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Submitted in partial fulfilment of the requirements

For the award of the degree of Bachelor of Commerce (Honours)




(Head of Commerce Department) B.Com (honours) 5th Sem.

Roll No. : 5625274

Registration No.:1412030946


Batch: (2014-2017)

This is to certify that the report entitled “Microfinance and Small Scale
Entrepreneurs’’ is done by Sonam Soni under my supervision.




I, Sonam Soni a bonafide student of (honours) 5th Semester in

Maharishi Dayanand University, Rohtak would like to declare that the
report entitled “Microfinance and small entrepreneurs” submitted by me
in partial fulfilment of the requirements for the award of the Degree of (honours) is my original work.

The above project was performed under the guidance of Mr. Ajay Bansal.

I hereby declare that the information given is true to my knowledge.



Project plays an important role in providing knowledge to students. A

successful project can never be prepared by the single effort of the person to
whom project is assigned, but it also demand the help and guardianship of some
conversant person who helped the undersigned actively or passively in the
completion of a successful project . At the very outset, I wish to express my
thanks to one and all that helped me while completing my project and foremost
let me raise my heart to almighty God for helping me in various ways to
complete this project. I would express my sincere thanks to Mr. Ajay Bansal
(Head of Commerce Department) for giving me the opportunity to
participate in this interesting research project, that helped me gain insights
in the corporate world and who has been a source of guidance and support.
Last but not the least I place a deep sense of gratitude to my family members
and my friends who have been constant source of inspiration during the
preparation of this project work.


B.COM (Honours) 5th Semester


Cover page

1.Microfinance: ........................................................................................................................ 7
Introduction ............................................................................................................................. 7
Microfinance is a Tool to Alleviate Poverty .......................................................................... 8

2.Background: .......................................................................................................................... 8
Microfinance and poverty ............................................................................................... 8
Ways in Which Poor People Manage Their Money ........................................................... 9

3.Meaning of Small Scale Industries: ..................................................................................... 9

4.Financing small and medium size enterprises .............................................................. 11

5.(MFIs) in serving small enterprises.: ............................................................................... 11

6.MICROCREDIT ................................................................................................................. 16
The new challenges of microcredit ...................................................................................... 16

7.TOP MICROFINANCE COMPANIES IN India 2014 – 2015 List ............................ 20

8.Issues .................................................................................................................................... 21
9.Understanding the financial needs of small entrepreneurs ........................................... 23
10.Microfinance Standards and Principles.......................................................................... 24
11.Problem or challenges facing micro finance bank in financing SMEs ........................... 25

12..MICROFINANCE MEET THE NEEDS OF SMALL ENTERPRISES ........................................... 25
Credit to Rural Poor: .............................................................................................. 25
Poverty Alleviation: ................................................................................................ 26
Women Empowerment: .......................................................................................... 26
Economic Growth: .................................................................................................. 26
Mobilisation of Savings: .......................................................................................... 26
Development of Skills: ............................................................................................ 26
Mutual Help and Cooperation: ................................................................................ 26
Social Welfare: ....................................................................................................... 26
13.Impact and Criticism .................................................................................................. 28


(Recommendations & Suggestions)



Microfinance is a source of financial services for entrepreneurs and small businesses lacking
access to banking and related services. The two main mechanisms for the delivery of
financial services to such clients are: relationship-based banking for individual entrepreneurs
and small businesses; and group-based models, where several entrepreneurs come together to
apply for loans and other services as a group. In some regions, for example Southern Africa,
microfinance is used to describe the supply of financial services to low-income employees,
which is closer to the retail finance model prevalent in mainstream banking.

For some, microfinance is a movement whose object is "a world in which as many poor and
near-poor households as possible have permanent access to an appropriate range of high
quality financial services, including not just credit but also savings, insurance, and fund
transfers." Many of those who promote microfinance generally believe that such access will
help poor people out of poverty, including participants in the Microcredit Summit Campaign.
For others, microfinance is a way to promote economic development, employment and
growth through the support of micro-entrepreneurs and small businesses.

Microfinance is a broad category of services, which includes microcredit. Microcredit is

provision of credit services to poor clients. Microcredit is one of the aspects of microfinance
and the two are often confused. Critics may attack microcredit while referring to it
indiscriminately as either 'microcredit' or 'microfinance'. Due to the broad range of
microfinance services, it is difficult to assess impact, and very few studies have tried to assess
its full impact. Proponents often claim that microfinance lifts people out of poverty, but the
evidence is mixed. What it does do, however, is to enhance financial inclusion.

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

individuals, or groups who otherwise have no other access to financial services. Ultimately,
the goal of microfinance is to give low-income people an opportunity to become self-
sufficient by providing a way to save money, borrow money and get insurance.
Microfinance refers to loans, saving, insurance, transfer services and other financial products
targeted at low level clients. Microfinance in India is mainly provided through Self -Helf
Groups (SGHs), Microfinance Institutions (MFIs) and some other methodologies. The
network of many financial institutions like public and private sector commercial banks,
services to the poor people.
Micro financing is regarded as a tool for socio-economic up-liftmen in a developing country
like India. It is expected to play a significant role in poverty alleviation and development.

Microfinance is a Tool to Alleviate Poverty
For millions of people without access to traditional banking, the internet is a lot more than a
place to share the latest family photos. Just 10 percent of the global population has access to
traditional banking, according the Gates Foundation. To bridge the gap, microfinance
institutions step in. Microfinance entails loans of as little as $25 to unemployed or low-
income individuals or groups who would otherwise have no other means of gaining financial
services, providing low-income people with opportunities to become self-sufficient.

