linked
05) (Million) (Million) (Million)
SHGs SHGs SHGs
Andhra
1. 15.8 5,87,238 43,455.18 6,83,619 71,209.73 7,23,717 83,610
Pradesh

2. Tamil Nadu 22.5 3,12,778 27,121.87 4,00,477 38,106.35 4,54,975 42,803

3. Karnataka 25.0 2,24,928 9,927.53 3,17,636 18,091.42 3,46,636 22,172

Total 11,24,944 80,504.58 14,01,732 1,27,407.5 15,25,328 1,48,585

13.61
(Three states) (50.25) (70.63) (47.92) (70.62) (43.86) (66.85)

22,38,565 1,13,975.43 29,24,973 1,80,407.42 34,77,965 2,22,265

Total in India
(100) (100) (100) (100) (100) (100)
Source: NABARD Data.
Note: The figures given in parentheses indicate percentages of SHGs and bank loans.
 91

3.9.4 High Interest Rates

Affordability of loan is equally important to the access of financial services to the
poor. Economic fundamentals exhort that every borrower is interest sensitive and the
capacity of borrowing decreases with increase in interest rates. High interest rates may
prove to be counterproductive, and weaken the social and economic condition of poor
clients. The high interest rate charged by the MFIs from their poor clients is perceived as
exploitative. The interest rates are not well regulated for private MFIs as well as for
formal banking sector. However, there are certain self-regulated interest rates fixed by
intermediate and apex institutions. MFIs adopt different approaches for fixing the
interest rates or service charges on loans to members. A complete picture of the MFI
sector regarding the terms and conditions of providing loans and financial services to
their clients are not available. Although the interest rates of some MFIs are regulated but
they impose some charges like transaction costs, the cost of documents and some other
charges. This increases the cost of borrowing, and thus making it less attractive.
Normally, banking sector is charging 9 to 10 per cent interest rate per annum from the
SHG members, while MFIs charge comparatively higher interest rate which is generally
11 to 24 per cent per annum. But this interest rate varies significantly according to the
lending conditions and policy of the MFI. Table 3.20 shows interest rates charged by
some of the MFIs working in India.

Table 3.20: Interest Rate Charged by Some of MFIs Working in India

S. Name of MFI Purpose of Loan Interest Rate
No. (% p.a.)
1. SHARE Production /housing 15

2. Nari Nidhi Production 12

3. WWF Production 18

4. RDT Production/Consumption 24

5. Shantidhan Production/Consumption 13

6. MYRADA Production/Consumption 24-36

Production/Consumption 24-60
7. SPMS
and Marriage and 20
Source: Study by EDA Rural Systems, Gurgaon [4].
 92

Banks and MFIs extend reasons for charging high rates of interest. Banks lose
heavily in providing small loans to the poor. The banks do not want to make small loans
due to high transaction cost. For example, a Rs. 2,000 loan involves the same transaction
cost as a Rs. 1,00,000 loan. The wages of bank employees are much higher than that
under microfinance programme of MFIs. Therefore, banks prefer to give loans to MFIs
(classified as a priority sector lending), which they then lend to the poor. This raises
interest costs. On the other hand, many MFIs in India have small business size and the
transaction costs for handling small amounts of credits are also high. This increases the
cost of borrowings for the poor people. These institutions depend on borrowings from
commercial financial institutions and donors grant/equity. Moreover, these institutes are
not allowed to mobilise deposits from the public. This restriction coupled with
borrowings at a high rate make them helpless. Besides the higher cost of funds, the cost
of management / transaction costs are also high since the scale of operations poses a
limitation to bring any reduction. In view of the MFIs philosophy of delivering credit
almost at the doorstep combined with higher costs of funds as well as transaction costs,
many of the MFIs may not reach breakeven point if they charge less than 24 per cent.
According to some registered NBFCs like SKS [5] and Sulaxmi Finance Private Limited
[6]:
‘The field staff managers perform village surveys before entering a village,
conduct interviews with potential members, train members on credit discipline, travel to
villages by motorbike every week to collect interest and disburse loans, and follow-up to
ensure the loans are being used for their intended purpose. These personnel and
administration costs easily amount to 11 per cent of total cost structure. In addition, the
cost of lending from commercial banks is anywhere from 10-12 per cent. The
combination of this personnel/administration costs, the cost of lending, a 1-2 per cent
loan loss provision (due to default or writing off a loan), and 1-2 per cent profit used to
expand operations, translates to an interest that appears high’

Therefore, for their sustainability, MFIs tend to cover their costs by charging high
interest rates from the borrowers.
3.9.5 Low Depth of Outreach
Another problem faced by the microfinance programme is the depth of services
provided. Though the outreach of the programme is expanding, large number of people
are provided with microfinance services but the amount of loans is very small. The
average loans per member in both MFIs and SHGs are between Rs. 3,500 and 5,000
(Srinivasan, 2009). Table 3.21 shows the average value of loans per SHG member for
 93

various years. This amount is not sufficient to fulfil the financial needs of the poor
people. The duration of the loans is also short. The small loan size and short duration do
not enable most borrowers to invest it for productive purposes. They, generally, utilise
these small loans to ease their liquidity problems.

