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Micro Finance- Financial Product for Bottom of Pyramid Market

Session: 201012
Presented at

Submitted By: Brijesh Kumar Jat MBA II Sem.

Submitted To:Mrs. Anju Agrawal

The beatitude, bliss & euphoria that accompany successful completion any task would not be completed without the expression of appreciation of simple virtues to the people who made it possible. So, I take my immense pleasure in expressing a whole hearted thanks to all the faculty members who guided me all the way making this project successful. It is my privilege to express a deep sense of gratitude and thanks to Mrs. ANUBHA for providing us various information directly related to project. I extend my gratitude and thankfulness to Apex Institute of Management & Science.

Date:19-05-11 Place: Jaipur

Submitted By: Brijesh Kumar Jat

The underlying aim of the seminar on contemporary issue as an integral part of MBA program is to provide the students with practical aspects of the organization working environment. Such type of presentation helps a student to visualize and realize about the congruencies between the theoretical learning in the premises of college and actual followed by the organization. It gives the knowledge of application aspect of the theories learnt in the classroom.

Micro Finance- Financial Product for Bottom of Pyramid Market is a complete experience in itself, which
The seminar project in provide me with the understanding. This has become as inspirable of my knowledge of management being learned in MBA program.

Table of Contents

1. Introduction Elements of Microfinance

2. History of Microfinance in India 3. Need for Micro Financing Who are client of microfinance? How it helps the poor people? Arent poor too poor to save? When is microfinance NOT an appropriate tool

4. Types of Organizations and Composition of the Sector Formal sector Semi Formal sector Informal sector What are MFIs and SHGs?

5. Why do MFIs charge high interest rates to poor people? 6. Can Micro finance be profitable 7. Impact of microfinance over poverty

8. Current Scenario of Micro - financing in India Indian economy and microfinance Recent trends in Micro finance Govt. role in supporting Microfinance Microfinance and capital requirement

Challenges in Indian context 9. Status of microfinance in Rajasthan Background Current situation of Micro finance & important issues Voluntary organizations in Rajasthan Major issues 10. Women & Micro Finance in india Women can make Microfinance succeed in India Rural finance for rural women Rural women at a glance Need credit to rural women Loan facilities to rural women Saving facilities to rural women 11. Conclusion 12. Bibilography

1. Introduction
Micro financing is the provision of financial services to poor and low income households without access to formal financial institutions. As defined by the Asian Development Bank (ADB), it is - A provision of a broad range of financial services such as deposits, loans, payment services, money transfers, and insurance to poor and low-income households and their micro-enterprises. To most, microfinance means providing very poor families with very small loans to help them engage in productive activities or grow their very small businesses. Like us, many poor people need and use financial services all the time. They save and borrow, invest in home repairs and improvements and meet occasional and domestic expenses such as food and school fees. However, there are some 500 million low income entrepreneurs in the world and about 5% have access to financial services. Indeed, the financial services available to the poor often have serious limitations in terms of cost, risk and convenience. As a result, over time, microfinance has come to include a broader range of services (credit, savings, insurance, etc.) as the industry has come to realize that the poor and the very poor that lack access to traditional formal financial institutions require a variety of financial products.

Elements of Microfinance
is the extension of very small loans (microloans) to the unemployed, to poor entrepreneurs and to others living in poverty who are not considered bankable. These individuals lack collateral, steady employment and a verifiable Microfinance refers to loans, savings, insurance, transfer services and other financial products targeted at low-income clients. Micro credit refers to a small loan to a client made by a bank or other institution. Micro credit can be offered, often without guarantee, to an individual or through group lending. Microcredit credit history and therefore cannot meet even the most minimal qualifications to gain access to traditional credit. Microcredit is a part of microfinance, which is the provision of a wider range of financial services to the very poor. Microcredit is a financial innovation which originated in Bangladesh where it has successfully enabled extremely impoverished people to engage in self-employment projects that allow them to generate an income and, in many cases, begin to build wealth and exit poverty. Due to the success of microcredit, many in the traditional banking industry have begun to realize that these microcredit borrowers should more correctly be categorized as pre-bankable; thus, microcredit is increasingly gaining credibility in the mainstream finance industry and many traditional large finance organizations are contemplating microcredit projects as a source of future growth. Although almost everyone in larger development organizations discounted the likelihood of success of microcredit when it was begun in its modern incarnation as pilot projects with ACCION and Muhammad Yunus in the mid-