Microfinance and poverty
In developing economies and particularly in rural areas, many activities that would be
classified in the developed world as financial are not monetized: that is, money is not used to
carry them out. This is often the case when people need the services money can provide but
do not have dispensable funds required for those services, forcing them to revert to other
means of acquiring them. In their book The Poor and Their Money, Stuart Rutherford and
Sukhwinder Arora cite several types of needs:

 Lifecycle Needs: such as weddings, funerals, childbirth, education, home building,

widowhood and old age.
 Personal Emergencies: such as sickness, injury, unemployment, theft, harassment or
 Disasters: such as fires, floods, cyclones and man-made events like war or bulldozing
of dwellings.
 Investment Opportunities: expanding a business, buying land or equipment,
improving housing, securing a job, etc.

People find creative and often collaborative ways to meet these needs, primarily through
creating and exchanging different forms of non-cash value. Common substitutes for cash vary
from country to country but typically include livestock, grains, jewellery and precious metals.
As Marguerite Robinson describes in The Micro finance Revolution, the 1980s demonstrated
that "micro finance could provide large-scale outreach profitably," and in the 1990s, "micro
finance began to develop as an industry" (2001, p. 54). In the 2000s, the micro finance
industry's objective is to satisfy the unmet demand on a much larger scale, and to play a role
in reducing poverty. While much progress has been made in developing a viable, commercial
micro finance sector in the last few decades, several issues remain that need to be addressed
before the industry will be able to satisfy massive worldwide demand. The obstacles or
challenges to building a sound commercial micro finance industry include:

 Inappropriate donor subsidies

 Poor regulation and supervision of deposit-taking micro finance institutions (MFIs)
 Few MFIs that meet the needs for savings, remittances or insurance
 Limited management capacity in MFIs
 Institutional inefficiencies
 Need for more dissemination and adoption of rural, agricultural micro finance

Microfinance is the proper tool to reduce income inequality, allowing citizens from lower
socio-economical classes to participate in the economy. Moreover, its involvement has shown
to lead to a downward trend in income inequality (Hermes, 2014).

Ways in Which Poor People Manage Their Money

Rutherford argues that the basic problem that poor people face as money managers is to
gather a 'usefully large' amount of money. Building a new home may involve saving and
protecting diverse building materials for years until enough are available to proceed with
construction. Children’s schooling may be funded by buying chickens and raising them for
sale as needed for expenses, uniforms, bribes, etc. Because all the value is accumulated
before it is needed, this money management strategy is referred to as 'saving up'

Often, people don't have enough money when they face a need, so they borrow. A poor
family might borrow from relatives to buy land, from a moneylender to buy rice, or from a
microfinance institution to buy a sewing machine. Since these loans must be repaid by saving
after the cost is incurred, Rutherford calls this 'saving down'. Rutherford's point is that
microcredit is addressing only half the problem, and arguably the less important half: poor
people borrow to help them save and accumulate assets. Microcredit institutions should fund
their loans through savings accounts that help poor people manage their myriad risks

Most needs are met through a mix of saving and credit. A benchmark impact assessment of
Grameen Bank and two other large microfinance institutions in Bangladesh found that for
every $1 they were lending to clients to finance rural non-farm micro-enterprise, about $2.50
came from other sources, mostly their clients' savings. This parallels the experience in the
West, in which family businesses are funded mostly from savings, especially during start-up.

Recent studies have also shown that informal methods of saving are unsafe. For example, a
study by Wright and Mutesasira in Uganda concluded that "those with no option but to save
in the informal sector are almost bound to lose some money—probably around one quarter of
what they save there."

The work of Rutherford, Wright and others has caused practitioners to reconsider a key
aspect of the microcredit paradigm: that poor people get out of poverty by borrowing,
building microenterprises and increasing their income. The new paradigm places more
attention on the efforts of poor people to reduce their much vulnerability by keeping more of
what they earn and building up their assets. While they need loans, they may find it as useful
to borrow for consumption as for microenterprise. A safe, flexible place to save money and
withdraw it when needed is also essential for managing household and family risk.

Meaning of Small Scale Industries:

Small scale sector plays an important role in the development of every country. In a
developing country like India this sector is indispensable. Since independence small scale
units have made significant progress. After agriculture small scale sector provides highest
employment to the labour force. Since small units are widely dispersed, they provide jobs to
local residents. The small scale industries play a vital role in the growth of the country. It
contributes almost 40% of the gross industrial value added in the Indian economy. Small
businesses can also be classified according to other methods, such as annual revenues,
shipments, sales, assets, or by annual gross or net revenue or net profits, the number of
employees is one of the most widely used measures.

In the sphere of production this sector provides a major share in the industrial production of
the country. Large scale units are also dependent on small units for various needs. Ancillary
units which are very important for big units are mostly in small sector. Government of India
also encourages the development of small units through industrial and financial policies.

The basis of distinction between large-scale and small scale industries is generally the scale
of operations, i.e. the size, capital investment and the number of persons employed in the
industrial unit. The main Criteria used for this distinction is of capital investment.

All industrial units with a capital investment of not more than Rs. one crore (since February
17, 1999) in plant and machinery are treated as small-scale units. As per this classification all
industries with capital investment higher than specified for small-scale units are large scale
industries. The development of SSI is being given due importance by the government in order
to provide additional employment opportunities, to mobilize resources and capital equitable
distribution of national income and promote the industrialization.

No doubt, in India the SSIs with their dynamism, flexibility and innovative drive increasingly
focusing on improved production methods, penetrative marketing strategies and management
capabilities to sustain and strengthen their operations, their share is only 30.8 per cent of total
exports as on 2007-08 which are about 34.28 per cent of total exports as on 2000-01 and
reduced by 3.48 per cent from 2000-01 to 2007-08. From the Table-4, it is evident that the
share SSIs exports to total exports have been constantly reduced over the years i.e., from
2000-01 to 2007-08.

