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Microfinance refers to the provision of various financial services like savings,

credit, money transfers, insurance etc. in small doses for the poor to enable them to

raise their income levels and improve living.

Microfinance and microcredit playing an important role in developing the

rural areas by providing loans to people at lower interest. It has been recognized

world over as one of the new development paradigms for alleviating poverty through

social and economic empowerment of the poor particularly women.

In fact, more than subsidies poor need access to credit. Absence of formal

employment make them non ‘bankable’. This forces them to borrow from local

moneylenders at exorbitant interest rates. Many innovative institutional mechanisms

have been developed across the world to enhance credit to poor even in the absence of

formal mortgage.

A range of institutions in public sector as well as in the private sector offers

the microfinance services in India. They can be broadly categorized in to two

categories namely, formal institutions and informal institutions.

The former category comprises of Apex Development Financial Institutions,

Commercial Banks, Regional Rural Banks, and Cooperative Banks that provide micro

finance services in addition to their general banking activities and are referred to as

micro finance service providers.

On the other hand, the informal institutions that undertake micro finance

services as their main activity are generally referred to as Micro Finance Institutions

(MFIs). While both private and public ownership are found in the case of formal

financial institutions offering micro finance services, the MFIs are mainly in the

private sector.

Among states West Bengal disbursed Rs 9449 crore during FY 2014-15,

holding the top position in terms of loan amount disbursed. Karnataka occupied

second position with Rs.9284 crore disbursements, followed by Tamil Nadu with

Rs.6943 crore and Uttar Pradesh with Rs.5140.

Traditionally, MFIs have been lending for both consumption and productive

purposes. It is believed that rural people use their loans for their emergency or urgent

needs and consumption needs more than for livelihoods.

In 2011, RBI regulation stipulated that a minimum of 70% of the MFI loans

are to be deployed for income generating activities. Analysis of the loan portfolio held

by reporting MFIs for 2013-14 and 2014-15 shows that the proportion of income

generation loan to non income generation loan is 80:20

Income Generation Loans

Agriculture, Animal Husbandry, Trading/Small business, Transport, Cottage,

Handicraft other productive and income generating activities.

1.2 Conceptual Framework, Historical background and Evolution of


Although much progress has been made, the problem has not been solved yet,

and the overwhelming majority of people who earn less than $1 a day, especially in

the rural areas, continue to have no practical access to formal finance sector.

Microfinance has been growing rapidly with $25Bn currently at work in microfinance

loans. Microfinance is a general term to describe financial services to low-income

individuals or to those who do not have access to typical banking services.

Microfinance is a broad category of services including microcredit.

Microcredit is provision of credit services to poor (economically backward)

clients. Although microcredit is one of the aspects of microfinance, critics attack

microcredit referring to it indiscriminately as either 'microcredit' or 'microfinance'.

Microfinance refers to small-scale financial services, including both credits and

deposits provided to people who farm, fish or herd; operate small or microenterprises

where goods are produced, recycled, repaired, or traded; provide services; work for

wages or commissions; gain income from renting out small piece of land, vehicles,

draft animals, or machinery and tools; in both rural and urban areas.


Credit unions and lending cooperatives have been around hundreds of years.

However, the pioneering of modern microfinance is often credited to Dr. Mohammad

Yunus, who began experimenting with lending to poor women in the village of Jobra,

Bangladesh during his tenure as a professor of economics at Chittagong University in

the 1970s. He founded the Grameen Bank in 1983 and won the Nobel Peace Prize in

2006. Grameen Bank (GB) has reversed conventional banking practice by removing

the need for collateral and created a banking system based on mutual trust,

accountability, participation and creativity. GB provides credit to the poorest of the

poor in rural Bangladesh, without any collateral. At GB, credit is a cost effective

weapon to fight poverty and it serves as a catalyst in the overall development of

socio-economic conditions of the poor who have been kept outside the banking orbit

on the ground that they are poor and hence not bankable. Since then, innovation in

microfinance has continued and providers of financial services to the poor continue to

evolve. Today, the World Bank estimates that about 160 million people in developing

countries are served by microfinance.


Microfinance began in India way back in 1921 with the establishment of

Syndicate Bank in the private sector. In its first years, the Syndicate Bank

concentrated on raising micro deposits in the form of daily/weekly basis and

sanctioned micro loans to its clients for shorter periods. But microfinance came to be

well known only when Dr Mohammad Yunus made it a mass movement in the form

of Grameen Bank experiment in Bangladesh.

Microfinance may be defined as a novel approach to provide savings and

investment facility to the poor around world. Improved access and efficient provision

of savings, credit, and insurance facilities in particular can enable the poor smoothen

their consumption, manage their risks better, gradually build up their asset base,

develop their businesses, enhance their earning capacities, and enjoy an improved

quality of life. In India, microfinance mainly operates through Self Help Groups

(SHGs), Non Government Organizations (NGOs), and Credit Agencies.

There‘s now plenty of evidence that access to financial services is a critical

tool for both economic growth and human development. Meanwhile, global

experience also shows clearly that the poor can be reliable clients and institutions that

service them right do good business.

Financial inclusion can be defined as a state in which all people of working

age have access to a full suite of quality financial services, provided at affordable

prices, in a convenient manner, and with dignity for the clients.

An inclusive financial system is one that services all clients—not just the

relatively well-off. This means reaching out to poor and low-income clients and

providing them with affordable financial services tailored to their needs.

In many countries, poor and low-income people don‘t have access even to

basic savings accounts, let alone more advanced financial services that could provide

security, predictability and the seeds of economic growth for their household. An

inclusive financial sector will support the full participation of lower income

households in the financial system.

Financial Inclusion is one of the best tools we have today to alleviate poverty

and contribute to the achievement of the development goals because sustainable

access to microfinance services helps poor households meet basic needs such as

adequate housing, healthcare, and education for their children. Small loans too can be

used to create new businesses, jobs and livelihoods. Poor people have proven that

they not only repay their loans on time, they can provide profitable business for the

loan provider that gives them the chance.

Poor people use other financial services such as insurance and savings

accounts to invest in their families and further secure the future of their households.

Poor people do not want charity; they want access, and opportunity. Microfinance

empowers the poor to participate in decision-making and control their lives. Providing

services that tap the entrepreneurial spirit of poor people is vital to eradicating


Traditionally, banks have not provided financial services to clients with little

or no cash income. Banks incurs substantial costs to manage and maintain a client

account, regardless of how small the sums of money involved. The fixed cost of

processing loans of any size is considerable as assessment of potential borrowers,

their repayment prospects and security; administration of outstanding loans, collecting

from delinquent borrowers, etc., has to be done for all clients.

There is a break-even point in providing loans or deposits below which banks

lose money on each transaction they make. Poor people usually fall below that

breakeven point. A similar equation resists efforts to deliver other financial services to

poor people.

In addition, most poor people have few assets that can be secured by a bank as

collateral. This means that the bank will have little recourse against defaulting

borrowers. Seen from a broader perspective, the development of a healthy national

financial system has long been viewed as a catalyst for the broader goal of national

economic development. Poor people borrowings often rely on relatives or a local

moneylender, whose interest rates can be very high.


Formal Sector – it covers the entire banking industry including all public,

private, regional rural banks, NABARD and RBI.