1970s, the United Nations declared 2005 the International Year of Microcredit. Microsavings are deposit services that allow one to store small amounts of money for future use. Often without minimum balance requirements, savings accounts allow households to save in order to meet unexpected expenses and plan for future investments. Remittances are transfers of funds from people in one place to people in another, usually across borders to family and friends. Compared with other sources of capital that can fluctuate depending on the political or economic climate, remittances are relatively steady source of funds. Micro-insurance is a term increasingly used to refer to insurance characterized by low premium and low caps or low coverage limits, sold as part of atypical risk-pooling and marketing arrangements, and designed to service low-income peoples. Micro-insurance is insurance with low premiums and low caps / coverage. In this definition, micro refers to the small financial transaction that each insurance policy generates. The Micro-insurance Regulations, issued in 2005 by the Indian Insurance Regulatory and Development Authority (IRDA).

History of Microfinance in India

In India, institutional credit agencies (banks) made an entry in rural areas initially to provide an alternative to the rural money lenders who provided credit support, but not without exploiting the rural poor. There are 3 main factors that count to the bringing up of Microfinance as a Policy in India 1. The first of these pivotal events was Indira Gandhis bank nationalization drive launched in 1969 which required commercial banks to open rural branches resulting[3] in a 15.2% increase in rural bank branches in India between 1973 and 1985. Today, India has over 32,000 rural branches of commercial banks and regional rural banks, 14,000 cooperative bank branches. 2. The second national policy that has had a significant impact on the evolution of Indias banking and financial system is the Integrated Rural Development Program (IRDP) introduced in 1978 and designed to be a direct instrument for attacking Indias rural poverty. This program is interesting to this study because it was a large program whose main thrust was to alleviate poverty through the provision of loans and it was considered a failure. 3. The last major event which impacted the financial and banking system in

India was the liberalization of Indias financial system in the 1990s characterized by a series of structural adjustments and financial policy reforms initiated by the Reserve Bank of India (RBI). The systems and procedures of banking institutions was emphasizing on complicated qualifying requirements, tangible collateral, margin, etc., that resulted in a large section of the rural poor shying away from the formal banking sector. The search for an alternative mechanism for catering to the financial service needs of the poor was thus becoming imperative. Microfinance has b been in practice for ages (though informally). Legal framework for establishing the co-operative movement set up in 1904. Reserve Bank of India Act, 1934 provided for the establishment of the Agricultural Credit Department. Nationalization of banks in 1969 Regional Rural Banks created in 1975. NABARD established as an apex agency for rural finance in 1982. Passing of Mutually Aided Co-op. Act in AP in 1995.

3. Need for Micro Financing

Since independence, various governments in India have experimented with a large number of grant and subsidy based poverty alleviation programs. These programs were based on grant/subsidy and the credit linkage was through commercial banks only. As a result, these programs became unsustainable, perpetuated a dependant status on the beneficiaries and depended ultimately on the govt. employees for delivery. This not only led to misuse of both credit and subsidy but banks never looked at it as a profitable and commercial activity as well. Hence was adopted the concept of micro-credit in India. Success stories in neighboring countries, like Grameen Bank in Bangladesh, Bank Rakiat in Indonesia, Commercial & Industrial Bank in Philippines etc, gave further boost to the concept in India in the 1980s. India thus adopted the similar model of extending credit to the poorest sector and took a no. of steps to promote micro-financing in the country.

Who are the clients of microfinance?

The typical microfinance clients are low-income persons that do not have access to formal financial institutions. Microfinance clients are typically self-employed, often household-based entrepreneurs. In rural areas, they are usually small farmers and others who are engaged in small income -generating activities such as food processing and petty trade. In urban areas, microfinance activities are more

diverse and include shopkeepers, service providers, artisans, street vendors, etc. Microfinance clients are poor and vulnerable non-poor who have a relatively stable source of income. Microfinance generally targets poor women because they have proven to be reliable credit risks and when they have the financial means, they invest that money back into their families, resulting in better health and education, and stronger local economies. By providing access to financial services - loans and responsibility for repayment, maintaining savings accounts, providing insurance - microfinance programs send a strong message to households and communities. Studies have shown that women become more assertive and confident, have increased mobility, are more visible in their communities and play stronger roles in decision making. For instance, micro credit might have a far more limited market scope than, say, a more diversified range of financial services which includes various types of savings products, payment and remittance services, and various insurance products. For example, many very poor farmers may not really wish to borrow, but rather, would like a safer place to save the proceeds from their harvest as these are consumed over several months by the requirements of daily living. For example, many very poor farmers may not really wish to borrow, but rather, would like a safer place to save the proceeds from their harvest as these are consumed over several months by the requirements of daily living.