The term "entrepreneur" is often conflated with the term "small business" or used
interchangeably with this term. While most entrepreneurial ventures start out as a small
business, not all small businesses are entrepreneurial in the strict sense of the term. Many
small businesses are sole proprietor operations consisting solely of the owner, or they have a
small number of employees, and many of these small businesses offer an existing product,
process or service, and they do not aim at growth. In contrast, entrepreneurial ventures offer
an innovative product, process or service, and the entrepreneur typically aims to scale up the
company by adding employees, seeking international sales, and so on, a process which is
financed by venture capital and angel investments. Successful entrepreneurs have the ability
to lead a business in a positive direction by proper planning, to adapt to changing
environments and understand their own strengths and weakness.

In the current political and economic environment, jobs are at the center of political debates in both
developed and developing economies. There are many expectations that small enterprises1 can create
new jobs, although recent studies suggest that small enterprises contribute more to the employment
share in low-income economies than in high-income countries (Ayyagari, Demirgüç-Kunt, and
Maksimovic 2012). International development agencies want to promote and finance small enterprises
(see Box 1) while the G-20 is also committed to improving access to finance for small businesses in
developing countries.

Embedded in these efforts is the assumption that access to finance is a key constraint to small business
expansion. In this Focus Note, we examine the experience and role of microfinance institutions (MFIs)
in serving small enterprises.

Generally, there is no universally accepted definition of small business. Countless efforts have been
made to define small business, using yardsticks such as number of employees, sales volume, and value
of assets. Some of the frequently used yardsticks include the employee size, total assets, investment and
sales level. In spite of the differences, a lot of sources define small and medium enterprises to have
between 0 -250 employees. According to SBA a small business is a business that has less than 500
employees. SMEs are regarded as facilitators of economic growth and for enhancing development. Its
main benefit is its employment creation potential and low capital requirement. Countries use different
definitions for categorizing their small business sector. The definition of small businesses by the
Federal Government are those businesses with annual turnover of not more than N500, 000 and whose
capital investment is not more than N 2 million. In the UK, small businesses are defined for the purpose
of research as businesses with less than 500 employees and annual turnover of not more than £100
million. In China, SMEs are defined according to the industry classification based on workforce size,
annual returns and total assets of the company.

SMEs could range from food shops, kiosks, tailoring shops, poultry businesses and general enterprises
and so on. The effects of proper management of small businesses on an economy include business
survival, increased employment, increased profit, increased outlets, increased capital size, improved
business management amongst others.

According to Oni , the capacity to build growth capital is dependent on ‘whom you know’ particularly
put as your ‘technical know who’. In India, one of the main problems facing small and medium
enterprises is capital required to finance their activities. Experiential data reveals that finance has about
25% impact on the success of SMEs. Enterprises are financed either by debt, equity or a combination
of the two. He two types of financing are derived from either the formal or informal financial sector. In
the formal sector, commercial banks and development banks are the main sources of financing for
businesses, while the informal sector comprises of loans from friends, relatives and cooperative
societies. In India, banks such as commercial, microfinance, and central bank, as well as international
development agencies are some of the institutions in the formal financial sector that have played
important roles in financing small businesses in India. Agwu stressed that the largest source of finance

for SMEs around the world remains the commercial banks. Nevertheless, a lot of commercial banks are
no willing to finance small businesses because of the risks and uncertainties involved. Some of the
reasons for the reluctance of commercial banks in Nigeria to finance the subsector include: harsh
economic environment, inadequate managerial skills and insufficient availability of modern technology
by small businesses. This has led to a constant reduction in financing small businesses in the country. A
number of credit institutions have been created by the government and its agencies over the years. The
aim of these credit institutions has been to enhance SMEs access to finance The CBN acknowledged
microfinance as an essential tool for poverty mitigation through empowering micro and small

Sources of finance for small businesses

There are many sources of finance for start-up companies. The first step is to calculate how much
money that would be needed and when the money would be needed. The financial requirements of a
business will differ depending on the type and size of the business. According to Ewiwile ,the sources
of finance accessible to small businesses include:

• The personal savings of the business owner as well as friends and family who may be business

• Business partners and associates.

• Banks and financial institutions.

• The small business administration and financial assistance program.

• Members of the trade, as well as manufacturers, wholesalers, and in some cases, customers.

From the above listed sources, personal savings is the most accessible to a lot of people. The other
options available for financing small businesses such as loans from financial institutions are virtually
not accessible. Insufficient access to finance has been recognized as part of the main limitations to the
development of small businesses.

Microfinance and Microcredit: Microfinance refers to the provision of financial services tailored to the
requirements of low income people like micro-entrepreneurs, particularly the delivery of small loans,
the provision of small loans, receipt of small savings deposits and easy payment services required by
micro-entrepreneurs and other poor people. Microfinance is a term that refers to the delivery of
financial services to customers who are omitted from the conventional financial system because of their
low economic status. Micro finance is the delivery of financial services to low-income workers and
extremely poor self-employed people. Microfinance is defined as the provision of thrift, credit and
other financial services in little amounts to the underprivileged to allow enable them to increase their
levels of income and enhance their standard of living. According to Ojo microfinance are described as
small scale financial services that are granted to informal small business operators in other to take part
in any other creative or distributive activities. Microfinance denotes small-scale business or credit
services; which are made available to people operating selected business; running small enterprises in
which goods are manufactured, reprocessed, repaired or exchanged in rural as well as urban areas . As

said by Rolando , microfinance is a suitable way of assisting entrepreneurs.

