Banks & Micro Finance

BANKS AND MICRO FINANCE
A
Report on
BANKS AND MICROFINANCE
A DISSERTATION SUBMITTED IN PARTIAL FULFILLMENT

OF
THE REQUIREMENTS FOR THE AWARD OF MBA DEGREE OF
BANGALORE UNIVERSITY.
Submitted By
K.PAVITRA
Reg.No-03XQCM6069
UNDER THE GUIDANCE OF

Dr.T.V.Narasimha Rao
INTERNAL GUIDE
M.P.BIRLA INSTITUTE OF MANAGEMENT

ASSOCIATE BHARTIYA VIDYA BHAVAN
43, RACE COURSE ROAD,
BANGALORE-560001
1
2003-2005
2
DECLARATION
I hereby declare that the research work embodied in this

dissertation entitled “BANKS AND MICROFINANCE , has been
carried out by me under the guidance and supervision of
Dr.T.V.Narasimha.Rao, M.P.Birla Institute of Management,
Bangalore (Internal Guide).
I also declare that this dissertation has not been

submitted to any other University/Institution for the award of
any Degree/Diploma.
Place: Bangalore K.PAVITRA

Date: 17th June 2005 Reg
No.03XQCM6069
3
PRINCIPAL’S CERTIFICATE
I hereby certify that this dissertation is an offshoot of the

research work undertaken and completed by Ms.K.PAVITRA.
under the guidance of Dr.T.V.NarasmihaRao, MPBIM,
Bangalore.
Place: Bangalore (Dr. N.S.

Malavalli)
Date: 17th June 2005.
Principal
4
ACKNOWLEDGEMENT
It gives me an immense pleasure to express my deep sense of

gratitude to my internal guide Prof. T.V.Narsmiha Rao for his
enormous guidance and assistance. He has been my mentor and
guide, his continuous encouragement and valuable suggestions
helped me at every stage of this project.
I would like to express my thanks to Dr. N.S Malavalli,

Principal M.P.Birla Institute of Management Bangalore.
I would like to express my thanks to Mr.A.S.Srikanth, (I.A.S),
M.D, Karnataka Land Army Corporation Ltd., for his guidance.
Finally, I would like to thank my family and friends for their
overwhelming
support and encouragement
K.PAVITRA
5
Table of contents
Abstract………………………………………………………………...01
Chapter 1: Introduction
Background……………………………………………….05
Problem Statement………………………………………..07
Research objectives……………………………………….07
Chapter 2: Theoretical Framework……………………………………..08
Chapter 3: Review of Literature

Methodology and findings………………………………..42
Chapter 4: Research Methodology

Methodology……………………………………………....44
Type of Research………………………………………….44
Collection of Data…………………………………………44
Research Limitations………………………………………45
Chapter 5: Analysis and Discussion

Interpretation………………………………………………46
Chapter 6: Conclusion
Conclusions……………………………………………….53
References………………………………………………………………54
6
LIST OF TABLES
Table Name Page

no. no.
1 Rating of SHG 19
2 SHGs linked by Commercial banks in 45
Karnataka
3 SHGs linked by RRB in Karnataka 46
4 SHGs linked by Co-operative banks in 47
Karnataka
5 District wise break up of SHGs in Karnataka 48
(03-04)
6 Performance of public sector and private sector 49
banks
7 New SHGs formed and loan disbursed by 51
banks in India
7
ABSTRACT
Post nationalization in India, commercial banks have been participating

actively
in implementation of poverty alleviation programmes of the Government
like the
Integrated Rural Development Programme (IRDP), Small Farmers
Development Agency
(SFDA) for the marginal farmers and agricultural laborers and the
Drought Prone Area
Programme (DPAP). Experimenting with subsidized credit for the poor
through these
programmes has resulted in one unpleasant and tangible outcome –
increased Non
Performing Assets . Group based micro finance was introduced in the
country in the early 1970s, but has not picked up momentum until
recent times. Banks, over time have begun adopting models that have
been tried and tested by Non Government Organizations (NGOs) and
Micro Finance Institutions (MFI). These institutions had the clear vision
to disprove the intuition of the formal bankers that banking with the
poor was a risky affair. They have proved beyond doubt that banking
with the poor is most certainly a profitable business. They have also
popularized the concept of group lending through the formation and
grooming of Self Help Groups (SHGs).
The objective of this research is to study the growth of microfinance sector in Karnataka.
The analysis has been based on the secondary data obtained from
NABARD and other published articles.
8
INTRODUCTION
The important finding of last three decades in the finance field is “poor can save, can
borrow and and certainly repay loans”. This is world of microfinance.
A good definition of microfinance as provided by Robinson is, ‘Microfinance refers to

small-scale financial services for both credits and deposits —that are provided to people
who farm or fish or herd; operate small or micro enterprises where goods are produced,
recycled, repaired, or traded; provide services; work for wages or commissions; gain
income from renting out small amounts of land, vehicles, draft animals, or machinery and
tools; and to other individuals and local groups in developing countries, in both rural
and urban areas’.
In the Indian context terms like "small and marginal farmers", “rural
artisans"
And "economically weaker sections" have been used to broadly define
micro-finance
customers. The recent Task Force on Micro Finance has defined it as
"provision of thrift,
credit and other financial services and products of very small amounts to
the poor in
rural, semi urban or urban areas, for enabling them to raise their income
levels and
9
improve living standards".
Microfinance services are provided by formal institutions such as rural

banks and
Cooperatives; semiformal institutions such as non-government
organizations; and
Informal sources such as moneylenders and shopkeepers. Institutional
microfinance is
defined to include microfinance services provided by both formal and
semiformal
institutions. Microfinance institutions are defined as institutions whose
major business is
the provision of microfinance services. At present, a large part of micro
finance activity is
confined to credit only. Women constitute a vast majority of users of
micro-credit and
savings services.
Self-help group (SHG) is an association of people belonging to similar

socioeconomic
characteristics, residing in the locality. The SHG concept is most
appropriate
and can succeed in our country only if and when a holistic approach is
imbibed in the
Promotion of SHGs as self-sustaining local organizations. However bank
linkages for
10
SHGs are at present driven more by annual targets than as a system. A

SHG has an average size of about 15 people from a homogenous class.
They come together for addressing their common problems. They are
encouraged to make voluntary thrift on a regular basis. They use this
pooled resources to make small interest bearing loans to their members.
The process helps them imbibe the essentials of financial intermediation
including prioritization of needs, setting terms and conditions, and
accounts keeping.
MICROFINANCE INSTITUTIONS IN INDIA

A range of institutions in public sector as well as private sector offers
micro
finance services in India. They can be broadly categorized into two
categories namely,
1. Formal institutions
2. Informal institutions.
The former category comprises 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 microfinance
services, the MFIs are mainly in the private sector.
The micro finance service providers include apex institutions like

National Bank for Agriculture and Rural Development (NABARD), Small
11
Industries Development Bank of India (SIDBI), and, Rashtriya Mahila

Kosh (RMK).
The micro finance initiative in private sector can be traced to the
initiative undertaken by Ms.Ela Bhatt for providing banking services to
the poor women employed in the unorganized sector in Ahmedabad City
of Gujarat State.
NABARD during the early eighties conducted a series of research studies
in association with MYRADA (a leading NGO from South India) and also
independently which showed that despite having a wide network of rural
bank branches that implemented specific poverty alleviation programmes
and self-employment opportunities through bank credit for almost two
decades, a very large number of the poorest of the poor continued to
remain outside the fold of the formal banking system. NABARD, however,
also took a conscious decision to experiment with other successful
strategies such as replicating Grameen, wholesaling funds through NGO-
MFIs.
The dominant model of microfinance – the group lending model
pioneered by the Grameen Bank in Bangladesh – socializes the costs of
lending to poor women by providing them access to credit on the basis of
“social collateral” obtained through membership in borrower groups.
Here social capital helps correct for imperfect information about
borrowers lacking in formal credit and employment histories and
substitutes for collateral by ensuring against default through social
sanction and peer enforcement.
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BACKGROUND
The NABARD led Pilot Project commenced with the support of the Central
Bank of the country, i.e., Reserve Bank of India, from 1992 onwards
aimed at promoting and financing 500 SHGs across the entire country,
the SHG- bank linkage strategy has come a long way. However, NGOs
and MFIs acted as a catalyst for change and helped in bringing about
such paradigm shift. They were very successful in combining social and
economic agenda with synergistic effect. They also recognized
sustainability as the core factor in development
The statistics in this field are mind-boggling. During the period April
2003 to March 2004 - 361,731 new SHGs were financed by banks to a
tune of Rs 18.55 billion (US $ 412 million) by way of loans. Cumulatively,
banks have lent Rs 39.04 billion (US $ 867 million) to 1,079,091 SHGs.
NABARD has extended a refinance of Rs 7.06 billion (US $ 156 million) to
banks during 2003-04 bring the cumulative refinance amount to Rs
21.24 billion (US $ 472 million).
These successes have been achieved only due to strict monitoring and
functioning of the NGOs and MFIs. For example, the Non Governmental
Organizations (NGOs) and Microfinance institutions promoting SHGs
must abide by the international best practices for microfinance, which
suggests that good financial analysis is the basis for successful and
sustainable microfinance operations leading to the success of the SHG
concept. With this understanding of the world of MF, this research was
13
carried out in accordance with the famous phrase “If you want to
evaluate the forest, look at the trees.” Thus it is important to evaluate an
institution’s performance with regard to different areas of its operation
i.e. product, service, delivery, etc. Microfinance as a developmental and economic
tool has caught the imagination of banks and other financial institutions, and NGOs in
India.
NGOs newly involved in microfinance tend to point to high repayment