How does microfinance help the poor?

Microfinance brings the power of credit to the grassroots by way of loans to the poor, without requirement of collateral or previous credit record. Experience shows that microfinance can help the poor to increase income, build viable businesses, and reduce their vulnerability to external shocks. Poverty is multi-dimensional. By providing access to financial services, microfinance plays an important role in the fight against the many aspects of poverty. For instance, income generation from a business helps not only the business activity expand but also contributes to household income and its attendant benefits on food security, children's education, etc. Moreover, for women, who, in many contexts, are secluded from public space, transacting with formal institutions can also build confidence and empowerment.

Recent research has revealed the extent to which individuals around the poverty line are vulnerable to shocks such as illness of a wage earner, weather, theft, or other such events. These shocks produce a huge claim on the limited financial resources of the family unit, and, absent effective financial services, can drive a family so much deeper into poverty that it can take years to recover.

Aren't the poor too poor to save

The poor already save in ways that we may not consider as "normal" savings--- investing in assets, for example, that can be easily exchanged to cash in the future (gold jewelry, domestic animals, building materials, etc.). After all, they face the same series of sudden demands for cash we all face: illness, school fees, need to expand the dwelling, burial, weddings.

These informal ways that people save are not without their problems. It is hard to cut off one leg of a goat that represents a family's savings mechanism when the sudden need for a small amount of cash arises. Or, if a poor woman has loaned her "saved" funds to a family member in order to keep them safe from theft (since the alternative would be to keep the funds stored under her mattress), these may not be readily available when the woman needs them. The poor need savings that are both safe and liquid. They care less about the interest rates that they can earn on the savings, since they are not used to saving in financial instruments and they place such a high premium on having savings readily available to meet emergency needs and accumulate assets.

These savings services must be adapted to meet the Poors particular demand and their cash flow been in practice for ages (though informally). Legal framework for establishing the co-operative movement set up in 1904. Reserve Bank of India Act, 1934 provided for the establishment of the Agricultural Credit Department. Nationalization of banks in 1969 Regional Rural Banks created in 1975. NABARD established as an apex agency for rural finance in 1982. Passing of Mutually Aided Co-op. Act in AP in 1995.

When is microfinance an appropriate tool?

It is hard to imagine that there would be any family in the world today for which some type of formal financial service couldn't be designed and made useful. But the fact of the matter is that in most people's mind, "microfinance" still refers to micro credit. Micro credit is only useful in certain situations, and with certain types of clients. As we are finding out, a great number of poor, and especially extremely poor, clients exclude themselves from micro credit as it is currently designed. Extremely poor people who do not have any stable incomesuch as the very destitute and the homeless should not be microfinance clients, as they will only be pushed further into debt and poverty by loans that they cannot repay. As currently designed, micro credit requires sustained, regular, and often significant payments from poor families. Micro credit serves best those who have identified an economic opportunity and who are in a position to capitalize on that opportunity if they are provided with a small amount of ready cash. Thus, those poor who work in stable or growing economies, who have demonstrated an ability to undertake the proposed activities in an entrepreneurial manner, and who have demonstrated a commitment to repay their debts (instead of feeling that the credit represents some form of social re-vindication), are the best candidates for micro credit. The universe of potential clients expands exponentially however, once we take into account the broader concept of microfinance.

4.Types of Organizations and Composition of the Sector

Microfinance providers in India can be classified under three broad categories: formal, semiformal, and informal.

Formal Sector
The formal sector comprises of the banks such as NABARD, SIDBI and other regional rural banks (RRBs). They primarily provide credit for assistance in agriculture and microenterprise development and primarily target the poor. Their deposits at around Rs. 350billion and of that, around Rs. 250billion has been given as advances. They charge an interest of 12-13.5% but if we include the transaction costs (number of visits to banks, compulsory savings and costs incurred for payments to animators/staff/local leaders etc) they come out to be as high as 21-24%.

Semi - formal Sector

The majority of institutional microfinance providers in India are semiformal organizations broadly referred to as MFIs and SGHs. Registered under a variety of legal acts; these organizations greatly differ in philosophy, size, and capacity. There are over 500 non-government organizations (NGOs) registered as societies, public trusts, or nonprofit companies.