According to Orodje , before CBN’s interference, microfinance in Nigeria was prior to CBN’s
intervention; microfinance in Nigeria was fast becoming extinct. Microfinance lending had not been
very successful from the formal as observed Arogundade . Diagne stated that inadequate access to
loans poor may negatively affect SMEs and their insufficient access to credit by the poor may have
negative consequences for SMEs and general welfare. The primary aim of microcredit according to
Maruth et al is to enhance the wellbeing of the underprivileged through improved access to small loans
which are not provided by the formal business institutions. Among the problems microfinance faces in
Nigeria today is the ability of the microfinance institutions to get to majority of the poor. Thapa stated
that the feasibility in microfinance could be organizational, managerial or financial. Microfinance
involves making a wide range of financial services available, like, deposits, loans, transfers and
insurance services to small businesses. It also involves making available financial services to small
businesses that are usually not catered for by the commercial banks.

Oladokun is of the opinion that microfinance should not include collaterals, should offer door-to-door
services that provides small loans to people, especially women using easy procedures. In the past,
Nigerians have attempted to make available needed finances through informal institutions like self-help
groups (SHGs), rotating savings and credit associations, (ROSCAs), accumulating credit and savings
associations (ASCAs) and lending from family and friends. The Central Bank of Nigeria (CBN) made
reference to this when it mentioned that due to the scarcity of funds, microfinance services have a
restricted extent to which they can reach. It was while trying to settle this known paucity of the
informal microfinance sector that in 2005, the CBN launched the microfinance policy as a preamble to
the issuance of microfinance banks in Nigeria. Consistent with the policy is the objective to establish a
microfinance framework that would improve the delivery of a variety of microfinance services for a
long-range time period to the underprivileged, provide a basis for the creation of microfinance banks
and enhance CBN’s supervisory performance confirming monetary stability. As a result of the
microfinance policy of the central bank of Nigeria in 2005 for the establishment of microfinance banks,
microfinance banks were created because of the inability of prevailing microfinance institutions to
sufficiently attend to the financing needs of the low income groups.

Microcredit is normally regarded as the provision of financial or banking services, majorly to small
businesses known as micro-enterprises that have no access to formal financial institution. The
inflexible credit procurement measures, inadequate collateral, huge transaction cost, as well as many
others have made credit unattainable to the poor.

Distinctive features of the business of microfinance in small

The concept of microfinance is sometimes used in place of microcredit; however, these two concepts
differ. It is important to understand that microfinance covers a broad range of services, one of which is
microcredit. Microcredit is central to many microfinance business models, and consists of some

distinguishing characteristics, some of which include:

• Micro borrowers: A microcredit giver generally provides for to low-income customers, including the
underemployed and entrepreneur along with a usually unofficial family business such as petty traders.

• Credit risk study: Loan records are created mainly by the loan officer from his stops at the debtor’s
home and business. Debtors usually lack official financial statements, thus, loan officers assist in
making records using awaited cash-flows and net-worth to ascertain the payback schedule and credit

• Use of security: Micro-lenders usually do not have adequate security conventional requested by
banks and what they need to undertake is of little importance for the financial organization but are very
valued by the lender.

• Credit authorization and monitoring: Due to the fact that micro-lending has the tendency to be an
extremely distributed process, loan authorization by loan committee relies strongly on the skill and
reliability of loan officers and executives for precise and timely information.

• Controlling debts: Usually, supervising is majorly the function of loan officers as information on
customers individual state of affairs is essential for valuable collections.

• Gradually increasing lending: Micro-lending employs incentive schemes to compensate reliable

borrowers with special access to impending, greater loans (at times with beneficial refund schedules
and minimum interest rates).

• Group lending: A number of micro-lenders utilize group lending techniques where funds are
accessible to small groups who undertake for other group members.

The development process through microfinance is classified as


Microcredit is the extension of very small loans (microloans) to impoverished borrowers who
typically lack collateral, steady employment and a verifiable credit history. It is designed not only to
support entrepreneurship and alleviate poverty, but also in many cases to empower women and uplift
entire communities by extension. In many communities, women lack the highly stable employment
histories that traditional lenders tend to require. Many are illiterate, and therefore unable to complete
paperwork required to get conventional loans. As of 2009 an estimated 74 million men and women
held microloans that totalled US$38 billion. Grameen Bank reports that repayment success rates are
between 95 and 98 percent.

Microcredit is part of microfinance, which provides a wider range of financial services, especially
savings accounts, to the poor. Modern microcredit is generally considered to have originated with the
Grameen Bank founded in Bangladesh in 1983. Many traditional banks subsequently introduced
microcredit despite initial misgivings. The United Nations declared 2005 the International Year of
Microcredit. As of 2012, microcredit is widely used in developing countries and is presented as having
"enormous potential as a tool for poverty alleviation."

The new challenges of microcredit

In a relatively short time, microfinance has become a major tool of international development. But too
many potential entrepreneurs still have little or no access to financing. Innovation and government
policy have a central role to play in correcting this imbalance.

For several months the humanitarian crisis in the Horn of Africa has epitomised the socio-economic
and environmental inequalities that exist at world level. At the same time, the financial crisis we have
witnessed since 2008, the Arab Spring and, more recently, the crisis in Greece remind us that these
inequalities do not only affect the very poor. Their effects are felt both by the poor and increasingly by
the middle classes in both emerging and advanced economies. Either a cause or the consequence of
these crises, the vulnerability of millions of micro-entrepreneurs and the growing precariousness of
salaried employment for the middle classes are the two major challenges facing socially sustainable
development and economic growth.

At the global level, some 3 billion people are excluded from the traditional financial system. As a
general rule, these people have created their own jobs, which are often precarious and in the informal
sector. This means that they have very limited access to the market, social protection and education.