Semi-formal Sector- it covers all exclusive micro financing institution, NGOs

and various self Help groups (SHGS) . Dominant among the microfinance models is

the Self Help Group (SHG) bank linkage model, whereby women’s SHGs are linked

to the rural branches of commercial banks, RRBs or cooperative banks. The SHG-

bank linkage program has reached out to around 12 million families.

Informal Sector – it covers family, friends, relatives, moneylenders,

pawnbrokers, traders and landlords etc.

Micro-enterprise development is based on sound economic theory, made

possible through community banks called micro-finance institutions. Micro-finance

institutions (MFIs) work through the same principles as credit unions. They are

designed to bring maximum benefits to their customers, with their profits recycled

into further loans. Each MFI has an independent board who understands the needs and

challenges of the community they are working in MFIs provide the funds to get

micro-enterprise development started in a community. Then, as loans are paid back

with interest, the bank begins to use its own money for further loans. A successful

micro-finance institution will see both the funds and the demands for loans grow

quickly, so that the benefits are felt by the entire community. Micro-enterprise loans

are not designed for the poorest of the poor but towards communities with high

unemployment or very low wages.

It is better to consider them clients, whose strong will to succeed helps them to

learn new skills, work hard and pay back their loan for long-term business security.

By paying interest, they are increasing the value of their community bank and making

it possible to provide further loans for themselves and others. Loans are usually small

and short-term. An initial loan might be for around US$150 and the timeframe for

paying it back 6 to 12 months. Subsequent funds may be a little higher to help the

established business expand. The success of the business continues long after the loan

is repaid, meaning greater family income for education, healthcare and a better life.


Microfinance is the provision of a broad range of financial services such as

deposits, loans, payment services, money transfers and insurance products to the poor

and low income households, for their microenterprises and small businesses, to enable

them to raise their income levels and improve their living standards.


• The poor needs access to appropriate financial services.

• The poor has the capability to repay loans, pay the real cost of loans and

generate savings.

• Microfinance is an effective tool for poverty alleviation.

• Microfinance institutions must aim to provide financial services to an

increasing number of Disadvantaged people.

• Microfinance can and should be undertaken on a sustainable basis.

Table-1: Characteristics and Features of Microfinance

Characteristic Distinguishing Features

Type of client • Low Income
• Employment in informal sector; low wage
• Lack of physical collateral
• Closely interlinked household/business
Lending Technology • Prompt approval and disbursement of micro loans
• Lack of extensive loan records
• Collateral substitutes; group-based guarantees
• Conditional access to further micro-credits
• cash flow analysis and group-based borrower
Loan Portfolio • Highly volatile
• Risk heavily dependent on portfolio management

Organizational • Remote from/non-dependent on government

Ideology • Cost recovery objective vs. profit maximizing

Institutional • Decentralized
Structure • Insufficient external control and regulation
• Capital base is quasi-equity (grants, soft loans)

Historical Development of Microfinance

The history of micro-financing can be traced back as long to the middle of the

1800s when theorist Lysander Spooner was writing over the benefits from small

credits to entrepreneurs and farmers as a way getting the people out of poverty. But it

was at the end of World War II with the Marshall plan, that the concept had a big


The current use of the expression micro financing has its roots in the 1970s

when organizations, such as Grameen Bank of Bangladesh with the microfinance

pioneer Mohammad Yunus, where starting and shaping the modern industry of

microfinancing. Another pioneer in this sector is Akhtar Hameed Khan. At that time a

new wave of microfinance initiatives introduced many new innovations into the

sector. Many pioneering enterprises began experimenting with loaning to the

underserved people. The main reason why microfinance is dated to the 1970s is that

the programs could show that people can be relied on to repay their loans and that it´s

possible to provide financial services to poor people through market based enterprises

without subsidy. Shore bank was the first microfinance and community development

bank founded 1974 in Chicago .

Today the World Bank estimates that more than 16 million people are served

by some 7000 microfinance institutions all over the world. CGAP experts means that

about 500 million families benefits from these small loans making new business

possible. In a gathering at a Microcredit Summit in Washington DC the goal was

reaching 100 million of the world´s poorest people by credits from the world leaders

and major financial institutions.

The year 2005 was proclaimed as the International year of Microcredit by The

Economic and Social Council of the United Nations in a call for the financial and

building sector to “fuel” the strong entrepreneurial spirit of the poor people around the


The International year of Microcredit consists of five goals:

• Assess and promote the contribution of microfinance to the MFIs

• Make microfinance more visible for public awareness and understanding as a

very important part of the development situation

• The promotion should be inclusive the financial sector

• Make a supporting system for sustainable access to financial services

• Support strategic partnerships by encouraging new partnerships and

innovation to build and expand the outreach and success of microfinance for


The economics professor Mohammad Yunus and the founder of Grameen

Bank were awarded the Nobel Prize 2006 for his efforts. The press release from states:

“The Norwegian Nobel Committee has decided to award the Nobel Peace

Prize for 2006, divided into two equal parts, to Muhammad Yunus and Grameen Bank

for their efforts to create economic and social development from below. Lasting peace

cannot be achieved unless large population groups find ways in which to break out of

poverty. Micro-credit is one such means. Development from below also serves to

advance democracy and human rights. Muhammad Yunus has shown himself to be a

leader who has managed to translate visions into practical action for the benefit of

millions of people, not only in Bangladesh, but also in many other countries. Loans to

poor people without any financial security had appeared to be an impossible idea.

From modest beginnings three decades ago, Yunus has, first and foremost through

Grameen Bank, developed micro-credit into an ever more important instrument in the

struggle against poverty. Grameen Bank has been a source of ideas and models for the

many institutions in the field of micro-credit that have sprung up around the world.

Every single individual on earth has both the potential and the right to live a

decent life. Across cultures and civilizations, Yunus and Grameen Bank have shown

that even the poorest of the poor can work to bring about their own development.

Micro-credit has proved to be an important liberating force in societies where

women in particular have to struggle against repressive social and economic

conditions. Economic growth and political democracy cannot achieve their full

potential unless the female half of humanity participates on an equal footing with the


Yunus’s long-term vision is to eliminate poverty in the world. That vision

cannot be realised by means of micro-credit alone. But Muhammad Yunus and

Grameen Bank have shown that, in the continuing efforts to achieve it, micro-credit

must play a major part.”

Evolution of Microfinance

The concept of microfinance is not new in India. Traditionally, people have

saved with and taken small loans from individuals and groups within the context of

self-help to start businesses or farming ventures. Majority of poor are excluded from

financial services. Micro finance is a program to support the poor rural people to pay

its debt and maintain social and economic status in the villages. Micro-finance is an

important tool for improving the standard of living of poor. Despite many

organizations offering micro finance, micro finance is not sufficient in India. The

potential for growing micro finance institutions in India is very high. Microfinance

market in India is expected to grow rapidly, supported by government of India’s

initiatives to achieve greater financial inclusion, and growth in the country’s

unorganized but priority sector. Microfinance has evolved rapidly into a global

movement dedicated to providing access to a range of financial services to poor and

near-poor households. The organizations that provide these services, known as

microfinance institutions (MFIs) may operate as formal micro banks, non-bank

financial institutions, non-governmental organizations, or community-based financial

institutions. These providers offer a range of financial services from small business

loans to savings accounts, money transfers, insurance, and consumer loans.

Major Cross-section can have benefit if this sector will grow in its fastest pace.