rates as an indicator of their success. If there is one universal micro-
credit doctrine, it is that repayment rates of close to 100 percent are
within reach if the microfinance institutions conduct their operations
along "best practice" lines. "Best practice" explanations for good
repayment rates include high frequency collection schedules, tight
controls, a good management information system, loan officer incentives,
good follow up, and a quick jump on delinquency. On the borrowers'
side, the effects of peer pressure in group based schemes, and the
attractiveness of products with relatively low transaction costs also
explain good repayment rates.
14
Research Objectives
Objectives of the study:

1. To study the microfinance by banks in Karnataka.
2. To compare the performance of private sector banks with that of public sector banks in
terms of microfinance provided.
3. To examine the role by banks in the development of SHGs in the realm of
microfinance.
RESEARCH PROBLEM
India is the largest emerging market for microfinance. Over the past decade, the
microfinance sector has been growing in India at a fairly steady pace. Though no
microfinance institution (MFI) in India has yet reached anywhere near the scale of the
well-known Bangladeshi MFIs. The sector in India is characterized by a wide diversity of
methodologies and legal forms. However, very few Indian MFIs have achieved
sustainability yet.
This research attempts to study the growth of microfinance in Karnataka and
different state and evaluation of private and public sector banks in this field.
15
THEORETICAL FRAMEWORK
The Indian microfinance sector is a culmination of several approaches found across

the world. Indian microfinance has lapped up the Grameen blueprint; it has replicated
some aspects of the Indonesian and the Bolivian model. In addition to the imported
artifacts of microfinance, we also have the home-grown model of self-help
groups(SHGs).
This study aims to understand the economic attractiveness of microfinance both to NGOs
and to commercial banks; the relative merits of various delivery channels; the issue
of growth; and finally, what lies beyond micro credit.
An integrated set of microfinance services, including savings, credit and insurance

products, should be provided for the poor, as quickly as possible. The most important
reason is that all these services are needed by the poor, especially by poor women who
predominate among the clients of microfinance. They need savings facilities for
safekeeping and to tide them over food deficits and other periodic emergencies, as well as
to accumulate larger amounts of funds for the marriage of their daughters and the
purchase of productive assets. Micro-credit is needed for investment in income-
generating activities, activities, so as to break out of the vicious cycle of poverty.
16
Life and large livestock insurance are needed so as not to burden survivors with debt, and
to be able to cope with the death of a large farm animal purchased with loan funds.
As far as savings facilities and micro-credit are concerned, the usually strong demand
from poor women is sufficient evidence.
A second important reason for NGO-MFIs to provide clients with an integrated set of
microfinance services is that they promote the early attainment of institutional financial
break-even and sustainability, without which NGO-MFIs will not be able to serve the
poor for long. Not only do loan client savings provide an obvious ‘cushion’ for timely
repayment; but even more important, client
savings provide the basis for financial intermediation that makes possible the efficient
supply of micro-credit to its clients. Normally, savings are an alternative and relatively
cheap source of funds for NGO-MFIs, because the interest rates usually are less than
those that have to be paid for debt. Therefore, by maximizing its savings mobilization, an
NGO-MFI should be able to minimize its average cost of funds. This in turn should
maximized its margin at any given interest rate to its clients, and thereby hasten the
attainment of break-even and profitability. Insurance products also promote the
attainment.
What is micro-credit?
Micro credit can be defined as the extension of small loans to population, too poor to
qualify for traditional bank loans. These schemes are characterized by relatively small
loans, a few hundred dollars at most. The repayment period is relatively short, about a
year or so. Women are the major beneficiaries of these schemes, and the destination of
the funds primarily includes agriculture, distribution and trading, small craft, processing
17
industries and consumption credits too. The administrative structure is generally light and
the entire process is participatory in nature.
The core issue for poor was the access to credit, rather than cost of credit. In fact one of
the contributions of microfinance can possibly be the ‘end of interest rate debate’.
Microfinance has proved time and again that it is access and not interest rates that are a
constraint for the poor.
Another discovery followed, that the poor can and will save, and can indeed use a wide
range of financial services such as remittances facilities and insurance products. The most
well known and cited international example of a micro credit institution is the Grameen
Bank in Bangladesh.
PLAYERS IN MICROFINANCE SECTOR
The different actors on the basis of the roles they play in building of the rural financial
structures depending on their needs & goals.
i) The Rural poor
• Perceive thrift as their strength as also as the bonding factor among themselves
• Realise that timely and adequate credit was preferable and productive than
subsidies and doles.
• They need hassle-free delivery mechanisms.
ii) NGOs
• Act as catalysts of change

• Combine social and economic agenda with synergistic effect
18
• Recognise sustainability as the core factor in development
iii) Banking system
• Accept SHG-bank linkage as a cost effective means of reaching the poor

• Accept peer pressure as collateral substitute for excellent recovery of loans
iv) Government
• Formulate supportive policy framework

• Encourage routing of social programmes through SHGs
v) Reserve Bank of India
• RBI policy inputs on micro Finance lead to increased involvement of banks.

• Liberalise interest rates and deregulated interest rate structure for micro credit,
leading to flexibility in lending rates.
vi) NABARD
• Provides inputs in capacity building for banks and partner agencies

• Promotes the idea of organising thrift and credit groups among the NGOs as an
add-on activity and encouraged linking them with banks.
MODEL WISE LINKAGE PROGRAMME

Three different models of credit linkage have been evolved and the model-wise
status of credit linkage as on 31 March 2004 is as follows:
Model I: SHGs formed and financed by banks
In this model, banks themselves take up the work of forming and nurturing the
groups , opening their savings accounts and providing them bank loans. Up to
march 2004, 20% of the total number of SHGs financed wee from this. This
19
showed an increase of 52 % over the position upto march 2003, reflecting an