Since the late 1970s, microfinance has fulfilled the role of helping poor populations, who are excluded
from the banking system, develop an income-generating activity by supplying financial services such
as microcredit, savings and micro-insurance, and non-financial services like training and awareness-
raising. The increase in income and the stabilisation of income flows make it possible to better manage
the growth of an enterprise (cash flow, stock management, investment), to improve housing, to cover
health and education expenses, and to better prepare for unexpected external shocks through savings. In
particular, microfinance made it possible for many women to become entrepreneurs, enhancing their
role in the family unit, which for far too long has been dismissed by society.

Today, an estimated 190 million people are funding activities through microfinance. However, 500
million micro-entrepreneurs are still excluded. To help them gain access, microfinance must not limit
itself to supplying financial services but must expand to address the challenges of sustainable
development. Only a few microfinance institutions (MFIs) are currently developing an integrated
approach in collaboration with other actors. The priority for the other MFIs in many cases is still to
consolidate their growth and increase their scope of action. This is the mission of PlaNet Finance, an
organisation promoting international solidarity and specialising in microfinance, created in 1998.

Microfinance must find new resources to finance training and capacity building in MFIs, addressing
such issues as governance, new products, management of social performance, management information
systems, legal transformation. Funding “Microfinance Plus” programmes, which incorporate into
microfinance a development component such as education, health or the environment, is also a priority.
These projects, pursued as part of an integrated approach, can have greater impact on success rates by
increasing value added at the local level by enhancing micro-entrepreneurs’ ability to negotiate with
intermediaries, by putting know-how to work on environmental protection policies, etc.

Broadening the scope of microfinance institutions depends on technological innovation, which helps
lower the transaction costs of MFIs, particularly in rural areas where microfinance is still not developed
enough to meet the demand of potential entrepreneurs. Mobile banking, which is a highly developed
activity in Kenya, the Philippines and Senegal, shows that it is possible to reach out to large numbers of
customers. Approximately 4 billion people currently own a mobile phone, making the potential for
growth in mobile banking enormous. But mobile banking is subject to a specific regulatory framework,
which is why the leverage effect will doubtless take time. In Africa, PlaNet Finance is helping MFIs in
this area.

These challenges call for new forms of action on the part of the microfinance sector, governments and
international organisations in order to support the estimated 20-30% a year growth in the sector and to
foster synergies between public and private development actors.

Microfinance institutions in small enterprises

A microfinance institution is an organization that offers financial services to low income populations.
Almost all give loans to their members, and many offer insurance, deposit and other services. A great
scale of organizations is regarded as microfinance institutes.

Poverty is the main cause of concern in improving the economic status of developing countries. A
microfinance institution is an organization that offers financial services to low income populations.
Almost all give loans to their members, and many offer insurance, deposit and other services.

A great scale of organizations is regarded as microfinance institutes. They are those that offer credits
and other financial services to the representatives of poor strata of population (except for extremely
poor strata).

Microfinance is increasingly being considered as one of the most effective tools of reducing poverty.
Microfinance has a significant role in bridging the gap between the formal financial institutions and the
rural poor. The Micro Finance Institutions (MFIs) accesses financial resources from the Banks and
other mainstream Financial Institutions and provide financial and support services to the poor.

MFIs are the pivotal overseas organizations in each country that make individual microcredit loans
directly to villagers, micro entrepreneurs, impoverished women and poor families. An overseas MFI is

like a small bank with the same challenges and capital needs confronting any expanding small venture
but with the added responsibility of serving economically-marginalized populations. Many MFIs are
creditworthy and well-run with proven records of success, many are operationally self-sufficient.

Various types of institutions offer microfinance to small enterprises: credit unions, commercial banks,
NGOs (Non-governmental Organizations), cooperatives, and sectors of government banks. The
emergence of “for-profit” MFIs is growing. In India, these ‘for-profit’ MFIs are referred to as Non-
Banking Financial Companies (NBFC). NGOs mainly work in remote rural areas thereby providing
financial services to the persons with no access to banking services.

The term “transformation,” or commercialization, of a microfinance institution (MFI) refers to a

change in legal status from an unregulated nonprofits or non-governmental organization (NGO) into a
regulated, for-profit institution. Regulated, transformed organizations differ from nonprofits in that they
are held to performance and capital adequacy standards and are supervised by a financial authority,
typically the central bank of the country where they are registered. A transformed MFI also attracts
equity investors. The equity investors want to ensure that the values of their investments are maintained
or enhanced and elect Board members who share a common vision for the new for-profit institution.
Among transformed MFIs, varying classifications of regulated institutions exist, the strictest being
banks — rural banks and thrift banks — followed by non-bank financial institutions. Different
countries have varied names for these regulated MFIs.

The microfinance sector consistently focuses on understanding the needs of the poor and on devising
better ways of delivering services in line with their requirements, developing the most efficient and
effective mechanisms to deliver finance to the poor. Continuous efforts towards automation of
operations are steady improving in efficiency. The automated systems have also helped accelerate the
growth rate of the microfinance sector.

Microfinance institutions can be classified into three major categories,

 Village Savings and Loans Associations/Village Banks:
 Cooperatives (Savings and Credit Cooperative Societies (saccos) & Multi Purpose
 Micro Deposit Taking Institutions (MDIS)

The goal for MFIs in small enterprises should be:

• To improve the quality of life of the poor by providing access to financial and support services;

• To be a viable financial institution developing sustainable communities;

• To mobilize resources in order to provide financial and support services to the poor, particularly
women, for viable productive income generation enterprises enabling them to reduce their poverty;

• Learn and evaluate what helps people to move out of poverty faster;

• To create opportunities for self-employment for the underprivileged;

• To train rural poor in simple skills and enable them to utilize the available resources and contribute to
employment and income generation in rural areas,


After a gap of more than five years, CRISIL – India’s leading agency for microfinance ratings has
released its updated list of the top microfinance companies in India titled “India’s 25 Leading MFI’s for
the years 2014 – 2015”.