Table 3.21: Average Loan Size per Member in SHGs

Up to Up to Up to Up to Up to Up to
Particular March March March March March March
2003 2004 2005 2006 2007 2008
Total Amount of
Loans 20,487 39,042 68,980 1,13,970 1,80,407 2,22,265
(in Rs. Million)

Number of SHGs 7,17,360 10,79,091 16,18,476 22,38,565 29,24,973 34,77,965

Average Loan
Size per SHG 28,558.88 36,180.45 42,620.34 50,912.08 61,678.18 63,906.62
(in Rs.)
Average Loan
Size per member* 2,039.92 2,584.31 3,044.31 3,636.57 4,405.58 4,564.76
(in Rs.)
Source: NABARD Data.
* Average size of an SHG in India is 14 members.

3.9.6 Unregulated Microfinance Institutions

In India, micro finance is provided by a variety of institutions. These include
banks (including commercial banks, RRBs and co-operative banks), primary agricultural
credit societies and MFIs that include NBFCs, Section-25 companies, trusts and
societies. But only the banks and NBFCs fall under the regulatory purview of the
Reserve Bank of India. Other entities, e.g., MFIs are covered in varying degrees of
regulation under their respective State legislations. There is no single regulator for this
sector. As a result, MFIs are not required to follow some standard rules and are not
subject to minimum capital requirements and prudential norms. This has weakened their
management and governance, as they do not feel it mandatory to adopt some specific
systems, procedures and standards. Since MFIs are unregulated, one can not know about
their internal financial health. There is no specific code of conduct for the MFIs. It is not
uncommon to see many ‘not for profit’ MFIs transformed to fully commercial and for-
profit organisations. Also, many NGOs pursuing microfinance are in a stage of
transforming themselves into full-fledged MFIs. Many MFIs, basically promoted for
 94

taking care of the needs of the poor, are setting their development goals and business
interests. In recent past, some erring MFIs in Andhra Pradesh have been charged with
exploiting the poor with usurious interest rates and intimidating the borrowers by forced
loan recovery practices, the combined effect of which forced the debt-ridden poor to
suicide.
Therefore, there is a need for regulating the varied number of microfinance
providers which are influencing the lives of millions of poor people. The regulation
would, therefore, help in improving the growth of MFIs in an orderly approach.
According to Mahajan and Nagasri (1999) the need for regulation and supervision of
microfinance organisations arises from several considerations like protecting the interest
of small savers, ensuring proper terms of credit, instilling financial discipline and having
a proper reporting and supervision system. Regulation and supervision may ensure that
MFIs are run prudently and cases of poor people losing their money due to fraud or
incompetence are minimised.
3.9.7 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.
3.9.8 Binding of Saving, Meetings and Regular Payments
The uniqueness of the SHG-BLP is the fundamental requirements of the
programme, such as compulsory savings, group meetings, regular repayments etc. But
these requirements also lead to the exclusion of the core poor from joining the
 95

microfinance programme. Poor people who generally do not have a regular source of
income are required to save before getting a loan. These loans are to be repaid regularly
in fixed instalments. But due to their irregular and seasonal nature of jobs, poor people
face difficulties while repaying the loans. It is also found that the initial group loans are
utilised for essential non-productive purposes rather than for generating incomes which
leads to repayment difficulties. Weekly or fortnightly group meetings are made
mandatory, so, the rural poor people who generally earn their livelihood through
domestic labour and daily wage earning find it difficult to attend group meetings
regularly.