increased role of banks in promoting and nurturing SHGs.
Model II: SHGs formed by formal agencies other than banks, NGOs and others,
but directly financed by banks.
This model continues to have the major share, with 72% of the total number of
SHGs financed up to march 204, here NGOs and formal agencies in the field of
microfinance act only a s facilitators, they facilitate organizing, forming and
nurturing of groups and train 5them in thrift and credit management. Banks give
loan directly to these SHGs.
Model III: SHGs financed by banks through NGO s and other agencies as
financial intermediaries
This is the model where in the NGOs take on the additional role of financial
intermediation. In areas where the formal banking system faces constraints the
NGOs are encouraged to approach a suitable bank for bulk loan assistance. This,
in jkturn , is used by the NGO for on lending to the SHGs. In areas where a very
large number of SHGs have been financed by bank branches, intermediate
agencies like federations of SHGs are coming up as link between bank branch and
member SHGs.These federations are financed by banks, who, in turn, finance
their member SHGs. Other agencies like NBFCs are also coming up to take up
this role. The share of cumulative number of SHGs linked under this model upto
march 2004 continued to be small at 8%.
In any model the most important element of microfinance sector is the SHG-Slef
help group. the self help group indicates:
S-Savings H-Honesty G-Growth
E-Earnings/Employment E-Economy R-Resources
L-Learning L-Leadership O-Opportunities
F-Friendship P-Productivity U-Unity
P-Progress
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Assessing a self help group is a vital component.
ASSESSING A SELF HELP GROUP
The norms for SHGs in a particular place may have to be developed keeping in view the
local conditions. The above pattern is only a model and indicative one and could be used
as the basis for developing suitable norms for financing SHGs is it banks or any other
financing institution. A few proactive commercial banks, Regional Rural Banks and
Cooperative Banks have already introduced their own norms and the same is being
followed by the financing units.].
[This note may be read with NABARD circular letter dated February 2000, which also
shares different formats for appraising a SHG for finance].
For any financing institution, appraisal is very important for ensuring the utility of the
loan and repayment of the loan. Bankers generally appraise the project and the borrower.
In case of SHG financing, most of the project appraisal norms like assessing the cost
benefit and profits will not be workable due to the peculiarities of SHG financing. For
considering a loan application for financing the Financer has to evaluate the capacity and
character of the prospective borrower. SHG’s also being customers have to be appraised
before extending credit facilities. But then assessment of creditworthiness of a SHG is
very different from that of an individual. SHGs are not to be assessed in terms of their
ability to provide collateral or guarantees of net worth. The SHGs have to be assessed in
terms of Group dynamics like cohesion, vibrancy, goal-oriented action, participation of
members, democratic decision and collective leadership. The appraiser has to see whether
21
the group is functioning, actually as a group, why the members have come together,
whether it is for obtaining loan from bank or the group sees other purposes, what is the
group discipline and whether it is sustainable.
The basic principles on which the SHGs function are:
i. The members of the groups should be residents of the same area and must have an
affinity. Homogeneity of relationship could be in terms of caste/occupation/gender or
economic status (which is critical).
ii. Savings first, credit thereafter
iii. SHGs should hold regular meetings
iv. SHGs should maintain record of financial and other transactions
v. They should have norms regarding membership, meetings etc.
vi. Group leaders should be elected by members and rotated periodically
vii. Transparency in operations of the group and participatory decision making
viii. Rates of interest on loans should be decided by the group
ix. Group liability and peer pressure to act as substitutes for traditional collateral.
22
For assessing a Self Help Group the important aspects that a financer should look into
include;
1. Norms for functioning : The SHG should have developed some kind of norms
for its functioning the norms should be covering major areas of its functioning as well as
the decision making processes, leadership etc., Norms generally relate to
a. Membership
b. Meetings - time, periodicity
c. Savings - amount, periodicity, rate of interest (return)
d. Credit - procedure for sanction, ceiling amount, purposes, rate of interest to be

charged, repayment
period etc.
e. Fines - in case of default in attending meetings, savings and credit repayment. group
may also levy any fines for any deviant behavior etc.
f. Leadership - election or nomination of leaders, rotation of leaders etc.
g. Personal/social improvement - minimum literacy level to be achieved, social work

to be done etc.
23
The above norms may be written or oral. They may be decided in the initial meetings or
they may evolve over a period of time depending upon the need of the group. The
important aspect to be looked into are :
•• How norms evolved, whether by the consensus of the whole group.

•• Whether the members are aware of the norms (even if they are oral) and
understand them,
•• Whether the norms are implemented.
2. Meetings
The group decides the periodicity of the meetings i.e., weekly, fortnightly or monthly.
They also decide on the time of the meeting. Decision on time and periodicity helps in
regular conduct of meetings. The regularity in the holding of the meeting and the
attendance during meeting gives an indication bout groups functioning. Therefore a
Financer should see whether.
• The meetings have been held regularly

• The attendance in the meetings
• The members are punctual and stay till the end of the meeting
• Are there any sanctions for the delinquent members ?
The Financier can use his observations during the meetings and the meeting register to
get data on this appraisal aspect.
3. Maintenance of Books
Whether group is maintaining the basic books that will give details of its functioning and
accounts of the group is an important criterion to be judged. The books should give the
details of number of meetings held, decisions taken in the meetings, amount of savings of
the members and credit availed, the total savings of the group and repayments. Who
maintains these books is another important criterion for judging the group. Do members
24
maintain it, if not are they making efforts to achieve basic numeracy or literacy so that
they can start doing it themselves.
Financer has to verify :
• Whether details of meetings, proceedings, and attendance are maintained.

• Whether member-wise record of saving and credit are maintained.
• Whether the records are upto date.
• Whether all members are kept informed of their savings and credit balances from
time to time.
• In case of illiterate groups whether what is the system followed, does the group
verify the books maintained by NGO/outsider.
•• Whether systems have been developed to ensure safe custody of cash.
4. Leadership
Two or three group members are elected as leaders*/ book-writers. Initially the opinion
leaders may be the leaders and over a period of time they are expected to be take turns.
The group leaders are expected to a) regularly convene and conduct the meetings, b) help
the group members in taking decisions, c) resolve conflicts, d) maintain books of account
and e) approach bank branch for operation of accounts.
The aspects that are to be seen are :
25
• Whether the leaders have been elected and rotated

• Whether they help in democratic functioning of the group
• Whether there is a conscious attempt to groom other members to take up
leadership
• Are they marginalizing the benefits (especially loans)
5. Participation and Awareness of Group Members
Are the Members aware of the purpose of group formation, the operations and activities
of the group viz. The savings and the credit of the group as well as the individual
member’s savings and credit details.
• Do they participate in group discussions and decision making

• Do they help solve the problem that are raised in the meetings
• Do they work cohesively and have transparent dealings
The democratic character of the group may be judged by attending one or two meetings
and talking to individual members. The awareness level of members helps in healthy
functioning of the group and resolution of conflicts within the group.
6. Savings :
The group decides on the amount of savings as also its periodicity. It has to be seen
whether the saving, as decided upon, is regularly made, how the defaults are dealt with
and whether the system is modified as per the requirements of the members.
7. Credit :
The following aspects to be looked into while assessing the credit function of the group:
26
• The decision making process of selecting loanees.

• The system followed in assessing credit requirement of individual members and
the amount to be sanctioned.
• The system of monitoring the credit.
• The repayment performance of members and incidence of defaults besides the
effectiveness to deal with such defaults; whether the concept of `peer pressure’ is
working.
8. Self Reliance of the Group
Can the group function on its own without the support of the NGO is an important
criterion for assessment? The level of dependency on the NGO/promoter of the group and
impact of withdrawal of NGO/promoter on the group is to be assessed.
TABLE-1
RATING OF SELF HELP GROUPS
SL.NO CATEGORY CRITERIA MARK KEY

1 COMPOSITION a. Membership is 10 The rating is based on the
homogeneous judgment of assessing
5 official
b. No homogeneity
in membership
2 AGE OF THE c. One year and 10 There is no need to
GROUP above evaluate an SHG if it is
5 less than six month old
d. Six months and (ignore marginal shortfalls
above but less than a up to 1 month)
year
3 WEEKLY e. Four meetings per 10 The total number of
GROUP month meetings conducted during
MEETINGS 8 the last 3 months may be
f. 2-3 meetings per divided by 3 to arrive at
month 5 average no. Of group
meetings.
g. 1 meeting per
month
27
4 ATTENDANCE h. More than 90% 10 See explanation 1 at the

end.
i. Between 70% 5
and 90%
3
j. Less than 70%
5 MINUTES BOOK k. Written in detail 10 Peruse of minutes book
pertaining to meetings held
l. Maintained, but 5 during the last 3 months.
not in detail
6 PARTICIPATION m. Participation by 5 Peruse minutes book (if
IN GROUP only a few members rating is 10 for item 5)
DISCUSSION 10
n. Participation by Observe during a couple of
majority of members group meeting
Interact with members

7 SAVINGS o. 4 times a month ( 10 Step 1 : Take the average
(FREQUENCY) by majority members) no. Of members making
8 saving during last 3
p. 4 times a month months.
(but not by majority) 8
Step 2 : Compare this with
q. 2-3 times a month 5 the total no. Of members
(by majority members)
3 Step 3 : Majority mean >
r. 2-3 times a month 60%
(but not by majority)
Step 4 : For average no.
s. 1 time a month 1 Of meeting, follow rating
day (by majority given for item 3 above.
members)
t. 1 time a month
(but not by majority) Note : Please see
explanation 2 at the end.
8 SAVINGS & u. Collected in 10 Ascertain form group

LOAN group meetings leaders and members in
RECOVERY 5 this regard also, peruse
v. House - to house minutes book.
(MODE OF collection
COLLECTION)
9 STYLE OF w. Democratic and 10 Peruse minutes book,
FUNCTIONING Transparent Interact with members,
AND GROUP 0 Observe in few group
DECISIONS x. Decisions taken meetings, Ascertain
by few 28 dominant whether periodical
member / members / elections are conducted for
group leaders the leadership and whether
all decisions are in group
AND GROUP Transparent 0 Observe in few group