On the basis of growth and evolution related to micro finance, the study predicts the

new agenda for future. The microfinance industry being very small in terms of value

added to the Indian financial sector. It examines the experience, of India, which has

one of the largest microfinance sectors in the world. Globally, over a billion poor

people are still without access to formal financial services. Some 200 million of these

people live in India. Microfinance, the provision of a wide range of financial services

to poor people, has proved a very successful way of providing immensely valuable

services to poor people on a sustainable basis. Access to financial services has

allowed many families throughout the developing world. It is incontestable that an

efficient and effective microfinance system is essential for building a sustained

economic growth. The Indian Government should find an avenue for creation of

awareness on how microfinance can benefit from loans and monitors closely to ensure

disbursement of loans and grants to entrepreneurs.

There has been much criticism of the high interest rates upto 24% charged to

borrowers. However, annual rates charged to clients are higher, as they also include

local inflation and the bad debt expenses of the microfinance institution. The role of

donors is also in question. The Consultative Group to Assist the Poor (CGAP)

comments that "a large proportion of the money they spend is not effective, either

because it gets hung up in unsuccessful and often complicated funding mechanisms or

it goes to partners that are not held accountable for performance”.

There has also been criticism of micro lenders for not taking more

responsibility for the working conditions of poor households, particularly when

borrowers become quasi-wage laborers, selling crafts or agricultural produce through

an organization controlled by the MFI. Critics maintain that there are few if any rules

or standards in these cases governing working hours, holidays, working conditions,

safety or child labour, and few inspection regimes to correct abuses. Microcredit has

been blamed for many suicides in India: aggressive lending by microcredit companies

in Andhra Pradesh is said to have resulted in over 80 deaths in 2010.

Milford Bateman, the author of Why Doesn't Microfinance Work?, argues that

microcredit offers only an "illusion of poverty reduction". "As in any lottery or game

of chance, a few in poverty do manage to establish micro enterprises that produce a

decent living," he argues, but "these isolated and often temporary positives are

swamped by the largely overlooked negatives."


Less than a year ago, in August 2010, SKS was riding high, having become

the first microfinance institution, or MFI, to go in for an initial public offering which

was received with much enthusiasm and oversubscribed nearly 14 times. Yet its

fourth quarter results, for the year 2010/2011, report a loss of Rs 70 crore. Worse, its

reputation, along with that of the entire microfinance sector, has taken a battering;

following suicides by poor borrowers in Andhra Pradesh allegedly due to coercive

loan recovery methods resorted to by some MFIs, who had begun to resemble the

very village moneylenders they sought to replace. The common view seems to be that

though SKS was flush with funds following the IPO, what needs to be seen is the way

its balance sheet will look three to four years from now. Of the total gross loan

portfolio of Rs 4,111 crore, the share of Andhra Pradesh (including the overdues) is

Rs 1,285 crore. Even accounting for the 10.3 % recoveries continuing in the state, the

company's balance sheet will take a huge hit if SKS writes off such a large amount in

the next three to four years. It is these fears that seem to be reflecting on the bourses

with the SKS scrip dipping by around 70 % since October 2010, when the Andhra

government ordinance came in. In wake of the suicide deaths and to regulate the

functioning of the MFIs, the AP government issued the Andhra Pradesh MFI

Ordinance’ in Oct 2010. The ordinance, applicable from immediate effect, required

MFIs to specify the area of their operations, the rate of interest, the system of

operation and recovery.

The Registering Authority may, at any time, either sue upon receipt of

complaints by Self-Help Groups (SHGs) or general public cancels the registration of

the MFIs after assigning sufficient reasons. The MFIs should not seek security from a

borrower by way of pawn or any other security and they should also display the rates

of interest rates charged by them prominently in their offices. The ordinance makes it

clear that the amount of interest should not be in excess of the principal amount. The

MFIs should not extend a second loan unless the first loan is cleared.

The MFIs must scrupulously maintain their accounts and submit a monthly

statement to the Authority giving the list of loaners, the loan given to them and the

amount of interest. In the wake of complaints that rowdy elements go to recover the

loan amounts, the Ordinance mandates that only those staff with identity cards should

go for recovery which should be done in a public place.

The loaners can complain to the Registering Authority in case of any problems

and they can also call the grievance cell with toll free number.

The state government would establish fast track courts after consultation with

the High Court for settlement of disputes of civil nature. All those connected with the

MFI would be liable for punishment of imprisonment for upto three years or fine upto

Rs 1 lakh or both if they resort to any coercive measures. RBI appointed a committee

under YH Malegam to study the ills of the Microfinance sector.

The report was released in Jan 2011 and aimed to rein in MFIs & subject

micro-credit to norms and disciplines with RBI as the MFI regulator.

The report has recommended that MFIs charge no more than 24% on loans

and that the margins they make be also no more than 10%.

The report has said disallowed more than two microfinance companies to lend

to one borrower.

It recommended setting up of a microfinance credit information bureau and

recommended a priority status on loans to micro lenders.

The committee proposed to set up an ombudsman for the MFI sector. It also

called for the Reserve Bank of India to draft a customer protection code for


The committee has said that NBFCs with microfinance operations should be

classified as an NBFC-MFI, and said that bank loans to these NBFC-MFI

should be included in the priority sector.

An NBFC-MFI will be a company that provides loans largely to low-income

borrowers and gives small amount, short-term loans on unsecured basis. The

report says that an NBFC MFIs cannot give more than Rs 25,000 as loan to

single borrower and can provide loans only to families with income less than

Rs 50,000.

1.3 Microfinance-Credit Lending Models-


Microfinance: Credit Lending Models is an attempt to document the various

models currently being used by Microfinance institutions throughout the world.

Microfinance institutions are the oldest financial institutions in the world, but

with time they have adapted to the changes, and have started using various credit

lending models. The Microfinance community has divided itself into hierarchies.

Some of the popular Microfinance credit lending models adopted across the world is:


This is where the target community forms an 'association' through which

various microfinance (and other) activities are initiated. Such activities may include

savings. Associations or groups can be composed of youth, women; can form around

political/religious/cultural issues; can create support structures for microenterprises

and other work-based issues.

In some countries, an 'association' can be a legal body that has certain

advantages such as collection of fees, insurance, tax breaks and other protective

measures. Distinction is made between associations, community groups, peoples

organizations, etc. on one hand (which are mass, community based) and NGOs, etc.

which are essentially external organizations.

Bank Guarantees

As the name suggests, a bank guarantee is used to obtain a loan from a

commercial bank. This guarantee may be arranged externally (through a

donor/donation, government agency etc.) or internally (using member savings). Loans

obtained may be given directly to an individual, or they may be given to a self-formed


Bank Guarantee is a form of capital guarantee scheme. Guaranteed funds may

be used for various purposes, including loan recovery and insurance claims. Several

international and UN organizations have been creating international guarantee funds

that banks and NGOs can subscribe to, to onlend or start microcredit programmes.

Community Banking

Community Banking model essentially treats the whole community as one

unit, and establishes a semi-formal or formal institutions through which microfinance

is dispensed. Such institutions are usually formed by extensive help from NGOs and

other organizations, who also train the community members in various financial

activities of the community bank. These institutions may have savings components

and other income-generating projects included in their structure. In many cases,

community banks are also part of larger community development programmes which

use finance as an inducement for action.