The previous ranking of Microfinance Institutions was released in 2009 and was titled India’s Top 50
Microfinance Institutions. CRISIL has been associated with the Indian Microfinance Sector for more
than a decade and its ratings and reports about MFI’s and the sector are highly valued by microfinance
practitioners, analysts and the general public. As of June 2014, CRISIL has ratings or grading
outstanding on more than 60 Indian MFI’s which account for more than 70% of the loans outstanding
in the Indian Microfinance Sector.

Since the last report was released, the microfinance sector in India has been turned upside down with
many of the top MFI’s from the 2009 list missing from the 2014 list, these are mainly MFI’s based in
the state of Andhra Pradesh who bore the brunt of the Indian Microfinance Crisis and no longer figure
in the top 25.

The publication also carries an opinion piece by CRISIL on the near to medium term outlook for the
microfinance sector in India. The report also includes an overview of the top 25 companies in Indian
MFI space along with CRISIL’s analysis of the key strengths and challenges faced by the different
microfinance institutions in India.

The report ends with a list of top 25 emerging microfinance companies in India who still have a small
asset base and portfolio compared to the top 25 but could scale up in the long run to join the league of
big MFI’s.

1. Annapurna Microfinance Pvt. Ltd

2. Arohan Financial Services Pvt. Ltd
3. Asirvad Microfinance Pvt. Ltd
4. Bandhan Financial Services Pvt. Ltd
5. BSS Microfinance Pvt. Ltd
6. Cashpor Micro Credit
7. Disha Microfin Pvt. Ltd
8. Equitas Microfinance Pvt. Ltd
9. ESAF Microfinance and Investments Pvt. Ltd
10. Fusion Microfinance Pvt. Ltd
11. Grama Vidiyal Micro Finance Ltd
12. Grameen Financial Services Pvt. Ltd
13. Janalakshmi Financial Services Pvt. Ltd
14. Madura Micro Finance Ltd
15. RGVN (North East) Microfinance Limited
16. Satin Creditcare Network Ltd
17. Shree Kshetra Dharmasthala Rural Development Project
18. SKS Microfinance Ltd
19. S.M.I.L.E Microfinance Ltd

20. Sonata Finance Pvt. Ltd
21. Suryoday Micro Finance Pvt. Ltd
22. SV Creditline Pvt. Ltd
23. Swadhaar FinServe Pvt. Ltd
24. Ujjivan Financial Services Pvt. Ltd
25. Utkarsh Micro Finance Pvt. Ltd


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

The following are some of the issues faced by microfinance institutions in

1. Diversion of Micro Finance Fund: There have been several cases of corrupt public officials,
diverting credit meant for small scale farmers. It could be seen that because of the high level of poverty
in the country, loans are diverted into solving problem of feeding. Thus, micro finance is supposed to
meet the need of the poor to raising their financial sustainability, which in this case is not so.

2. Inadequate finance: One of the critical problems facing microfinance institutions is the lack of
finance needed to expand financial services to clients. This primarily arises from low capital base of the
institution, inordinate fixed asset acquisition, and ostentatious operational disposition, inability to

mobilize deposits, poor lending and questionable governance and management arrangement.

3. Unfavourable/Frequent Changes in Government Policies: Instability has impacted

negatively on the performance of primary institutions responsible for policy monitoring and
implementation. There were cases of sudden reversal of policy which has resulted to incomplete and
abandoned projects. This creates distortions in the macro-economic structure and low productivity.

4. High Risk and Mounting Loan Losses: About 70% of micro credits given to micro
enterprises via government microfinance scheme were not recovered. Some people see the loans as
their own share of the national cake and do not see any need for the repayment. The consequence of
this is that it leads to other applicants not getting loan.

5. Low Capacity and low Technical Skills on Micro financing : Management of micro
finance institutions would require a pedigree of knowledge on micro financing to successfully operate
in the industry; however, most staff recruited in the microfinance institutions, particularly at
management level, has little or no experience in microfinance practice.


Microfinance banks were established as a result of the incapability of the informal microfinance
institutions to satisfy the needs of small business operators. Microfinance banks can be differentiated
from other business organizations because they provide small loans and they do not require collaterals
and have simple operations. Microfinance banks made available, credit to low income earners and rural
areas and also financially empower those areas. From the name, we can observe that microfinance
direct their activities on rural communities, receiving deposits and lending within a constrained trade
area instead of operating in regional or national markets. Microfinance Banks are certified financial
institutions set up to cater for the un-served but working population in the rural areas by making
available differentiated, inexpensive and reliable financial services to the low income group, in a
suitable and competitive manner which would allow them to carry out and develop long-term, viable
entrepreneurial actions and assemble savings for intermediation . Kolawole asserts that microfinance
banks assist to produce savings in the economy, entice foreign contributing agencies, foster
entrepreneurship and promote development in the economy. Creation of microfinance banks by the
government to enhance the availability of loans and savings service for the underprivileged is presently
being encouraged as an essential development strategy to promote the extinction of poverty and
economic development. Jegede noticed that entrepreneurs would rather use personal savings and
credits from cooperatives than funds from microfinance and commercial banks stating reasons of
unavailability, unreasonable collaterals and high interest rates. Okpugie stated that the high interest
requested by the microfinance banks has been observed to be the cause of alarming default.

Procedure for obtaining funds from microfinance banks
Obasi opined that in order to obtain loans from banks under any scheme, the following procedures are

• The businessman will submit an application form along with passport photographs.

• Then, he would be required to write four copies of formal application forms to the bank.