DECISIONS meetings, Ascertain
x. Decisions taken whether periodical
by few dominant elections are conducted for
member / members / the leadership and whether
group leaders all decisions are in group
meetings and on
democratic lines.
10 SANCTION AND y. Selection of 2 Ascertain the position from
DISBURSEMENT borrowers in group group leaders/ members
OF LOANS meetings 2
Peruse minutes book
z. Sanction and (Each item will get marks
disbursement of loans in shown against it, if the
group meetings 2 conditions are satisfied)
aa. Loan terms and

conditions discussed in
group meetings and 2
recorded in minutes
bb. Utilisation of loans

reviewed regularly in 2
group meetings
cc. Recovery of loans

reviewed regularly in-
group meetings.
11 INTEREST ON Uniform rate 5 Peruse loan register.
SHG LOANS irrespective of source of
funds Ascertain from group
leaders / members
Different rates 3
depending on source of
funds
Interest rates vary 5

according to the purpose
of loan
Uniform interest rate for 3

all purposes
12 UTILISATION a. Above 80% 10 Compare savings
OF SAVING FOR outstanding on a given date
LOANING b. Above 50% and 5 with loans outstanding on
upto 80% the same date to obtain the
29 percentage. Nil mark for
utilisation of savings below
50%
LOANING b. Above 50% and 5 with loans outstanding on

upto 80% the same date to obtain the
percentage. Nil mark for
utilisation of savings below
50%
13 RECOVERY OF c. Dues not 10 Even one instalment
LOANS recovered in respect of unpaid without
10% or less of total authorisation by the group
no.of loan accounts is treated as dues not
5 recovered. Count such
d. Dues not accounts and compare
recovered between 10% them with total no. Of loan
and 30% of total no.of a/c. Also, peruse minutes
loan accounts. book for authorisation for
non-payment
14 BOOKS OF e. Attendance cum 3 Each record / register, if
ACCOUNTS minutes book maintained properly and
3 upto date, will get marks
f. Savings Register shown against each.
3
g. Loan Ledger
1
h. Bank Passbook
15 BYLAWS / i. Known to all 10 Ascertain from the member
GROUP RULES members through interaction
5
j. Known to most of
the members 0
k. Not known to
many members
TOTAL MARKS 150
SELECTION CRITERIA OF SHG FOR LINKAGE TO BANK LOAN
30
1. SHG scoring more than 120 marks out of maximum of 150 marks could be chosen
for credit linkage
2. SHG scoring less than 120 marks will have to be further developed before linkage.
The areas for taken up after 3 months.
NABARD & microfinance
mF - NABARD’s Vision and Mission
Vision
To facilitate sustained access to financial services for the unreached poor in rural areas
through various microFinance innovations in a cost effective and sustainable manner.
Mission Accomplished
Provision of financial access to 16.7 million poor families through formation and credit
linkage of 1,079,091 self help groups as on 31 March 2004.
Mission-Ahead
Formation and credit linkage of 585,000 new self help groups by the year 2007 with
60% of them coming from 13 priority underdeveloped states of the country.
Facilitate mature SHGs to graduate from microFinance for consumption or production

credit to microEnterprises.
31
microFinance- NABARD's Strategy
Overall Strategy
• Forming and nurturing small, homogeneous and participatory self-help groups

(SHGs) of the poor has today emerged as a potent tool for human development.
This process enables the poor, especially the women from the poor households, to
collectively identify and analyse the problems they face in the perspective of their
social and economic environment. It helps them to pool their meagre resources,
human and financial, and prioritise their use for solving their own problems.
• The emphasis on regular thrift collection and its use to solve immediate problems
of consumption and production not only helps to meet their most urgent needs,
but also trains them to handle larger financial resources more skillfully, prudently
and with a more lasting impact.
• Encourage SHGs to become a forum for many social sector interventions.
SHG-Bank Linkage Programme
•• Facilitating SHGs to access credit from formal banking channels. SHG-Bank

Linkage Programme has proved to be the major supplementary credit delivery
system with wide acceptance by banks, NGOs and various government
departments.
32
Region-specific Initiatives
• NABARD has intensified its efforts for roping in new partners for promotion and
linkage of groups in regions where the growth of groups has not been
commensurate with potential.
• Priority has been assigned to awareness- building and for identification of NGOs
and other partners in 13 priority states, which account for 70% of rural poor in
the country.
Capacity Building Initiatives
• NABARD has supports/ sponsors capacity building programmes for various

partners in the field of microFinance to sensitise and equip them with concept &
nuances of SHG bank linkage programme. Upto the end of March 2004 about
687,000 persons have been trained by us through our regional offices, training
establishments, resource NGOs and partner agencies.
• NABARD provides training inputs on SHG financing to training establishments
of participating banks, to help them to internalise the training requirements at
their level.
• NABARD gives technical support to banks to evolve suitable intermediate
structures like Farmers' Clubs (Vikas Volunteer Vahini Programme of the
National Bank) to increase the outreach of their branches in promotion and
linking SHGs
• NABARD supports and helps banking institutions (especially RRBs &
cooperative banks) to take on the role of Self Help Promoting Institutions
(SHPIs)
33
Support to Governments
• Necessary assistance is provided to the governments by NABARD for

dovetailing mF practices with the poverty alleviation programmes
• NABARD also encourages the association of Panchayati Raj Institutions ( PRIs )
in adopting group processes for maximization of empowerment.
• NABARD , in association with Lal Bahadur Shastry National Academy of
Administration, Mussoorie conducts tailor made exposure programme on self
help group and microFinance for senior and middle level officers of Indian
Administrative Services (IAS) who are posted as district collectors/ Chief
Executive Offices of local administrative set ups (Zilla Parishad)
Support to NGO Partners
•• Several steps have been taken by NABARD for capacity building of NGOs
which partner in promotion and nurturing of SHGs. The emphasis is on involving
a large number of NGOs. Special focus is on those NGOs participating in
watershed development, health, literacy and women development, to encourage
them to take up promotion, nurturing and linkage of SHGs as an 'add
-on' activity.
•• NABARD has a scheme of part-financing the cost of promotion of groups by
NGOs.
•• NABARD has developed specialized programmes for use by CEOs of NGOs for
appropriately envisioning this as an add-on concept. Separate programmes have
also been designed for NGO field staff to appreciate the nuances of SHG
functioning.
Alternate mF practices
•• The NGOs and other local bodies at village, block and district levels in the North
Eastern States are encouraged to take up alternative micro-credit delivery
mechanisms through direct funding.
34
mechanisms through direct funding.

•• Formation and operation of SHG Federations is supported and encouraged by
NABARD. Similarly, networking of NGOs is also encouraged.
Coordinating mF Efforts in India
NABARD coordinates the mF activities in India at international/

national/state/district levels. These include organizing international/national
Workshops, Seminars, etc for experience sharing, Organizing National and State level
Meets of Bankers and NGOs etc.
Dissemination of best practices in SHG / microFinance.
Monitoring and Review
Block/district/state level review meetings are organised and/or organised by

NABARD. The relative documentation and database is also carried out by NABARD.
In addition, periodical Monitoring studies are conducted through NABARD/Bank
Officers. Internal Impact Studies and are conducted by NABARD periodically.
mF- Regulation and Supervisory Aspects
This Section looks at the emerging requirement for regulation and supervision of
microFinance Institutions in India and introduces the issues and policies related to it.
A. Emerging microFinance Institutions (mFIs)
35
• Banks provide mF service as one of the many services provided by them, along
with their other conventional business. Therefore, banks can be classified as "mF
service providers".
• There are other agencies and institutions which provide mF service for the poor,
as a predominant activity. These institutions are called microFinance Institutions (
mFIs).
• NGOs have, over the past two decades, started financial intermediation as an add-
on activity, to enhance acceptability of their social welfare programmes. Over the
years they have emerged as the major microFinance Institutions, although most of
them continue with their social sector interventions.
• Three broad categories of mFIs are:
1. Not for Profit mFI, comprising NGOs, Trusts and Not-for-Profit Companies;
2. Mutual Benefit mFIs, mostly State and National Level Cooperatives; and
3. For-Profit mFIs, which are classified as Non Banking Financial Companies.
• It is estimated that more than 500 NGOs are providing mF services to the
poor at present
• Similarly, 2155 NGOs have participated in SHG-credit linkage
programme till March 2002.
A Task Force was set up by NABARD to look into the entire gamut of mF and mFIs to
catalyse their growth.
B. Transformation of Donorship into Ownership of mFIs
Recognition of NGO-mFIs
• Although not legally recognised as such, the role of NGOs as providers of

financial services has been accepted by Government of India and RBI.
• There are however, certain inherent restrictions in the financial activities of the
NGO-mFIs as regards
• mobilisation of savings
• lack of equity concept for leveraging bank loan
• uncertain status as regards taxation on interest earned
36
• inability to transfer resources to form a new company