A co-operative is an autonomous association of persons united voluntarily to

meet their common economic, social, and cultural needs and aspirations through a

jointly-owned and democratically-controlled enterprise. Some cooperatives include

member-financing and savings activities in their mandate.

Credit Unions

A credit union is a unique member-driven, self-help financial institution. It is

organized by and comprised of members of a particular group or organization, who

agree to save their money together and to make loans to each other at reasonable rates

of interest.

The members are people of some common bond: working for the same

employer; belonging to the same church, labor union, social fraternity, etc.; or

living/working in the same community. A credit union's membership is open to all

who belong to the group, regardless of race, religion, color or creed.

A credit union is a democratic, not-for-profit financial cooperative. Each is

owned and governed by its members, with members having a vote in the election of

directors and committee representatives.

Grameen model

The Grameen model emerged from the poor-focussed grassroots institution,

Grameen Bank, started by Prof. Mohammed Yunus in Bangladesh. It essentially

adopts the following methodology:

A bank unit is set up with a Field Manager and a number of bank workers,

covering an area of about 15 to 22 villages. The manager and workers start by visiting

villages to familiarize themselves with the local milieu in which they will be

operating and identify prospective clientele, as well as explain the purpose, functions,

and mode of operation of the bank to the local population. Groups of five prospective

borrowers are formed; in the first stage, only two of them are eligible for, and receive,

a loan. The group is observed for a month to see if the members are conforming to

rules of the bank. Only if the first two borrowers repay the principal plus interest over

a period of fifty weeks do other members of the group become eligible themselves for

a loan. Because of these restrictions, there is substantial group pressure to keep

individual records clear. In this sense, collective responsibility of the group serves as

collateral on the loan.

Group Model

The Group Model's basic philosophy lies in the fact that shortcomings and

weaknesses at the individual level are overcome by the collective responsibility and

security afforded by the formation of a group of such individuals. The collective

coming together of individual members is used for a number of purposes: educating

and awareness building, collective bargaining power, peer pressure etc.


This is a straight forward credit lending model where micro loans are given

directly to the borrower. It does not include the formation of groups, or generating

peer pressures to ensure repayment. The individual model is, in many cases, a part of

a larger 'credit plus' programme, where other socio-economic services such as skill

development, education, and other outreach services are provided.


Intermediary model of credit lending positions a 'go-between' organization

between the lenders and borrowers. The intermediary plays a critical role of

generating credit awareness and education among the borrowers (including, in some

cases, starting savings programmes). These activities are geared towards raising the

'credit worthiness' of the borrowers to a level sufficient enough to make them

attractive to the lenders.

The links developed by the intermediaries could cover funding, programme

links, training and education, and research. Such activities can take place at various

levels from international and national to regional, local and individual levels.

Intermediaries could be individual lenders, NGOs, microenterprise/microcredit

programmes, and commercial banks (for government financed programmes). Lenders

could be government agencies, commercial banks, international donors, etc. Most

Models ,mentioned here invariably have some form of organizational or operational

intermediary dealing directly with microcredit, or or non-financial services.

Non-Governmental Organizations-

NGOs have emerged as a key player in the field of microcredit. They have

played the role of intermediary in various dimensions. NGOs have been active in

starting and participating in microcredit programmes. This includes creating

awareness of the importance of microcredit within the community, as well as various

national and international donor agencies. They have developed resources and tools

for communities and microcredit organizations to monitor progress and identify good

practices. They have also created opportunities to learn about the principles and

practice of microcredit. This includes publications, workshops and seminars, and

training programmes.

Peer Pressure

Peer pressure uses moral and other linkages between borrowers and project

participants to ensure participation and repayment in microcredit programmes. Peers

could be other members in a borrowers group (where, unless the initial borrowers in a

group repay, the other members do not receive loans. Hence pressure is put on the

initial members to repay); community leaders (usually identified, nurtured and trained

by external NGOs); NGOs themselves and their field officers; banks etc. The

'pressure' applied can be in the form of frequent visits to the defaulter, community

meetings where they are identified and requested to comply etc.


Rotating Savings and Credit Associations (ROSCAs) are essentially a group of

individuals who come together and make regular cyclical contributions to a common

fund, which is then given as a lump sum to one member in each cycle. For example, a

group of 12 persons may contribute Rs. 100 (US$33) per month for 12 months. The

Rs. 1,200 collected each month is given to one member. Thus, a member will 'lend'

money to other members through his regular monthly contributions. After having

received the lump sum amount when it is his turn (i.e. 'borrow' from the group), he

then pays back the amount in regular/further monthly contributions. Deciding who

receives the lump sum is done by consensus, by lottery, by bidding or other agreed


Small Businesses

The prevailing vision of the 'informal sector' is one of survival, low

productivity and very little value added. But this has been changing, as more and

more importance is placed on small and medium enterprises (SMEs) - for generating

employment, for increasing income and providing services which are lacking.

Policies have generally focused on direct interventions in the form of

supporting systems such as training, technical advice, management principles etc. and

indirect interventions in the form of an enabling policy and market environment.

A key component that is always incorporated as a sort of common

denominator has been finance, specifically microcredit - in different forms and for

different uses. Microcredit has been provided to SMEs directly, or as a part of a larger

enterprise development programme, along with other inputs.

Village Banking

Village banks are community-based credit and savings associations. They

typically consist of 25 to 50 low-income individuals who are seeking to improve their

lives through self-employment activities. Initial loan capital for the village bank may

come from an external source, but the members themselves run the bank: they choose

their members, elect their own officers, establish their own by-laws, distribute loans

to individuals, and collect payments and savings. Their loans are backed, not by goods

or property, but by moral collateral: the promise that the group stands behind each

individual loan.

1.4- Microfinance Product and Services-

Offering financial services to poor people in developing countries is expensive

business. The cost is one of the biggest reasons why traditional banks don´t make

small loans, the resources required for a 50$ loan is the same as for a 1000$ loan.

MFIs also have big personnel and administration costs. Field staff managers

must perform village surveys before entering a village, conduct interviews with

potential borrowers, educate the borrowers in credit discipline, travel to the villages

every week to collect interest and distribute loans and control that the loans are being

used for the given purpose.

The microcredit loan cycles are usually shorter than traditional commercial

loans with terms from typically six months to a year with payments plus interest,

payed weekly. Shorter loan cycles and weekly payments help the borrowers stay

current and not become surprised by large payments. Clearly the transaction-intense

nature of weekly payment collections, often in rural areas, is more expensive than

running a bank branch that provides large loans to economically secure borrowers in a

metropolitan area. As a result, MFIs must charge interest rates that might sound high.

In order to be able to lend out money, the microfinance institutions must in

addition borrow from the traditional finance sector with commercial perspective.

There´s always about 1-2% loss on loans due to people not paying back. To be able to

expand business the MFIs must also make some profit, at least 1-2%. All in all it´s

easier to understand why the MFIs charge their customer interest rates which in first

sight might appear high. With a growing market, better economics of scale and

increasing efficiency the cost will reduce and lower interest rates are able.

For a financial institution to scale and remain sustainable, at a bare minimum

it has to cover its costs. A large bank can charge lower rates in order to recoup its

costs. Because of smaller loan size and more transactions, the MFI has to charge

higher minimum rates.