• If the business man is a civil servant he or she will be obligated to present a letter of undertaken from
his or her organization. If however, he or she is not a civil servant, he or she will be required to present
a feasibility study account of the activity he or she wants to undertake along with bank statements and a
proof of collateral.

• The refund period differs and is subject to the type of business being embarked upon.

Activities of informal microfinance institutions in financing small

Microfinance involves making financial services available to the poor, who are usually not served by
traditional financial institutions. A micro-finance institution (MFI) is one that offers microfinance
services, spanning from minor non-organizations to large Deposit Money Banks. These informal credit
institutions offer loan and savings services to their members. Kirkpatrick , Microfinance is broader than
micro-credit as it comprises of savings, credit, insurance amongst others. Opara stated that unofficial
financial services comprise of rotating savings and credit associations (ROSCAs), thrift associations,
savings enlistment groups customarily called Esusu, bambam, ado and adashi by diverse societies, day-
to-day savings, or donation organizations, cooperative societies, religious institutions, social clubs as
well as village and town alliance .The non-conventional formal Microfinance Institutions (MFIs) are
working alongside with the informal institutions. The development of the microfinance institutions
came as a consequence of the inability or reluctance of the traditional banks to draw from the financial
assets in the rural areas. All through the whole universe, the underprivileged are often exempted from
the formal financial system either partly in developed countries or full exemption in Less Developed
Countries (LDCs)

Understanding the financial needs of small entrepreneurs

SMEs all over the world play a strong role in national development. This is attributed to the
massive employment it provides to the citizenry of the country where it exists. The financing
of these ‘’goose’’ which have being laying so many golden eggs has come under scrutiny by
academics and practitioners. Due to the recognition accorded this very important sector, the
Nigerian government established microfinance banks in the year 2007 to serve as
mechanisms for financial sources for various SMEs. This study explored the roles of these
micro finance banks and institutions on small and medium enterprises as well as the extent to

which the small businesses have benefited from the credit scheme of microfinance banks.
Primary data was obtained via interviews conducted in 15 small businesses across Lagos
state with their responses summarized in tables. This study advocates the recapitalization of
microfinance banks to enhance their capacity to support small business growth and
expansion and also to bring to the knowledge of the management of microfinance banks
and institutions the impact of the use of collaterals as a condition for granting credit to small

Microfinance Standards and Principles

Poor people borrow from informal moneylenders and save with informal collectors. They
receive loans and grants from charities. They buy insurance from state-owned companies.
They receive funds transfers through formal or informal remittance networks. It is not easy to
distinguish microfinance from similar activities. It could be claimed that a government that
orders state banks to open deposit accounts for poor consumers, or a moneylender that
engages in usury, or a charity that runs a heifer pool are engaged in microfinance. Ensuring
financial services to poor people is best done by expanding the number of financial
institutions available to them, as well as by strengthening the capacity of those institutions. In
recent years there has also been increasing emphasis on expanding the diversity of
institutions, since different institutions serve different needs.

Some principles that summarize a century and a half of development practice were
encapsulated in 2004 by CGAP and endorsed by the Group of Eight leaders at the G8 Summit
on June 10, 2004:

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

Microfinance is considered a tool for socio-economic development, and can be clearly

distinguished from charity. Families who are destitute, or so poor they are unlikely to be able
to generate the cash flow required to repay a loan, should be recipients of charity. Others are
best served by financial institutions.

The statement of the problem or challenges facing micro finance
bank in financing small and medium scale enterprises
i. High Operating Cost:

Small units of services pose the challenges of high operating cost, several loan
applications to be processed, numerous accounts to be managed and monitored,
and repayment collection to be made from several locations especially in rural

ii. Repayment Problem:

Loan default is a major threat to micro finance banks’ sustainability; it is the

deadly “virus” which affects the operation of the banks. It demoralized staff and
deprives beneficiaries of further valuable services.

iii. Inadequate Experienced Credit Staff:

Micro financing is more than dispensing loans, to be viable micro finance banks
require experienced and skilled personnel. As a young and growing industry,
there is a dearth of experienced staff in planning, product development and
effective engagement with clients.

iv. Problems Of Illiteracy:

This affects record keeping and decisions-making ability of borrowers and

consequently affects their relationship with the banks.


Microfinance institutions are those which provide credit and other financial services and
products of very small amounts to poor in rural, semi-urban and urban areas for enabling
them to raise their income and improve their standard of living.

Credit to Rural Poor:

Usually rural sector depends on non-institutional agencies for their financial requirements.
Micro financing has been successful in taking institutionalized credit to the doorstep of poor
and have made them economically and socially sound.

Poverty Alleviation:
Due to micro finance poor people get employment. It also helps them to improve their
entrepreneurial skills and encourage them to exploit business opportunities. Employment
increases income level which in turn reduces poverty.

Women Empowerment:
Normally more than 50% of SHGs are formed by women. Now they have greater
access to financial and economical resources. It is a step towards greater security for women.
Thus microfinance empowers poor women economically and socially.

Economic Growth:
Finance plays a key role in stimulating sustainable economic growth. Due to
microfinance, production of goods and services increases which increases GDP and
contributes to economic growth of the country.

Mobilisation of Savings:
Microfinance develops saving habits among people. Now poor people with meagre
income can also save and are bankable. The financial resources generated through savings
and micro credit obtained from banks are utilised to provide loans and advances to its
members. Thus microfinance helps in mobilisation of savings.

Development of Skills:
Micro financing has been a boon to potential rural entrepreneurs. SHGs encourage its
members to set up business units jointly or individually. They receive training from
supporting institutions and learn leadership qualities. Thus micro finance is indirectly
responsible for development of skills.

Mutual Help and Cooperation:

Microfinance promotes mutual help and cooperation among members. The collective
effort of group promotes economic interest and helps in achieving socio-economic transition.