• With a view to professionalising mF, certain NGOs have promoted exclusive
Non-Banking Financial Companies for mF.
Entry of Foreign Capital into mF
1. At present, certain restrictions are imposed on entry of foreign equity into rural
credit and microFinance.
2. The minimum capital requirement even for an mF-NBFC is Rs. 20 million, the
same as for any other company.
Areas for transformation of mFIs
• Development of systems for Resource Mobilisation by the mFIs in a sustainable

manner.
• Building managerial competence and creating qualified manpower
• Managing transition from a subsidy-dependent culture to a commerical culture
• Provision of sufficient protection in the laws for non-profit organisations.
C. Organisation and Economics of Supervision
• Banks as mF service providers are supervised by RBI and NABARD as part of

their overall banking business
• The mF activities of the NGO mFIs are unregulated and unsupervised
• Only mFIs registered as Cooperatives and NBFCs are presently regulated. Need
for regulation
• Savers with mFIs are legally not "members" of the mFIs, but only "clients".
• Protection of the savings of the poor is needed
• Infusion of financial discipline into the credit activities of mFIs is necessary. Task
Force on mF considers formation of "Self Regulatory Organisations" ( SROs) to
be the best suited for regulation of mFIs. Such SROs will have to emerge from
37
suitable associations of mFIs. Functions of Self Regulatory Organisations The

following functions have been envisaged for the proposed SROs:
• Registering of mFIs
• Setting of minimum performance standards
• Evolving accounting systems for mFIs
• Conducting audit and inspection of mFIs
• Representing mFIs in different fora
Innovative Pilot Projects
The phenomenal growth rate of microFinance sector, especially the SHG bank linkage
programme has posed number of issues and challenges which need immediate attention.
In response to this NABARD has initiated a number of innovations basically as an
investment for posterity. At the core of these innovations is a desire to improve the
outreach and sustainablility of the programme. Some of the pilot projects designed and
initiated recently are summarised here.
Introduction of Smart Cards- Application of IT in SHG Bank Linkage Programme
There are now many branches of Commercial Banks and Regional Rural Banks that
service more than 200 SHG accounts which were hitherto considered impossible.
Howsoever welcome the trend may be, the burgeoning numbers have also brought to the
38
fore a host of issues relating to tracking, monitoring and adequately servicing SHG
accounts. It was felt that the best way to deal with the huge numbers would be to take
recourse to new technologies available.
Also in general, the branch manager in the rural areas is hard pressed for time and as a
result does little for developing the business of the branch or for scouting for new
business opportunities for the branch. It was felt that use of Information Technology in
the form of processor/memory cards for SHGs and other clients coupled with automation
in a branch would serve to solve these vexed issues and leave adequate time for business
development work.
NABARD has therefore decided to experiment with about five branches per RRB in
different regions of the country. Introducing Processor/Memory Cards for active
clients and SHGs & automation of book keeping in SHGs is expected to reduce paper
work, save time and thus improve the efficiency of the field worker. This is also expected
to reduce the scope of manipulation, reduce unintended leakages and also maintain up to
date books at SHG level.
The first pilot project on smart cards has been launched with Sri Visakha Grameena Bank
in Andhra Pradesh, which has been one of the front-runner banks in financing SHGs. It is
expected that with enhanced use of rural-oriented technology, the bank would be able to
provide value addition to services being offered to the rural clients and further expand its
outreach in a sustainable manner.
The users of processor/memory cards would include SHGs and other good customers of
the bank who are its regular customers. About 500 such customers, who would perform
all banking transactions on a fast track, would be selected in each bank branch, Time
taken for banking by these regular good clients is likely to be reduced considerably. Use
of processor/memory cards by SHG customers also adds another set of advantages like
effective book keeping, tracking and monitoring of SHGs, reducing the hassles of
illiterate SHG members seeking the assistance of the NGO / promoter/ local book writer
to perform these functions. In addition to prompt upkeep of books by SHGs, auditing of
39
books of accounts, computing interest, could also be ensured with this system. The
transaction data of each SHG collected from the field could be consolidated at branch
office to generate MIS reports, which the branch staff could effectively use to track the
functioning of SHGs, ensure prompt credit linkages and recovery. This, coupled with
automation of back office operations of the branch would ease the branch manager of a
lot of time spent on routine matters and they could use the spare time to build new
customers and enhance business relations.
Pilot Project for linking SHGs with Post Offices
With more than one and a half lakh outlets, more or less evenly spread all across the
country, the outreach of the post offices is unmatched. Add the "neighborhood friend"
image that the ubiquitous postmen enjoy-especially in the rural areas, and you have a
near perfect "doorstep" credit delivery channel-waiting to be tapped.
On the other hand, there are many bank branches /PACS, which are either ill equipped in
terms of their financial soundness/ infrastructure or unwilling to take up the linkage
banking programme. Another internationally acclaimed channel of providing micro
finance i.e. MFIs, is yet to prove that in our country they are capable of attaining the
outreach of the formal institutions in a medium term or even long term time frame.
This has prompted NABARD to take up a pilot project on linking SHGs through post
offices. A Revolving Fund Assistance (RFA) of Rs.34 lakh has been sanctioned to select
post offices in Kancheepuram and Pudukottai districts in Tamil Nadu for providing loans
to 200 SHGs promoted by NGOs. Grant assistance has also been sanctioned under the
project for meeting initial expenditure on publicity & awareness creation. The rate of
interest, which would be shared between NABARD and the post office in the ratio of 2:1,
would be 9 %. The project would run up to March 2007.
The project would test the efficacy of the Department of Posts in providing micro finance
services to rural clientele and help NABARD in deciding the future strategy for
expansion of the linkage programme.
40
Joint Liability Groups
The pilot project on financing Joint Liability Groups aims at developing effective credit
products for mid segment clients, which reduce risk and transaction costs for the banker
and also introduce a greater degree of flexibility for the credit user to determine his/her
needs and priorities. This middle segment, which predominantly performs agriculture
related activities, often requires quantum's of credit larger than micro
-credit, it also
requires credit for longer durations – it is also at times linked to seasons, repayments are
normally met at the end of harvest seasons only. In essence, it is about “hassle-free credit
for agriculture and other rural enterprises".
A Joint Liability Group (JLG), proposed to be established under the pilot project, is an
assembly of 5-10 member clients (new or existing) for a bank, informally recognised by
the bank as a group. The JLG members offer an undertaking to the bank that enables
them to jointly receive such amounts as deemed eligible by the bank for pursuing any
individual or joint activities- as found suitable by the group. The main purpose of JLG is
to facilitate mutual loan guaranteeing and execution of joint liability agreement making
them severally and jointly liable for payment of interest and repayment of loan obtained
from the bank. The management of the JLG is to be kept simple with little or no financial
administration within the group. There could be different functional models of JLGs that
could be formed based on the need of the clients as also the comfort level and
understanding of the bank about its success. Thus the JLG approach could be either
credit-led or saving-led.
The project could be piloted in five/ ten banks located in diverse agro-climatic belts/
states. It will be implemented through five branches of each participating – RRB or
cooperative bank. An average of 20 accounts of JLGs will be implemented per branch
and experimented to cover about 500 borrowers/bank (or about 100 members per branch)
as the first stage testing of this product and also refining its design and operational
details.
41
The guidelines have been kept flexible giving the partner banks enough freedom to
implement the pilot, keeping the ground realities and context in perspective. National
Bank will provide, as grant assistance, Rs. 3.00 lakh for operational cost, during
implementation of the project. As an arrangement for the pilot project a special line of
credit limit by way of refinance will be made available to the participant banks.
Project on "Computer Munshi" - a self-sustaining mechanism to manage SHG

account and MIS
Quality and regularity of book keeping is the aspect of linkage banking, which is most
affected because of the widespread illiteracy amongst the poor SHG women. If ignored
for a long time, this has the potential to endanger the sustainability of the Groups.
Another related issue of almost equal importance is the MIS, which means passing on the
relevant information about the functioning of the SHGs to the concerned stakeholders
like SHPIs and banks.
PRADAN, an NGO, which has promoted more than 4000 SHGs, very strongly felt that
sustaining the groups would be a major problem if a proper accounting system and an
stronger MIS and were not put in place urgently. They, therefore came up with the idea of
Computer Munshies. The idea involves identification of skilled rural youth for the task
of higher order accounting by providing training as Computer Munshies (CM). The
trained individuals would be equipped with a computer and software to serve 100 to 300
SHGs. The SHG level meeting transaction statement will be send to the CM after every
meeting, which will be keyed in by the trained individual using the software which would
generate outputs like trial balance, member savings and loan balances. The SHG
promoter and the banker could also access data about SHGs from the CM on payment of
a fee.
The software (McFinancier) for the project has been developed by PRADAN with the
help of a Delhi based agency. It captures all the essential data- financial and non-
financial. The software also generates number of useful reports including 19 different
ratio analysis. The data could be aggregated at the cluster or block level to make
42
assessment of the functioning of the groups in a specific geo-span. It also facilitates