Data from the Micro Banking Bulletin reports that 63 of the world’s top MFIs

had an average rate of return, after adjusting for inflation and after taking out

subsidies programs, of about 2.5% of total assets. This lends to the hope that

microfinance can be sufficiently attractive for investors, as well as the mainstream in

the retail banking sector.

Table-1.2: Typical microcredit products look like this (the numbers are only

Product Purpose Terms Interest rate

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

The Income Generating Loan is used for a variety of activities that generate

income for their families. Clients submit a loan application and based on approval

receive the loan after one week. Loans are paid in 50 equal, weekly installments.

After completion of a loan cycle, the client can submit a loan application for a future

loan. The approach with smaller short-term loan is to avoid long-term economic

problems with bigger loans.

The Mid Term Loan is available to clients after 25 weeks of repaying their

IGL loan. A client is eligible for a MTL if the client has not taken the maximum

amount of the IGL. The residual amount can be taken as a MTL. The terms and

conditions of the MTL are otherwise exactly the same as IGL.

The Emergency Loan is available to all clients over the course of a fiscal year.

The loan is interest free and the amount and repayment terms are agreed upon by the

MFI and the client on a case by case basis. The amount is small compared to the

income generating products and is only given in times of dire need to meet expenses

such as funerals, hospital admissions, prenatal care and other crisis situations.

The Individual Loan is designed for clients and non-clients that have specific

needs beyond the group lending model. Loans are given to an individual outside of
the group lending process. Amounts are typically higher than that of the income

generating loan and repayments are less frequent. Applicants must complete a strict

business appraisal process and have both collateral and a guarantor.

Microfinance is not panacea from all troubles; this also means that not any

poor person can obtain the loan. In particular, representatives of very poor population,

lacking stable income, living by means of chance earnings, and particularly having

debts (in relation to community facilities, relatives, friends, etc…) cannot be clients of

microfinance, since in case of microcredit non-repayment they will have more debts,

becoming poorer. For such people special programs of social assistance are needed,

which are able to support main needs of people living in the poorest dwellings,

lacking garments and food.

There are some restrictions regarding what the money is used for. Usually micro

credits can´t be used for the purposes like:

• Payments of other loans or other debts;

• Production of tobacco and liquor;

• Forming turnover capital of trade and intermediary business;

• Organization or purchasing products for gambling or entertainment services

for the population;

• Establishing trading points;

• Purchase of property that´s not used for business.

In the microfinance sector there are other services expanding as well. The poor

need, like all of us, a secure place to save their money and access to insurance for

their homes, businesses and health. Microfinance institutions are now innovating new

products to help meet these needs, empowering the world’s poor to improve their own

lives. Products common used in the microfinance sector today is:

Micro savings – A possibility to save money without no minimum balance,

allows people to retain money for future use or for unexpected costs. In SHGs the

members save small amounts of money, as little as a few rupees a month in a group

fund. Members may borrow from the group fund for a variety of purposes ranging

from household emergencies to school fees. As SHGs prove capable of managing

their funds well, they may borrow from a local bank to invest in small business or

farm activities. Banks typically lend up to four rupees for every rupee in the group

fund. It is a possibility to save money without any minimum balance and it can use in

future. The SHG members save the small amount of money on monthly basis in

groups and future members may borrow the some money in group funds for their own

purpose ranging from household emergencies, children school fee, daughter marriage

purpose. Sometimes SHGs members maintain their funds in group and they may be

borrow the from local bank.

Micro insurance – Gives the entrepreneurs the chance to focus more on their

core business which drastically reduces the risk affecting their property, health or

working possibilities. There are various different types of insurance services like life

insurance, property insurance, health insurance and disability insurance. The spectrum

of services in this sphere are constantly expanded, as schemes and terms of providing

insurance services are determined by each company individually. The risk is

uncertain so ever human beings need safety and security against risk. The MFIs

recently adopted new concept of Micro-Insurance this will reduce the risk and

informal savings, No doubt many of the experts said, this is very expensive options

for clients and institutions, but it avoids the risk of poor families in rural and urban

areas. This is a new financial service so; they should understand the system and

increase the financial products that can be benefit for the poor people rather than

undermining the existing systems. Micro Insurance is a new concept adopted in 2005

to avoid the uncertain causes like illness, accidental death, loss of property,

agricultural losses and natural and man-disaster in rural areas and this will

significantly change over next few years. Development in planning technology and

investment results to diversified the products in rural areas.

Micro leasing – For entrepreneurs or small businesses who can´t afford buy at

full cost they can instead lease equipment, agricultural machinery or vehicles. Often

no limitations of minimum cost of the leased object; The micro leasing is one of the

dynamic products of the Micro finance industry; they adopted this innovative product

in their financial services menu and using it to raise the financial funds for the

purpose of purchases the finance equipment. The small businessmen are unable to buy

at full cost of equipment so, they are browning lease equipment like, agricultural

machinery or vehicles for day to day actives. Micro leasing can develop long term

financial operation for its clients and increase their borrowing capacity in rural area.

Microfinance Institutions offers different schemes to economic weaker section

people to gain short and medium term capital for fixed assets because the lease is

granted based on an enterprise cash flow rather than on its credit history, so this is

good opportunity to establish new business on a limited budget or increase products

through new capital investment.

Money transfer – A service for transferring money, mainly overseas to family

or friends. Money transfers without opening current accounts are performed by a

number of commercial banks through international money transfer systems such as

Western Union, Money Gram, and Anelik. On the surface they may seem like small

money transfers, but when one considers that such transactions take place millions of

times around the world each week, the numbers start to become impressive.

According to the World Bank, the annual global market for remittances – money

transferred home from migrant workers – is around 167 billion US dollars. The

estimated total is closer to 230 billion dollars if one counts unregulated transactions.

Remittances are also an important source of income for many developing countries

including India, China and Mexico, all of which receive over 20 billion dollars each

year in remittances from abroad. Micro Finance Institutions offers to fulfil the

financial goals and achieve the social objective. MFIs understand the low income

geographic areas and delivering additional services demanded by the low income

customers at lower cost than other financial main streams providers. The money

transfer market offers good opportunities for MFIs to attract the new customers or

clients and increases the existing client’s loyalty, these results to earn additional

revenue and they should seek the information of money transfer from experienced

institutions have already launched them in different areas.


Pension is key factor of the empowerment of women in rural area; because the

pension offer retires with old age benefits to women this will reduce the vulnerability

in home. In India few Micro financial Institutions supporting and strongly they are

working in Micro Pension schemes. The institutions have been offered different type

of schemes for the poor in rural areas on the basis of their savings and economic


Table-1.3: Types of Microfinance used by poor people

Figure-2: Microfinance Distribution Channel

Figure-3: micro-finance interventions through different organizations

Microfinance can play an important part in achieving the growth and

development as a sustainable approach to development, helping families to create

enterprises and take the first steps out of poverty, a ‘hand up rather than a hand out’. It

covers some of the innovations in the public and private sectors for scaling up

microfinance as it currently serves only 1% of the poor. The effectiveness of

microfinance in achieving the development and growth, the Consultative Group for

the Alleviation of Poverty, points out the ‘multi-tasking’ role of microfinance by

providing the means for poor people to have sustained access to employment, health

and education: Access to financial services forms a fundamental basis on which many

of the other essential interventions depend. … Financial services thus reduce poverty

and its effects in multiple, concrete ways. And the beauty of microfinance is that, as

programs approach financial sustainability, they can reach far beyond the limits of

scarce donor resources.