Informal Sector

In addition to friends and family, moneylenders, landlords, and traders constitute the informal sector. While estimates of their importance vary significantly, it is undeniable that they continue to play a significant role in the financial lives of the poor.

What are MFIs and SGHs?

Quite simply, a microfinance institution is an organization that offers financial services to low income populations. Almost all of these offer microcredit and only take back small amounts of savings from their own borrowers, not from the general public. Within the microfinance industry, the term microfinance institution has come to refer to a wide range of organizations dedicated to providing these services: NGOs, credit unions, cooperatives, private commercial banks and non-bank financial institutions (some that have transformed from NGOs into regulated institutions) and parts of state-owned banks, for example. The image most of us have when we refer to MFIs is of a financial NGO, an NGO that is fully and virtually exclusively dedicated to offering financial services; in most cases micro credit NGOs are not allowed to capture savings deposits from the general public. These groups of a few hundred NGOs have led the development of microcredit, and subsequently microfinance, the world over. A great many NGOs that offer microcredit, perhaps even a majority, do many other non-financial development activities and would bristle at the suggestion that they are essentially financial institutions. Yet, from an industry perspective, since they are engaged in supplying

financial services to the poor, we call them MFIs. The same sort of situation exists with a small number of commercial banks that offer microfinance services. For our purposes, we refer to them as MFIs, even though only a small portion of their assets may actually be tied up in financial services for the poor. In both cases, when people in the industry refer to MFIs, they are referring only to that part of the institution that offers microfinance. There are other institutions, however, that consider themselves to be in the business of microfinance and that will certainly play a role in a reshaped and deepened financial sector. These are community-based financial intermediaries. Some are membership based such as credit unions and cooperative housing societies. Others are owned and managed by local entrepreneurs or municipalities. These institutions tend to have a broader client base than the financial NGOs and already consider them to be part of the formal financial sector. It varies from country to country, but many poor people do have some access to these types of institutions, although they tend not to reach down market as far as the financial NGOs.

SELF HELP GROUPS (SHG) is group of rural poor who have

volunteered to organize themselves into a group for eradication of poverty of the members. They agree to save regularly and convert their savings into a Common Fund known as the Group corpus. The members of the group agree to use this common fund and such other funds that they may receive as a group through a common management. The group formation will keep in view the following broad guidelines:

Generally a self-help group may consist of 10 to 20 persons. However, in difficult areas like deserts, hills and areas with scattered and sparse population and in case of minor irrigation and disabled persons, this number may be from 5-20. Generally all members of the group should belong to families below the poverty line. However, if necessary, a maximum of 20% and in exceptional cases , where essentially required, up to a maximum of 30% of the members in a group may be taken from families marginally above the poverty line living contiguously with BPL families and if they are acceptable to the BPL members of the group. This will help the families of occupational groups like agricultural laborers, marginal farmers and artisans marginally above the poverty line, or who may have been excluded from the BPL list to become members of the Self Help Group. However, the APL members will not be eligible for the subsidy under the scheme. The group shall not consist of more than one member from the same family. A person should not be a member of more than one group. The BPL families must actively participate in the management and decision making, which should not ordinarily be entirely in the hands of APL families. Further, APL members of the Self Help Group shall not become office bearers (Group Leader, Assistant Group Leader or Treasurer) of the Group. The group should devise a code of conduct (Group management norms) to bind itself. This should be in the form of regular meetings (weekly or fortnightly), functioning in a democratic manner, allowing free exchange of views, participation by the members in the decision making process. The group should be able to draw up an agenda for each meeting and take up discussions as per the agenda.

The members should build their corpus through regular savings. The group should be able to collect the minimum voluntary saving amount from all the members regularly in the group meetings. The savings so collected will be the group corpus fund. The group corpus fund should be used to advance loans to the members. The group should develop financial management norms covering the loan sanction procedure, repayment schedule and interest rates. The members in the group meetings should take all the loaning decisions through a participatory decision making process. The group should maintain simple basic records such as Minutes book, Attendance register, Loan ledger, General ledger, Cash book, Bank passbook and individual passbooks. The sample Performa for maintenance of above records by the group is in the Annexure II for guidance. These could be used with necessary changes/ modifications wherever required. 50% of the groups formed in each block should be exclusively for the women. In the case of disabled persons, the groups formed should ideally be disability-specific wherever possible, however, in case sufficient number of people for formation of disability-specific groups are not available, a group may comprise of persons with diverse disabilities or a group may comprise of both disabled and non-disabled persons below the poverty line.