financial analysis, drawing a trial balance, balance sheet, portfolio analysis, member level
impact - by capturing the base line data etc. The outputs generated could be useful to all
related stakeholders including bankers, social intermediaries and the SHG themselves.
To test the idea, NABARD has sanctioned a grant assistance of Rs.6.10 lakh to PRADAN
for establishment of 10 Computer Munshi Units in the states of Jharkhand and Orissa.
PRADAN would measure the effectiveness of the idea and the commercial viability of
the project, based on which the future strategy will be decided.
If the experiment works out well NABARD could consider financing establishment of
mF call centres with computers, which could be financed by banks. This experiment
could also be able to give us a lead as to whether this could serve as a fundable revenue
model. Alternatively the individual being trained for the purpose (SHG accounting) could
use the services of the local Internet café or computer unit for completing the task and
generating print outs of the account sheets.
Grain Banks and SHGs
The tribal population in some parts of the country is known to use the concept of Grain
Banks (Grain Golas) for saving the grains during the harvesting seasons and using them
to meet their consumption requirements during the lean / dry periods. They also use the
arrangement for borrowing the grains for seed purposes at the time of sowing. in the past
also, some of the state and central government interventions in these backward regions
had attempted to create the infrastructure of Grain Banks. Currently, the need for
evolving a participatory food security system for backward tribal regions is being actively
debated. .
43
The strong emphasis on group savings in kind and borrowing in kind under the Grain
Bank approach has significant similarities with the SHG Bank Linkage Programme; the
difference being that the savings and loans are in kind. The issue, therefore, is how to
facilitate monetization of the savings and loans in kind and integrate the traditional
approaches into the monetized microFinance system. Such an integration would enable
the poor tribal population to access need based financial services and also address the
issues of food and seed securities. These considerations have led to the launch of the
pilot project on Grain Banks
The Pilot Project, sanctioned to Antoday -an experienced NGO, is proposed to be

implemented in 17 villages in Thaumul Rampur Block of Kalahandi district in KBK
region of Orissa state. It involves promotion of 25 SHGs and formation of 3 Grain
Banks. There would be one Grain bank for every 100 households. Apart from the
savings in cash, monetization of the savings-in-kind, as also loans to SHGs against their
stock of grains, would be considered by the Bank. Members would save and draw loans
both in cash and / or kind, depending upon their convenience. The Kalahandi Anchalik
Gramin Bank would extend loans to the SHGs against the stock of Grain banks and cash
savings of the Groups. The SHGs wouild utilize the bank loan to procure grains when the
price is low and for repayment of loan taken from Grain Bank.In due course the Grain
Banks could be linked with PDS and other Govt. Programs.
The project is likely to enable the poor to save in kind, raise resources against such
savings, provide access to self managed, participate in food security systems and also
provide access to seeds for sowing purpose in the times of distress.
SHG-Bank linkage programme in Karnataka
Karnataka, a pioneer in SHG-Bank linkage programme continues to manintain its

leading status in promotion and credit linkages of SHGs. While the NGO’s and Women
and Child Development Department (WCDD, GoK) have been actively involved in
44
promotion of majority of the SHGs in the state, all the banks have taken the responsibility
of linking these groups with the formal banking system. Over a period of time, some of
the Regional Rural Banks and Cooperative Banks in the state have deveopled the skill in
promoting SHGs on their own and assumed the mantle of Self Help Promoting
Institutions (SHPIs).The SHG-Bank linkage programme registered its progress in the
state of Karnataka by leaps and bounds during the year 2003-04.
Role of Government of Karnataka
The state government through its women and child development department (WCDD) as
its implementing agency, continued its mission of empowering rura poor woen in the
state through its stree shakthi programme. With the active involvement of the anganwadi
Workers in the state, the government realized its goal of promotion of a cuuative ONE
LAKH SHGs during the year. The state through capacity building of the SHGs in co-
ordination with NABARD and other reputed NGOs in the state.
The Swashakthi programme ,which is implemented in select districts of the state

through Karnataka State Women’ Development Corporation (KSWDC), played
its role in strengthening the women groups promoted under the programme. As on
31st amrch 2004, 2,120 Shgs have been promoted and 1599 SHGs have been
credit linked under the programme.
Role of micro-finance in alleviating poverty
Hunger is complex in its causes and solutions. It cuts across religious lines, language,
borders and gender. Through self-employment opportunities to people - both men and
45
women, hunger can be reduced. But the two are not always related, meaning the poor are
not necessarily unemployed and all unemployed are not poor. The relationship depends
on the level of productivity and earnings that employment carries.
The relationship between gender specific employment and poverty is further complicated
by the fact that while employment is a phenomenon related to an individual, poverty is a
household phenomenon. It was found that the creation of women self-employment
opportunities through micro-finance has impacted on the poverty and related
characteristics of the household than the employment of the men. It was also found that
women tend to utilize their earnings more on basic needs of the household and
particularly, on improving the well being of their children. This however assumes that
women have greater control over their earnings and its utilization. The most promising
aspects of micro-finance programs especially with small savings and credit groups
of women, has been a demystification of the age old image of poor as non-
creditworthy' and a confirmation of the power of collective action[Mosely 2000].
Since early 90s, micro-finance has emerged as a major plank of donor poverty
alleviation strategies. It is also increasingly getting feminize as more and more
people argue for female targeting and an emphasis on facilitating women's access ot
financial services.
Micro-finance is moving from just a subsidy dependent activity to a serious business

proposition. The challenge ahead is to build and strengthen the limited institutional
capability of the retailers.
MICRO-FINANCE AND POVERTY REDUCTION
Given below is the demand for micro-finance and structure and characteristics
The sources of demand, products and services and characteristics of demand for
microfinance are explained below.
1. Source of demand - Households poorest [Rural and Urban]

Products and Services and characteristics of demand- Convenient access to safe and
46
liquid deposit services, Passbook savings with unlimited withdrawal facility, Strong
demand for consumption and emergency loans with no collateral, Small size loans for
livelihood activities, Occasional loans for finance lumpy expenditures such as schools
fees, Service outlet and close proximity, Simple procedures, Low transaction costs
2. Source of demand -Poor [Rural and Urban]

Products and Services and characteristics of demand - Convenient access to safe, liquid
deposit facilities, Return on savings, Passbook savings with easy withdrawal facilities,
Term deposits with small denominations and regular interest payments, Money transfer
services, payment services, Insurance services for livestock, Consumption and emergency
loans, Small loans for livelihood activities, Loans to finance lumpy expenditures, Low
transaction costs
3. Source- Enterprises Micro-farms [Rural]

Products and Services and characteristics of demand - small loans for working capital
(fertilizer, seeds), small loans for fixed capital (purchase Products and Services and
characteristics of demand of simple tools, land improvements etc), below informal
market interest rates, easy access and minimal transaction costs, seasonal demand,
deposit facilities (safe, liquid, convenient), return on deposits
4. Soucre- Fisheries, Livestock and Poultry [Mainly Rural]

Products and Services and characteristics of demand - working capital loans for feed,
fixed capital loans (tools, purchase of chicks), small loan size, substantial demand from
47
livestock sector, deposit services (safe, liquid and convenient), insurance services
5. source- Non-farm [Rural and Urban]

Products and Services and characteristics of demand - deposit services (safe, liquid and
convenient), money transfer, payment services, insurance and leasing services, a wide
range of enterprises, demand for loan is not seasonal, demand is large for working capital
loans, relatively large loans within the confines of micro-credit, minimal transaction costs
and easy access
Source: Asian Development Bank
What is Unique about the SHGs and Linkage Programme?
• Decision
Members make decisions collectively. SHG concept offers opportunity for

participative decision making on conduct of meetings, thrift and credit decisions. The
participative process makes the group a responsible borrower
• Financial services
SHGs provide the needed financial services to the members at their doorstep. The
rural poor needs different types of financial services, viz. Savings, consumption
48
credit, production credit, insurance, remittance facilities etc. The platform of SHG
provides the possibility to converge these services.
• Supplementary to formal banking