Microfinance stands as one of the most promising and cost effective tools

which fight against global poverty. The microfinance program through SHG (Self

Help Group)- Bank linkage has been launched by the government of India as a

strategy of poverty elimination and rural economic development. The pioneering

efforts at this has been made by National Bank for Agriculture and Rural

Development (NABARD) which is vested with the task of framing appropriate policy

for rural credit, provision of technical assistance banked liquidity support to banks,

supervision of rural credit institutions and other economic development initiatives.

Microfinance has become, in recent years, a fulcrum for development

initiatives for the poor, particularly in the Third World countries and is regarded as an

important tool for poverty alleviation The microfinance revolution, particularly the

success stories of institutions like Grameen Bank in Bangladesh, Banco Sol in

Bolivia, and Bank Rakyat in Indonesia, attracted several economists to study

microfinance in the latter half of the 1990s.But in present days the economists are

expressing concerns about the market oriented nature of the micro finance institutions

in India.

Microfinance sector has emerged as major strategy to combat the twin issues

of poverty and unemployment that continue to pose a major threat to the polity and

economy of both the developed and developing countries. The emerging microfinance

revolution with appropriate designed financial products and services enable the poor

to expand and diversify their economic activities, increase their incomes and improve

their social Well being (Bennett and Cuevas, 1996; Ledgerwood, 1999).

A number of agencies- Government as well as Non-government

Organizations- are, today involved in micro-finance development initiatives.

1.5 Significance of Microfinance Institutions

Microfinance Institutions helps society in following ways-

1.Eradicating Poverty Microfinance allows poor people to: Protect,

diversify, and increase their sources of income, the essential path out of poverty and

hunger, use a safe, convenient savings account to accumulate enough cash to buy

assets for a small business enterprise, pay for health, home improvements, and school

fees, Safeguard against the extreme vulnerability of their everyday existence with

loans, savings, and insurance to take them over lean periods, emergencies or deaths in

the family.

2. Promoting Children's Education: One of the first things poor people all

over the world do with new income from micro enterprise is invest in their children's

education. Children of microfinance clients are more likely to go to school. An impact

study of a microfinance program in India, conducted for the various project, showed

that client households invest more in education than non-client households.

3. Improving Health Outcomes for Women and Children: Households of

microfinance clients appear to have better nutrition, health practices, and health

outcomes than comparable non-client households. Along with financial services,

some microfinance institutions also provide health education; others provide credit

products for water, sanitation, and housing and a growing number are working with

insurance providers to offer health insurance.

4. Empowering Women: Microfinance programs have generally targeted

women as clients as they tend to be more financially responsible and reliable, with

many microfinance institutions reporting repayment rates from 80 to 95%.

Appropriate program design can have a strong, positive effect on women's

empowerment, resulting in women owning more assets, having a more active role in

family decisions, and increasing investment in family welfare.

1.6 Current Trends, Challenges Crisis and Issues in Microfinance sector-


According to a World Bank survey in 2012, only 35% of adults in India had

access to a formal bank account and only 8% borrowed from institutional and formal

sources. There has been a vacuum that has been created by the banks and

Government. The very poor are the ones who are extremely vulnerable to the vagaries

of nature and are hence considered to be ‘unbankable’ by mainstream commercial

financial institutions. Microfinance has emerged as a powerful economic development

tool intended to favor low-income women and men.

Without access to savings accounts, loans, insurance and fund transfers,

billions of unprivileged people around the world appear to face insurmountable

obstacles to overcome poverty. A movement to provide better financial services to the

poor has been operating since the late 1970s and early 1980s and these services are

collectively called Microfinance. Microcredit serves as a powerful tool of

microfinance, which involves giving out loans to the poor. Such loans can help a

person start a business, generate income and so, can begin the climb out of poverty.

This approach enables capital to be put to a productive use in the local economy.

Microfinance institutions also provide savings and insurance, which can help the poor

manage unforeseeable events more effectively and also ensure their livelihood is

intact. Grameen bank, originating in Bangladesh was the first to establish successful,

scalable models for modern Microfinance.



The brief overview of the demand for micro-financial services suggests the

huge challenges and the opportunities the Indian market presents. Protective financial

services may be critical for poverty alleviation, but they do little for helping people

out of poverty. Hence, promotional financial services are required, primarily for

enhancing livelihood among poor people. It is said that micro-finance can also harm

poor people (Hume and Mosley, 1996). The increase in income of microcredit

borrowers is directly proportional to their starting level of income – the poorer they

were to start with, the less is the impact of the loan. Secondly, poor borrowers from

Micro-financing organizations often do not graduate to higher and higher loans, and

consequently to productive small enterprises. While credit may initially be the ruling

constraint for micro enterprises, to grow beyond a certain size, other constraints come

into play. Micro-enterprises are therefore unlikely to grow substantially without

inputs that can address these additional constraints. Livelihood promotion is complex,

opening up multiple potential goals and interventions and demanding an

understanding of individual household and enterprise as well as the economic systems

or sub-sectors in which they operate. Intervening in livelihood promotion is far more

challenging than developing efficient delivery of financial services.

The microfinance industry has, in fact, moved away from livelihood

promotion. Using micro-credit to promote livelihood may not be feasible with such a

strategy. The necessary non-financial services that have to be added and the

investment in understanding the complexity of livelihood systems entail significant

costs. The interventions may also require engagement with market actors. By 2008, at

least one million SHG’s with 17 million members are expected to emerge. As

autonomous organization, SHG’s share the challenges and dynamics of other small


Forming new groups requires significant energy and the necessary group

Processes. Governments, donors, policy makers and resource providers need to be

aware of the dynamics involved in these small organizations.

The institutional challenges in micro financing are three fold:

i. How to support existing leading and social entrepreneurs and nurture new

ones; at least one million SHG’s will be require support;

ii. How to ensure the SHG’s remained autonomous and is not captured by

political and bureaucratic interests pursuing votes or targets? Will the

emerging movement of SHG’s be any better at preventing this than previous

movements, such as cooperatives?

iii. How to support the SHG’s movement so that it can go beyond financial

service provision to support the development of a large number of livelihoods

among SHG members? Some would argue, this is inappropriate for such small

organizations. Other, would say it is essential given the livelihood India needs

to generate, not the least for women?

As for credit, its usage among poor households in 1998 was estimated to be

almost $11 billion. It is clear from the rapid growth of self help groups and other

community based intermediaries that if credit were more readily available, its usage

would only go up, suggesting that much demand for credit among poor households is

also not met. Further, the supply of insurance services to poor people is increasing,

including low premium schemes, covering death, accidents, natural calamities, loss of

assets etc. However, poor people face significant risks in purchasing insurance.

Moreover, the total current demand for micro-financial services is not being met and

there is likely to be significant additional latest demand. In addition, demand needs to

be enhanced by supporting the growth of micro-producers and community based

organizations that will enhance their need and capacity for absorbing credit, as well as

other financial services.

The total outreach of specialized providers of micro-financial services is

estimated to fall over-below one percent of credit usage by poor households. While

banks have given a very large number of small loans, the proportion of rural credit

usage supplied by the formal sector stood at 56.6 percent in 1991 and it is much lower

for the poorest households. Banks have not delivered effective micro-financial

services, but they have been driven by mandatory targets and subsidies resulting in

low repayment rates, leading to a vicious cycle of non-availability and non-repayment

(Mahajan and Nagasri, 1999). Non-profit Micro financial organizations face the

following constraints (Matthew Titus, 2002):

1. In most states, the Registrar of Societies has not recognized microfinance as a

permitted activity for societies (NGO’s).