5. Why do MFIs charge such high interest rates to poor people?

Providing financial services to poor people is quite expensive, especially in relation to the size of the transactions involved. This is one of the most important reasons why banks don't make small loans. A $100 dollar loan, for example, requires the same personnel and resources as a $2,000 one thus increasing per unit transaction costs. Loan officers must visit the client's home or place of work, evaluate creditworthiness on the basis of interviews with the client's family and references, and in many cases, follow through with visits to reinforce the repayment culture. It can easily cost US$25 to make a micro loan. While that might not seem unreasonable in absolute terms, it might represent 25% of the value of the loan amount, and force the institution to charge a high rate of interest to cover its cost of loan administration.

Evidence shows that clients willingly pay the higher interest rates necessary to assure long term access to credit. They recognize that their alternativeseven higher interest rates in the informal finance sector (moneylenders, etc.) or simply no access to creditare much less attractive for them. Interest rates in the informal sector can be as high as 20 percent per day among some urban market vendors. Moreover, the interest rate is only a small part of their overall transaction cost of credit, and if microfinance institutions offer credit on a more accessible basis, substantial costs in terms of time, travel, paperwork, etc. can be reduced, thus benefiting the poor.

6. Can microfinance be profitable?

Yes it can. 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 might have received, of about 2.5% of total assets. This compares favorably with returns in the commercial banking sector and gives credence to the hope of many that microfinance can be sufficiently attractive to mainstream into the retail banking sector. Many feel that once microfinance becomes mainstreamed, massive growth in the numbers of clients can be achieved. Others worry that an excessive concern about profit in microfinance will lead MFIs up-market, to serve better off clients who can absorb larger loan amounts. This is the crowding out effect. This may happen; after all, there are a great number of very poor, poor, and vulnerable non-poor who are not reached by the banking sector. It is interesting to note that while the programs that reach out to the

poorest clients perform less well as a group than those who reach out to a somewhat better-off client segment, their performance is improving rapidly and at the same pace as the programs serving a broad-based client group did some years ago. More and more MFI managers have c o m e to understand that sustainability is a precursor to reaching exponentially greater numbers of clients. Given this, managers of leading MFIs are seeking ways to dramatically increase operational efficiency. In short, we have every reason to expect that programs that reach out to the very poorest micro clients can be sustainable once they have matured, and if they commit to that path. The evidence supports this position.

7. Impact of microfinance over poverty

There is increasing emphasis on the significance of the wider impacts of microfinance those beyond the immediate financial and social benefits for the individual. Yet, the wider impacts of microfinance are notoriously difficult to identify or assess. Often, MFOs confident claims to be having a wider impact and to be able to assess these impacts are based on weak, circumstantial evidence. Here we consider ways in which building evidence of wider impacts may be approached, which reflects processes of microfinance more faithfully, including the intended and unintended consequences of microfinance operations.

Wider impacts may occur in the following ways: through the labour market: poor people taken on by expanding micro-finance borrowers may as a consequence be taken upward across the poverty line; through the capital market: the intervention of a micro-finance institution may make existing lending institutions in the market, such as private moneylenders, lower their interest rates to compete, with beneficial effects on borrowers from institutions other than the one being studied; through the markets for goods consumed by poor people: if micro-finance induces an increase in supply, and hence a cheapening in the price, of goods consumed by poor people, households other than those of borrowers will benefit; through production linkages: an expansion of livelihoods (agricultural or otherwise) induced by micro-finance will support the formation of rural industries and services, and help to bring about income changes among non-borrower households;

9. Current Scenario of Micro - financing in India

Indian Economy and Micro Microfinance
Home to about 1.9 billion people as of 2008, India constitutes approximately one sixth of the worlds total population. It is the worlds largest democracy and a key emerging market alongside China and Brazil. The picture of growing GDP and rising foreign investments shows an environment where wealth is increasing for the nation.