SHG linkage does not supplant the existing banking system, but it supplements it thus
taking full advantage of the resources and other advantages of the banking system.
• Cutting costs
SHG linkage cuts costs for both banks and borrowers. In a study sponsored by FDC,
Australia, it was observed that the reduction in costs for the bankers is around 40 %
as compared to IRDP loans. The poor have a net advantage of 85 % as compared to
individual borrowing. Similar finding was also observed in a NABARD study.
• NPA Savvy
The Linkage mechanism has proved that the repayments are as high as 95% - 100 %
• Peer pressure as collateral

The SHG linkage emphasises peer pressure within the group as collateral substitute.
• Quality clients
The SHGs are turning out to be quality clients in view of better credit management,
mobilisation of thrift, low transaction costs and near full repayments.
• Client preparation
The members of the SHGs could over a period of time, very selectively graduate to
the stage of micro entrepreneurship and have been prepared with requisite credit
discipline.
• Social agenda
49
Available statistics indicate dependency of 35%-40% of rural households on non-

institutional sources for credit needs. SHG Linkage offers a better way of dealing
with the magnitude of social agenda. Many NGOs/ Governments have recognised the
SHG as a vehicle for carrying and deepening of their developmental agenda/ delivery
of services.
• Exclusive poor focus

SHGs have exclusive focus on absolute have-nots, who have been bypassed by the
banking system. Social banking does not have any meaning if the lowest strata and
the unreached are not focused.
• No-subsidy- dependence syndrome

The programme does not envisage any subsidy support from the government in the
matter of credit. The issue is to build capabilities and enterprise of the individual
members, blending with group cohesion and solidarity through training provided by a
SHPI to set the ball rolling for the SHG.
REVIEW OF LITERATURE
Literature review discusses the work of previous scholars that support, offer a counter
position, and provide a context for my study.
Methodology:
Reviewing the articles on this topic in the internet (WWW).
1. Microfinance – An Introduction
50
by- R.Srinivasan and M.S.Sreeeram
This round table focusses on issues relating to microfinance in India. The Indian
microfinance sector is a museum of several approaches found across the world. Indian
microfinance has lapped up the Grameen blueprint; it has replicated some aspects of the
Indonesian and the Bolivian model. In addition to the imported artifacts of microfinance,
we also have the home-grown model of self-help groups.
The round table discussion thereafter looks at four major issues the economic
attractiveness of microfinance both to NGOs and to commercial banks; the relative merits
of various delivery channels; the issueof growth; and finally, what lies beyond
microcredit.
2. Microfinance: Analysis of monthly cash flows of Self Help

Groups
by Ms S Usha Nandhini, Dr P David Jawahar

and
Mr M Shivachandran
The objective of this research has been to study the repayment patterns
of the SHGs. The analysis has been based on samples taken from Self
Help Groups operating in urban limits. Questionnaires and Direct
Interview have been used for data collection. The repayment pattern was
presumed to be the determinant of the success of a group. However the
analysis has brought to light several other factors which are
instrumental in determining the success and failure of Self Help Groups.
This survey also provided insights in studying the changes that have
taken place in the lives of the
poor and the variables that have contributed to these changes.
3.Microfinance in India-The Role Of Banks

January 17, 2005
By R.Anand
This project talks about various aspects in
51
¾Access to rural finance

¾SHG-bank linkage programme
– What is it?
– Outreach
– Viability
– Impact
¾Other approaches
¾Going forward
These articles have enabled me to understand the concept of microfinance and helped me
in the process of my research and provided a base for documentation.
REARCH METHODOLOGY
Type of research
This study is a descriptive study which aims to compare the growth of microfinance
sector and contribution of banks in this field in Karnataka. This is based on the secondary
data published by NABARD.
52
Scope of the study

The study aims at providing an in depth knowledge of microfinance, its operations
and benefits.
Sampling technique
The technique is convenient sampling. The sample taken is the commercial banks,
regional rural banks, cooperative banks and private banks.
Research tools
Secondary data collection (literature survey)—
Sources: Publications of NABARD
Library
E-library
Data analysis
Averages, ratios Tables.
Analysis
Micro finance in Karnataka
Commercial Banks (CBs)
The SHG-Bank Linkage Programme became part and parcel of
53
business for the 22 public sector banks and 03 private sector banks.
Canara Bank had credit-linked the highest number of SHGs (5,054) during 2003-04,
followed by Vijaya Bank (4,678), Syndicate Bank (1,397) and State Bank of India (
1,290). During the year, a number of CBs registered impressive growth in SHG-bank
linkage. Among the private sector banks, Karnataka Bank has significantly credit linked
SHGs.
TABLE-2
SHGs LINKED BY COMMERCIAL BANKS IN KARNATAKA
% increase in the %increase in the

Year No of SHGs Bank Loan SHGs over loan disbursed over
previous year the previous year
(as on 31 (Rs. Lakh)
March)
1997 1,425 206.00 137.8143 144.0559
1998 2,008 297.27 140.9123 144.3058
1999 2,974 473.61 148.1076 159.3198
2000 4,829 1017.60 162.3739 214.8603
2001 6,395 1452.00 132.4291 142.6887
2002 14,425 2426.24 225.5668 167.0964
2003 20,987 4539.58 145.4905 187.1035
2004 35,912 10227.38 171.1155 225.2935
The commercial banks have shown 225% growth in the disbursement of loan in the
previous year which depicts the reach of the commercial banks in Karnataka
Regional Rural Banks (RRBs)

The Regional Rural Banks financed SHGs significantly during 200304 in the State. All
the 13 RRBs in the State participated in the SHGBank Linkage Programme. The
achievement of RRBs as a percentage to the total registered an impressive
54
increase in terms of SHGs linked, bank loan disbursed and refinance availed
from NABARD. The highest number of SHGs has been linked by Malaprabha GB
(2,981) in the State, followed by Cauvery GB (2,087). The other RRBs showing
significant increase were Tungabhadra GB, Krishna GB and Kalpataru GB.
TABLE-3
SHGs LINKED BY RRBs IN KARNATAKA

SHGs over loan disbursed
Year No of SHGs Bank Loan
previous year over the previous
year
(as on 31 (Rs. lakh)
March)
1997 1,022 186.65 155.3191 205.0423
1998 1,528 314.57 149.5108 168.5347
1999 2,417 513.34 158.1806 163.1878
2000 4,735 1000.20 195.904 194.8416
2001 8,334 1647.70 176.0084 164.7371
2002 13,279 3021.70 159.3353 183.389
2003 23,473 6048.29 176.7678 200.1618
2004 38,631 10947.28 164.5763 180.9979
The regional rural banks have shown considerable increase in the promotion of self help
groups.
Cooperatives
All the 21 DCCBs in the State have involved themselves prominently in the SHG-Bank
Linkage Programme upto March 2004. The major contributors were Hassan, Bidar, South
Canara, Tumkur and Mandya DCCBs in that order.
55
TABLE-4
SHGs LINKED BY CO-OPERATIVE BANKS IN KARNATAKA

SHGs over loan disbursed
Year No of SHGs Bank Loan
previous year over the previous
year
(as on 31 (Rs. lakh)
March)
1997 5 0.50 ---- ----
1998 54 13.50 1080 2700
1999 201 68.25 372.2222 505.5556
2000 1,046 212.30 520.398 311.0623
2001 3,890 576.80 371.8929 271.691
2002 9,328 1951.70 239.7943 338.3669
2003 17,718 3973.05 189.9443 203.5687
2004 29,323 7346.63 165.4984 184.9116
The contribution by commercial in this sector has been appreciable. The pioneer in the
commercial banks are SBI and ICICI. There has been a growth of above 150% in the
formation of new SHGs by commercial banks and increase of 180% in disbursement of
laons.
TABLE-5
District wise break up of SHGs formed in year 2003-04 and bank loan
disbursed in the year.
District No of SHGs formed in Bank loan disbursed in

year 2003-04 2003-04
56
Bagalkot 576 19.79

Bangalore(R) 1,152 41.12
Bangalore(U) 304 16.87
Belgaum 1,480 61.99
Bellary 1,774 61.99
Bidar 1,577 81.61
Bijapur 518 17.33
Chamarajanagar 877 37.70
Chikmagalur 664 20.74
Chitradurga 1.842 59.40
Dakshin Kannada 6,925 217.71
Davangere 577 11.50
Dharwad 795 20.89
Gadag 527 11.69
Gulbarga 1,993 46.76
Hassan 2,941 87.59
Haveri 618 19.44
Kodagu 682 18.98
Kolar 1,553 40.24
Koppal 605 6.38
Mandya 1,891 52.45
Mysore 2,601 85.61
Raichur 831 18.42
Shimoga 1,033 82.18
Tumkur 2,943 79.74
Udupi 3,427 134.57
Uttara Kannada 982 43.36
Total 41,688 1,396.04
On an average every district has 1544 new SHGs in the year 2003-04 and disbursed a
loan of 51.7 Million.
Comparison of Performance of private sector and public sector banks
TABLE-6
57
The performance of public sector and private sector banks.
bank Cumulative New SHGs Cumulative Bank loan