Section-III

3.10 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:
3.10.1 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
 96

programme, SHGs may be linked with the post offices for disbursement of credit to rural
poor by utilising the vast network of post offices in rural areas. NABARD has launched a
pilot project of this type in Tamil Nadu.
3.10.2 Reducing Regional Disparity
As discussed in the problems, the spread of microfinance programme is unequal
among various regions of India and there is limited spread in the poorer states. So, there
is ample scope to spread microfinance programme in the unreached areas including the
poorer states. However, taking a step in this direction NABARD has recently identified
13 states to scale up the microfinance programme in these states in order to reduce the
regional disparity. These priority states are Assam, Bihar, Jharkhand, Gujarat, Himachal
Pradesh, Maharashtra, Madhya Pradesh, Chhattisgarh, Orissa, Rajasthan, Uttar Pradesh,
Uttaranchal and West Bengal. These states accounted for 70 per cent of India's poor and
were not effectively reached by the microfinance programme. Special efforts by
NABARD resulted in an increase in the number of SHGs credit linked in these states
from 3,97,464 as on March 2004 to 17,64,856 as on March 2008 as shown in Table 3.22.
The growth rate in these states is higher as compared to the growth at national level but it
is not increasing as compared to the previous years. Therefore some other measures can
be taken to eradicate the regional disparities in the coming future.

Table 3.22: Growth of SHGs Credit Linked in 13 Priority States

Priority States National Level
Number of Growth in Number of Growth in
Year
Credit Linked Outreach Credit Linked Outreach
SHGs (%) SHGs (%)
Up to March
3,97,464 59 10,79,091 50
2004
2005 6,67,761 68 16,18,476 50

2006 10,05,272 51 22,38,565 38

2007 13,74,917 37 29,24,973 31

2008 17,64,856 28 34,77,965 19

Source: NABARD Data.

3.10.3 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.
3.10.4 Regulation of MFIs
Currently, various entities such as co-operative societies, mutual benefit societies
or mutually aided societies etc. are engaged in the activity of microfinance. They are
guided by different laws under which they are registered. Lack of a single regulatory
authority restricts the orderly growth of microfinance sector. Keeping in view all the
regulatory problems, the Government of India has proposed legislation and formulated a
bill for the development and regulation of microfinance sector. This bill is under
consideration of the Parliament. This bill will provide all the regulatory powers to
NABARD; and all the MFIs will come under a single formal statutory framework. In
case of any offence by microfinance organisations, the redressal mechanism and
settlement of disputes have also been discussed in this bill. The legislation, however, is
yet to be enacted.
3.10.5 Insurance Services
In India, the penetration of insurance services among rural poor people is very
limited and there is a great potential for the same. Moreover, poor are very much
vulnerable to the natural uncertainties and insurance is necessary for them. The network
used for microfinance programme can be used to tap the potential of insurance in rural
markets. Non-Government Organizations, Microfinance Institutions and Self-Help
Groups can be used as micro-insurance agents. They can offer target specific insurance
products at a relatively lower cost, for a lower coverage of amount. It may be envisaged
that micro-insurance would facilitate penetration of insurance to rural and remote areas.
However, some of the NGOs are providing accident, life and crop insurances in India but
such type of services need to be expanded.
3.10.6 Flexibility in the Programme
Some main features of the microfinance programme include compulsory savings,
regular group meetings, record maintenance etc. These bindings lead to the exclusion of
 98

core poor from joining the microfinance programme. Therefore, in order to expand the
outreach of the programme to the poorer people, there is a need to introduce more
flexible system such as the one adopted in Bangladesh, where even the beggars are
provided with micro-loans by the Grameen Bank. These beggars do not make any
compulsory saving and do not attend any group meeting. A Project in Orissa enables the
poor to save in kind and raise resources against such savings and provide access to self-
managed, participative food security system. Under this project, SHG members can save
and get credit both in cash and in kind depending on their convenience. Such flexibilities
in the microfinance programme may increase the access and affordability of the rural
poor.
3.10.7 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 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.

Notes

[1] Task Force was a group of senior government officials and prominent microfinance
practitioners. It was constituted by NABARD in 1999 to make a conceptual policy
framework for sustainable growth of microfinance in India.
[2] Microfinance Scenario in the Country, NABARD, Available at: http://www.nabard.org/
pdf/publications/reports/mF_Scenario_in_the_Country.pdf [Accessed on 12.10.2008].
 99

[3] Report on the Working of RBI, Available at: http://rbidocs.rbi.org.in/rdocs/Annual

Report/DOCs/38761.doc [Accessed on 22.01.2009].
[4] Microfinance Institutions Experiences and Services, NABARD, Available at: http://ww
w.nabard.org/pdf/publications/reports/mF_Institutions_Experiences_and_Services.pdf
[Accessed on 12.10.2008].
[5] SKS Microfinance, Available at: http://www.sksindia.com/faq.php [Accessed on 12.10.
2009].
[6] Sulaxmi Finance Private Limited, Available at: http://sulaxmi.com/index.php?option=
com_content&task=view&id=69&Itemid=114 [Accessed on 12.10.2008].

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