Social Welfare:
With employment generation the level of income of people increases. They may go for better
education, health, family welfare etc. Thus micro finance leads to social welfare or
betterment of society.

Most criticisms of microfinance have actually been criticisms of microcredit. Criticism
focuses on the impact on poverty, the level of interest rates, high profits, over indebtedness
and suicides. Other criticism includes the role of foreign donors and working conditions in
companies affiliated to microfinance institutions, particularly in Bangladesh.

The impact of microcredit is a subject of much controversy. Proponents state that it reduces
poverty through higher employment and higher incomes. This is expected to lead to improved
nutrition and improved education of the borrowers' children. Some argue that microcredit
empowers women.

Critics say that microcredit has not increased incomes, but has driven poor households into a
debt trap, in some cases even leading to suicide. They add that the money from loans is often
used for durable consumer goods or consumption instead of being used for productive
investments, that it fails to empower women, and that it has not improved health or education.
Moreover, as the access to micro-loans is widespread, borrowers tend to acquire several loans
from different companies, making it nearly impossible to pay the debt back. As a result of
such tragic events, microfinance institutions in India have agreed on setting an interest rate
ceiling of 15 percent. This is important because microfinance loan recipients have a higher
level of security in repaying the loans and a lower level of risk in failing to repay them.

The available evidence indicates that in many cases microcredit has facilitated the creation
and the growth of businesses. It has often generated self-employment, but it has not
necessarily increased incomes after interest payments. In some cases it has driven borrowers
into debt traps. There is no evidence that microcredit has empowered women. In short,
microcredit has achieved much less than what its proponents said it would achieve, but its
negative impacts have not been as drastic as some critics have argued. Microcredit is just one
factor influencing the success of small businesses, whose success is influenced to a much
larger extent by how much an economy or a particular market grows. For example, local
competition in the area of lack of domestic markets for certain goods can influence how
successful small businesses who receive microcredit are.

MFIs currently operate in 29 States, 4 Union Territories and 588 districts in India. The
reported 166 MFIs with a branch network of 12,221 employees have reached out to an all
time high of 39 million clients with an outstanding loan portfolio of Rs63,853 crore. This
includes a managed portfolio of Rs 16,914 crore. Out of managed portfolio, BC portfolio
accounts for Rs 7,984 crore. The average loan outstanding per borrower stood at Rs 11,425
and 94% of loans were used for income generation purposes.

Outreach grew by 8% and loan outstanding grew by 31% over the previous year. The
Southern region continues to have the highest share of both outreach and loans outstanding,
followed by East. However growth rates are higher in the North-eastern and Central regions.
Outreach proportion of urban clientele has decreased marginally as against the rural
population. The proportion of urban clientele which was 67% in 2014-15 decreased to 62% in
2015-16. Women borrowers constitute 97% of the total clientele of MFIs; SC/ST borrowers
constitute 30% and minorities 27%.

Of the total, NBFC-MFIs contribute to 85% of clients outreach and 88% of outstanding
portfolio, while NGO MFIs contribute to the remaining. MFIs with portfolio size of more
than Rs 500 crore contribute significantly to the total outreach (85%) and loan outstanding
(88%) of the sector.

MFI sector employs 1,03,415 personnel, out of which 15% are women, and 62% are field
staff. An active borrower per credit officer (ABCO) is 440, which is higher than the previous
year indicating higher focus on client services without much of staff growth.


The report provides the latest data on financial inclusion trends in India. A large part of the
Indian population which was financially excluded has become a part of the banking system
through the Pradhan Mantri Jan Dhan Yojana. PMJDY will have a profound impact on the
financial ecosystem in India and experts are yet to pass their final judgement on it as it is still
a work in progress.

The CRISIL Inclusix index has shown a marked improvement compared to its launch in
2009, PMJDY is a major contributor to the increase in the Crisil Inclusix Index.

The report contains comprehensive data from many surveys about the financial behaviour of
Indians which is quite fascinating to the lay person. Some of these findings are:-

 About 70% of those who saved money deposited their money in bank accounts while
30% saved it at their homes.
 Most Indians (67%) took loans from their community networks and relied on friends,
neighbours and relatives. While only 11% borrowed money from a bank and 12%
borrowed it from money lenders.

 Low Banking activity continues despite the success of PMJDY, only 47% of users
surveyed had a bank account and out of these only 54% had carried out a bank
transaction from their bank accounts in the previous 90 days.
 Low ATM Usage – The survey also revealed that ATM usage was still low at 28%.


A conclusion that emerges from this account is that microfinance can contribute to solving the
problems of inadequate housing and urban services as an integral part of poverty alleviation
programmes. The challenge lies in finding the level of flexibility in the credit instrument that
could make it match multiple credit requirements of the small enterprises. To adequately support
small enterprises, MFIs will need to better understand their unique needs and to tailor financial
services and build appropriate infrastructure to meet them. Successfully serving small enterprises
is a process, not a one-time event, so careful planning is crucial. This will require a commitment
from top management to create a client-centric approach, hire dedicated and knowledgeable staff,
and invest in appropriate technologies.


The following are recommendations for the better performance of microfinance banks in the
financing small businesses:

• The government should increase their efforts in encouraging microfinance banks and institutions
to support the small businesses.

• Microfinance banks should expand the repayment period of their customer’s asset loans, make
use of the collective group-based loan disbursement strategy, as this will minimize the rate at
which clients default in payment and the level of portfolio at risk.

• As regards the ancillary services provided, microfinance banks should support their clients by
offering trainings on credit maximization.

• Microfinance banks should try to find long-term capital from Pension and Insurance Companies
within the country.

• This helps minimize their rate of lending and allow them distribute their interest payment
through a longer time period.



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