2. The Income Tax Act [Section 2(15)] does not define micro-finance as a

charitable activity, so that NGO’s engaged in micro-finance risk losing their

charitable status.

3. The Income Tax Act [Section 11(5)] does not allow NGO’s to promote mutual

benefit or commercial micro-financial organizations, as they are not allowed

to invest in equity.

4. The Foreign Contribution Regulation Act is ambiguous about receiving funds

for microfinance, whether the foreign funds are used as grants or loans.

5. Non-profit micro-financial organizations have difficulty is raising deposits

without contravening the Reserve Bank of India Act. With massive expansion,

the performance of SHG’s also becomes even more critical, especially as

many SHG’s are being promoted by governments and banks. Ensuring good

performance and sustainability across such a vast number of small local

organizations is a real challenge and will require significant resources for

support and development.

6. Moreover, as specialized micro-financial organization grow, whether NGO’s,

cooperatives or companies, they will require increasing resources not just for

capital but also for organizational and human resource development to ensure

their becoming become effective financial and developmental organizations.

Another challenge is that the vast majority of resources are channelled through

public agencies, which can be slow, rule bound and risk averse. Almost no

attempt has been made to build more independent organizations for resourcing

and supporting providers of micro-financial services that must emerge if the

sector is going to massively expand and develop.

Crisis and Issues in Microfinance-


In November 2011, the Indian microfinance industry – one of the biggest, and

the fastest growing in the world – was paralyzed as a result of the most major

repayment crisis that it has confronted in its history. This led to an almost-immediate

government take-over of the situation and a freeze on the operations of the country’s

biggest MFI – and was accompanied by instant media reports labeling this breakdown

the Indian equivalent of the subprime mortgage crisis.

The immediate trigger for the crisis in India was a rise in village suicides,

particularly in the state of Andhra Pradesh. This was linked, in the eyes of most, to the

arm-twisting tactics increasingly used by the microfinance industry in ensuring loan

repayment – and resulted in the enactment of state legislation imposing serious

restrictions on loan collection by microfinance institutions (MFIs). But how did the

use of coercion – until recently only a sporadic phenomenon in the microfinance

industry – come to become, or at least be perceived to become, the key mechanism

employed to enforce loan repayment?

The central player in the crisis – SKS Microfinance – was founded by the

high-profile Vikram Akula and, until recently, rated as second in importance,

globally, only to the Grameen Bank. Crucially, the crisis followed close upon the

heels of a shift by SKS to a for-profit lending model: in 2010 it issued an IPO raising

$350 million from major corporate investors.

The significance of these events is immense. Andhra Pradesh, for example,

with total lending by MFIs amounting to 80 billion rupees or approximately 2 billion

dollars is home to a third of India’s microfinance industry, with an estimated 26.7

million borrowers. Many feared that the crisis would spread to the mainstream Indian

banking sector with its heavy investment in the microfinance industry.

The central bank – the Reserve Bank of India – responded by instituting the

Malegam Committee, which made several recommendations on the reform of the

microfinance sector including limiting competition, a cap on interest rates and a

ceiling on per household lending. Its report is the precursor to the national legislation

to regulate the sector. With regulation on the way and the threat to the Indian banking

industry deemed to be minimal, relative calm appears to have been restored and the

crisis more or less contained. But trust in the microfinance industry has been shaken

the world over, and the impact of regulation remains uncertain.



The first challenge relates to sustainability. MFI model is comparatively

costlier in terms of delivery of financial services. An analysis of 36 leading MFIs by

Jindal & Sharma shows that 89% MFIs sample were subsidy dependent and only 9

were able to cover more than 80% of their costs. This is partly explained by the fact

that while the cost of supervision of credit is high, the loan volumes and loan size is

low. It has also been commented that MFIs pass on the higher cost of credit to their

clients who are ‘interest insensitive’ for small loans but may not be so as loan sizes

increase. It is, therefore, necessary for MFIs to develop strategies for increasing the

range and volume of their financial services.

Lack of Capital

The second area of concern for MFIs, which are on the growth path, is that

they face a paucity of owned funds. This is a critical constraint in their being able to

scale up. Many of the MFIs are socially oriented institutions and do not have adequate

access to financial capital. As a result they have high debt equity ratios. Presently,

there is no reliable mechanism in the country for meeting the equity requirements of


The IPO issue by Mexico based ‘Compartamos’ was not accepted by purists as

they thought it defied the mission of an MFI. The IPO also brought forth the issue of

valuation of an MFI.

The book value multiple is currently the dominant valuation methodology in

microfinance investments. In the case of startup MFIs, using a book value multiple

does not do justice to the underlying value of the business. Typically, startups are loss

making and hence the book value continually reduces over time until they hit

breakeven point. A book value multiplier to value startups would decrease the value

as the organization uses up capital to build its business, thus accentuating the negative

rather than the positive.

Financial service delivery

Another challenge faced by MFIs is the inability to access supply chain. This

challenge can be overcome by exploring synergies between microfinance institutions

with expertise in credit delivery and community mobilization and businesses

operating with production supply chains such as agriculture. The latter players who

bring with them an understanding of similar client segments, ability to create

microenterprise opportunities and willingness to nurture them, would be keen on

directing microfinance to such opportunities. This enables MFIs to increase their

client base at no additional costs.

Those businesses that procure from rural India such as agriculture and dairy

often identify finance as a constraint to value creation. Such businesses may find

complementarities between an MFI’s skills in management of credit processes and

their own strengths in supply chain management.

ITC Limited, with its strong supply chain logistics, rural presence and an

innovative transaction platform, the e-choupal, has started exploring synergies with

financial service providers including MFIs through pilots with vegetable vendors and

farmers. Similarly, large FIs such as Spandana foresee a larger role for themselves in

the rural economy ably supported by value creating partnerships with players such as

Mahindra and Western Union Money Transfer.

ITC has initiated a pilot project called ‘pushcarts scheme’ along with BASIX

(a microfinance organization in Hyderabad). Under this pilot, it works with twenty

women head load vendors selling vegetables of around 10- 15 kgs per day. BASIX

extends working capital loans of Rs.10,000/- , capacity building and business

development support to the women. ITC provides support through supply chain

innovations by: making the Choupal Fresh stores available to the vendors, this avoids

the hassle of bargaining and unreliability at the traditional mandis (local vegetable

markets). The women are able to replenish the stock from the stores as many times in

the day as required. This has positive implications for quality of the produce sold to

the end consumer.

HR Issues

Recruitment and retention is the major challenge faced by MFIs as they strive

to reach more clients and expand their geographical scope. Attracting the right talent

proves difficult because candidates must have, as a prerequisite, a mindset that fits

with the organization’s mission.

Many mainstream commercial banks are now entering microfinance, who are

poaching staff from MFIs and MFIs are unable to retain them for other job


85% of the poorest clients served by microfinance are women. However,

women make up less than half of all microfinance staff members, and fill even fewer

of the senior management roles. The challenge in most countries stems from cultural

notions of women’s roles, for example, while women are single there might be a

greater willingness on the part of women’s families to let them work as front line

staff, but as soon as they marry and certainly once they start having children, it

becomes unacceptable. Long distances and long hours away from the family are

difficult for women to accommodate and for their families to understand.