SHGs till provided loan bank loan disbursed in 03-
31mar 2003 in 03-04 disbursed upto 04 (Rs in
march 2003 million)
Public sector 348368 168329 10545.10 9650.35
Private sector 12693 9032 949.99 1402.85
Public sectors banks have grown tremendously in this field in year as in this field in the
year 2003-04 the loan disbursed are as much as 84.84% of total disbursements till 2003.
Public sector has been an active player and has a share of 94.9% of new SHGs formed in
2003-04.
Chart showing the share of public and private sector banks in New SHGs formed in
2003-04.
58
pub
priv
SBI the largest player in the public sector with a share of 23.9% has disbursed loans
which forms 26% of total loan disbursed in 2003-2004.
Private sector banks have shown a considerable increase as loan granted by them in 2003-
2004 is 147.6% on cumulative loan given in previous years till 2003.
In the private sector ICICI has been the major player with a disbursement of 84% in
year 2003-04and with maximum 4741 SHGs promoted in this year.
Development of SHGs in the realm of microfinance.
59
Banks have played a significant role in this field by ensuring accessibility to poor. The
efforts of banks can be appreciated on the reach to the common man. There has been a
tremendous increase in the number of SHGs promoted by banks for the past few years.
In 2001 149050 SHGs were formed, where as in 2002 there were 197653 new SHGs
promoted which shows there has been a growth of 132% and .
In 2003 new SHGs prromted were 255882 which shows a growth of 129% from the
previous year.
In 2004 new SHGs promoted by banks were 361731 which depicts growth of 141%
against previous years.
The quantum of bankloan to SHGs has been constantly increasing which shows the
efforts of banks in this field.
TABLE-7
SHGs formed and bank loan disbursed from yr 2001-2004 in India.
year New SHGs formed growth rate against Bank loan (Rs Growth rate in
previous year in SHGs
in million) bank loan
2001 149050 ----- 263825 -------

2002 197653 132% 461478 174%
2003 255882 129% 717360 155.4%
2004 361731 141% 1079091 150%
There has been a considerable increase in the reach to the poor and amount of
disbursements by banks.
60
. RESEARCH LIMITATIONS
The study had limitations due to the lack of time for the project.
The study is limited to the secondary data.
Analysis and Discussion
Microfinance has been growing in India but needs to grow a lot. The study shows that
the public sector banks are playing a very good role. The thought of past that the the
poor are less reliable and cant repay the credit has been proved wrong as there is 95-
100% recovery of microfinance loans. It is one of the reason that the banks are willing to
expand the horizon of operations and working towards achieving growth. The private
sector banks are now beginning to enter the microfinance sector , the lead being taken by
ICICI bank.
The banks in all the sectors-public, private, commercial, regional rural banks and district
cooperative banks have been taking initiatives in enlarging the scope of microfinance .
The apex authority NABARD has been issuing guide lines for effective implementation
of the various programs in the realm of microfinance.
Various steps taken such as introduction of smart cards, linking of SHGs with post
offices, creation of joint liability groups, project on computer munshi to make SHG self
sustainable have all yielded fruitful results which can be seen in the form of improved
status of the poor.
Government is playing the role of a catalyst by proving support to various programs of

NABARD and providing incentives to banks which excel in this field. the government of
Karnataka has taken initiatives in this field through its women and child development
department , stree shakthi programme and is continuously making efforts to make poor
more self reliant and in empowering women.
61
Conclusions and recommendations
Conclusions
Microfinance has a huge potential to grow. Microfinance is moving from just a subsidy
dependent activity to a serious business proposition. The challenge ahead is to build and
strengthen the limited institutional capability of retailers.
Microfinance has been growing enormously in the past few years and will continue to
grow as now the potential has been well understood by the government , institutions of
finance and the biased thought of inability of poor to repay has broken. The well formed
chain of SHG, NGO’s and the banks have been a great success.
Recommendations:
• Though microfinance sector has been growing, there still exists huge untapped
potential. Banks with the help of NGOs and SHGs need to grow in terms of
geographic reach.
• Private Banks need to grow and reach the poor.
• Delivery of additional financial services eg life insurance to SHG members
through banking channels will give more security to the poor.
• Further surveys/studies needed to understand better impact.
62
REFERENCES
1. Srinivasan R and Sriram M S, ‘Round Table - Microfinance in India:
Discussion’,
IIMB Management Review, Volume 15, No. 2, June 2003.
2. Robinson, Marguerite S, ‘Microfinance: the Paradigm Shift From credit
Delivery
to Sustainable Financial Intermediation’, in Mwangi S Kimenyi, Robert C
Wieland and J D Von Pischke (eds), 1998, Strategic Issues in
Microfinance,
Ashgate Publishing: Aldershot.
3. Finance for the poor: Microfinance development strategy, Asian
Development
Bank (ADB) report, 2000.
4. Self-help groups and bank linkage: R.K Mukherjee, The Economic
Times, May
26 1999.
5. www.nabard.org/roles/mcid/microfinance.htm
6. Publications by NABARD:
Progress and perspectives of SHGs in Karnataka in 2003-04
Progress of SHG-Bank linkage in India 2003-04.
63

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BANKS AND MICRO FINANCE

A DISSERTATION SUBMITTED IN PARTIAL FULFILLMENT

UNDER THE GUIDANCE OF

M.P.BIRLA INSTITUTE OF MANAGEMENT

I hereby declare that the research work embodied in this

I also declare that this dissertation has not been

Place: Bangalore K.PAVITRA

I hereby certify that this dissertation is an offshoot of the

Place: Bangalore (Dr. N.S.

It gives me an immense pleasure to express my deep sense of

I would like to express my thanks to Dr. N.S Malavalli,

Chapter 2: Theoretical Framework……………………………………..08

Chapter 3: Review of Literature

Chapter 4: Research Methodology

Chapter 5: Analysis and Discussion

Table Name Page

Post nationalization in India, commercial banks have been participating

A good definition of microfinance as provided by Robinson is, ‘Microfinance refers to

improve living standards".

Microfinance services are provided by formal institutions such as rural

Self-help group (SHG) is an association of people belonging to similar

SHGs are at present driven more by annual targets than as a system. A

MICROFINANCE INSTITUTIONS IN INDIA

On the other hand, the informal institutions that undertake micro

The micro finance service providers include apex institutions like

Industries Development Bank of India (SIDBI), and, Rashtriya Mahila

NGOs newly involved in microfinance tend to point to high repayment

Objectives of the study:

The Indian microfinance sector is a culmination of several approaches found across

An integrated set of microfinance services, including savings, credit and insurance

PLAYERS IN MICROFINANCE SECTOR

i) The Rural poor

• Act as catalysts of change

• Recognise sustainability as the core factor in development

iii) Banking system

• Accept SHG-bank linkage as a cost effective means of reaching the poor

• Formulate supportive policy framework

v) Reserve Bank of India

• RBI policy inputs on micro Finance lead to increased involvement of banks.

• Provides inputs in capacity building for banks and partner agencies

MODEL WISE LINKAGE PROGRAMME

showed an increase of 52 % over the position upto march 2003, reflecting an

Assessing a self help group is a vital component.

ASSESSING A SELF HELP GROUP

The basic principles on which the SHGs function are:

ii. Savings first, credit thereafter

iii. SHGs should hold regular meetings

iv. SHGs should maintain record of financial and other transactions

v. They should have norms regarding membership, meetings etc.

vi. Group leaders should be elected by members and rotated periodically

vii. Transparency in operations of the group and participatory decision making

viii. Rates of interest on loans should be decided by the group

b. Meetings - time, periodicity

c. Savings - amount, periodicity, rate of interest (return)

d. Credit - procedure for sanction, ceiling amount, purposes, rate of interest to be

f. Leadership - election or nomination of leaders, rotation of leaders etc.

g. Personal/social improvement - minimum literacy level to be achieved, social work

•• How norms evolved, whether by the consensus of the whole group.

• The meetings have been held regularly

Financer has to verify :

• Whether details of meetings, proceedings, and attendance are maintained.

The aspects that are to be seen are :

• Whether the leaders have been elected and rotated

Banks & Micro Finance

Banks & Micro Finance