Micro insurance Issue-

First big issue in the micro insurance sector is developing products that really

respond to the needs of clients and in a way that is commercially viable.

Secondly, there is strong need to enhance delivery channels. These delivery

channels have been relatively weak so far. Micro insurance companies offer minimal

products and do not want to go forward and offer complex products that may respond

better. Micro insurance needs a delivery channel that has easy access to the low-

income market, and preferably one that has been engaged in financial transactions so

that they have controls for managing cash and the ability to track different individuals.

Thirdly, there is a need for market education. People either have no

information about micro insurance or they have a negative attitude towards it. We

have to counter that. We have to somehow get people - without having to sit down at

a table - to understand what insurance is, and why it benefits them. That will help to

demystify micro insurance so that when agents come, people are willing to engage

with them.

Adverse selection and moral hazard

The joint liability mechanism has been relied upon to overcome the twin

issues of adverse selection and moral hazard. The group lending models are

contingent on the availability of skilled resources for group promotion and entail a

gestation period of six months to one year. However, there is not sufficient

understanding of the drivers of default and credit risk at the level of the individual.

This has constrained the development of individual models of micro finance. The

group model was an innovation to overcome the specific issue of the quality of the

portfolio, given the inability of the poor to offer collateral. However, from the

perspective of scaling up micro financial services, it is important to proactively

discover models that will enable direct finance to individuals.

1.7 Significance of the Study-

The overall development of a nation is closely depends on the development of

the rural economy. During the last few decades it has been seen that due to the vicious

cycle of poverty these overall development cannot be achieved. Poverty is a term with

which many developing countries are suffering. In India, most of the people lives in

the rural areas are below the poverty line and finance to these indigenous peoples is

considered as important issues for the Government of India. There are still around 200

million people in rural areas that live below the poverty line and for whom banking

access is still not a reality. The financial requirement is one of the basic needs of the

poorer section of the society for socioeconomic development. Credit has been

available to poor for centuries in one form or other. But they are not organized and

institutionalized. Money lenders and chettiars (local money lenders of have existed for

a long time in Chinese and Indian communities to provide credit at high interest rate.

Money lenders were providing credit mortgaging land records and other valuable

assets like gold and silver ornaments and other domestic asset base like domestic

animals. In case of non-recovery of loans, these mortgage items were being

impounded throwing the borrowers to destitution. Thus the need for an institutional

mechanism is felt.

“What do the poor really mean in the context of microfinance and financial


If decisions in microfinance are consistently approached in terms of serving the poor?

Is MFI are active in Gulbarga and reaching the poor in an important manner?

At present Micro Finance Institutions has been facing many problems such as-.

Absence of a proper regulatory framework and supervision mechanism for

the sector is a major hindrance in orderly growth of the sector.

Transaction cost of MFIs is high

Transparency in dealing with poor clients,

Effective cost of credit to clients

. In view of the above, the study, assumes a greater importance and the present

research work may provide suitable suggestions for policy framers to resolve

problems being faced by Microfinance Institutions as well as their clients

1.8. Statement of the Research Problem-

There are certain key characteristics of the rural poor with regard to their

credit needs. Majority of them work as casual labour in the informal sector as

hawkers, home-based producers and manual labor such as housemaids. Their credit

needs often arise out of uncertain earnings and consequent disruptions in their cash

flow, medical emergencies, household needs and extortions by lawful or unlawful

actors (Gaiha, 2005). There is lack of documented data about the impact of

microfinance on rural development in Gulbarga division of Karnataka state. The

present study attempts to examine analytically the impact of microfinance on rural

développent in select micro finance institutions at Gulbarga division of Karnataka


1.9. Objectives of the Study-

1. To know the impact of micro financial services on rural development of

Gulbarga division.

2. To know whether there is need for microfinance initiatives in Gulbarga


3. To assess the satisfaction level of microfinance clients for Microfinance

services offered by Microfinance Institutions in Gulbarga Division.

4. To identify whether the Micro financial services initiatives are dependent of the

interest and financial conditions of rural people.

5. To throw light on role played by Micro Financial institutions in Improving

standard of living of rural people of Gulbarga division.

1.10 Hypothesis of Study

Hypothesis of Study:

H0: There is no significant association between Micro-financial Services

Initiatives and Rural Development.

H01: There is a significant association between Micro-financial Services

Initiatives and Rural Development.

H02: There is no significant association between Micro financial Services offered

and satisfaction level of microfinance clients in Gulbarga District.

H12. There is significant association between Micro financial Services offered

and satisfaction level of Microfinance clients in Gulbarga District

H03: Micro financial services initiatives are not dependent of the interest and

Financial conditions of rural people.

H13. Micro financial services initiatives are dependent of the interest and

Financial conditions of rural people

H04: Involvement of Micro -Financial Institution does not improve the standard

of living of Poor families.

H14: Involvement of Micro -Financial Institution significantly improves the

standard of living of Poor families.

1.11. Limitations of the Study-

In my research work the following limitations were observed.

1. Though, Karnataka has around 30 districts, research is conducted in Gulbarga

Division Only.

2. The study was carried out with some assumptions regarding time, study area

and sample size.

3. The identification of the respondents and gathering information from them

was one difficult task faced by the researcher.

4. Accessibility of the researcher to the rural areas was also considered while

selecting the district of Gulbarga.

5. The study is mainly based on primary and secondary data. Some of the

conclusions are based on the estimates, assumptions, observations and

informal interview.

6. Personal biases were identified by the researcher when carrying out the

survey. The research results are applicable only for the region of Gulbarga and

it cannot be generalized.

7. Microfinance Clients hesitate to fill up the questionnaire and they do not take

it seriously because they are in different mood and hence there is need to

convince them.

8. For my research work, I have gathered data for a period of 10years (2005-


1.12. Scope of the study-

The study is confined to Gulbarga division of Karnataka state, the division

consists of Gulbarga, Raichur, Bidar, Yadgir and Koppal each district has lot of

potentiality to develop Microfinance Institutions. when I compared the four different

regions of Bangalore, Mysore, Belgaum and Gulbarga, it was observed Gulbarga is

economically least developed that lagged significantly behind the other three with

only 10% of the total MFI presence in Karnataka while Gulbarga has 18% of the total

population of Karnataka.

1.13. Chapter Scheme- My research work is presented through the undernoted six


1. Introduction

2. Literature Review

3. Research Methodology

4. Development of Microfinance

5. Data Analysis and Interpretation

6. Summary of Findings, Suggestion and Conclusions

The first chapter is introductory compiled in nature and spells out the

conceptual frame work, Historical background and Evolution of Microfinance,

Microfinance credit lending models, Microfinance products and services, significance

of Micro finance Institutions, objectives of the study, hypotheses of the study,

significance of the study and statement of the problem. This chapter serves as the

foundation on the basis of which the other chapters of the study are developed.

Literature reviews are discussed in the second chapter. The third chapter deals with

the Research Methodology adopted for the study. The fourth chapter focuses on the

Microfinance in India; fifth chapter consists of analysis and interpretation of primary

data and finally the sixth chapter deals with the survey findings, suggestions and

conclusion of the study.