Due to its large size and population of around 1000 million, India's GDP ranks among the top 15 economies of the world. However, around 300 million people or about 60 million households are living below the poverty line. It is further estimated that of these households, only about 20 percent have access to credit from the formal sector. Additionally, the segment of the rural population above the poverty line but not rich enough to be of interest to the formal financial institutions also does not have good access to the formal financial intermediary services, including savings services. A group of micro-finance practitioners estimated the annualized credit usage of all poor families (rural and urban) at over Rs 45,000 crores, of which some 80 percent is met by informal sources. This figure has been extrapolated using the numbers of rural and urban poor households and their average annual credit usage (Rs 6000 and Rs 9000 pa respectively) assessed through various micro studies. Estimated that 350 million people live Below Poverty Line This translates to approximately 75 million households. Annual credit demand by the poor in the country is estimated to be about Rs. 60,000 crores. Cumulative disbursements under all microfinance programs is only about Rs. 5000 crores.(Mar. 04) Total outstanding of all microfinance initiatives in India estimated to be Rs. 1600 crores. (March 04) Only about 5 % of rural poor have access to microfinance. Though a cumulative of about 20 million families have accessed microfinance to the extent of Rs. 5000 crores, the total outstanding is estimated to be only about Rs. 1600 crores. The

active borrowers are estimated to have a per capita outstanding of only Rs. 2500. With 75 million poor households potentially requiring financial services, the microfinance market in India is among the largest in the world. Estimates of household credit demand vary from a minimum of Rs. 2,000 to Rs. 6,000 in rural areas and Rs. 9,000 in urban settings. Given that 80 percent of poor households are located in rural areas, total credit demand ranges between Rs. 255 billion and Rs. 500 billion. However, only Rs.18 billion of this amount has been generated so far. The reason for this is that major portion for rural crediting has been from the informal sector and this is at a very high interest rate, thus reducing the volumes of such credits, and by far has been for investment purposes (13%) and more for family emergencies (29%) and social expenditures (19%). There are a number of factors why rural crediting by the formal sector has not taken pace so far. High fiscal deficits have meant that Government is appropriating a large share of financial savings for itself. Persisting interest rate restrictions reduce the attractiveness of lending, particularly to small, rural clients. On the other hand, informal credits have been attractive although high interest rates due to: Flexible repayment options Convenience and frequency with which such loans can be accessed

As on March31, 2007, 25.5 lac SHG has taken bank credit of Rs.14320 crore across the company, bringing 4 crore families under the banking umbrella. The journey was made possible with the long and enduring work of the banking sector in rural India.

Growth in purchasing power of rural people

10000 8000 6000 4000 2000 0 89-90 94-95 7-Jun Rural Urban

Annual growth(%) keeping pace with urban growth Urban 2.4 3.2 Rural 3.4 4.5 the growth in purchasing power of rural people is high compare to urban people it shows the future opportunity in rural market in India.

Credit source of poor people in India

The dependency of poor for credit on their family is 39% while only 2% out of total creditor is taken through SHGs. Moneylenders percentage in total credit is 37% which show the dependency on moneylender. Merely 2% share in total credit show the need to concern about it.

credit source of poor people

2 29 32 Moneylender familymember indiv idual to bank SHGs


Recent trends in micro finance

The scenario of microfinance sector facing drastically changes recently. The initial trademark of CSR (Corporate Social Responsibility) is now changes to profit earning sector. Many big corporate giant are mulling towards the microfinance sector.

1. Retailers in micro finance

Now it is clear that microfinance is a large untapped market. Todays retail industry are directly dependent on rural production, they consider microfinance as ally of their retail industry Under these consideration Reliance Capital, the financial services arm of Anil Dhirubhai Ambani Group, has funded two two microfinance institutions in Gujarat - MAS Financial Services and Vardan Trust. They havent disclosed the investments, but this is probably the first known foray for Reliance Capital in this area. Reliance Capital plans to fund microfinance institutions initially in Gujarat and Maharashtra, before spreading out on a national scale. MAS Financial Services, with 61 branches across Gujarat, caters to over 2,50,000 customers in the urban, semi-urban and rural markets. Vardan Trust offers microfinance to farmers, small shopkeepers,

artisans, small enterprise workers and individuals engaged in animal husbandry. Indian microfinance space is getting hotter with MFIs like SKS.

2. Money transfer
A new concept comes in micro finance is Dhan Sthanantran, through these scheme poor people can transfer their money to their relative through their SHGs account, which is living far from them. For example if a person living in Gujarat interested to send money totheir relative living at rajasthan, he can deposit the money in gujarat to the name of the SHG in rajasthan and his relative can withdraw money from rajasthan

3. Banks in microfinance
The rural banking market is still untapped because of tiny saving by people, lack of infrastructure etc. now banks are penetrating rural market through microfinance. ICICI Bank has taken a stake of under 20 per cent in Financial Information Network and Operations Private Ltd (FINO), which was launched on 13th July 2007. FINO would provide technological solutions as well as services to finance providers to reach the underserved in the country. ICICI Bank is the lead facilitator in FINO. ICICI Bank expects to target 200 micro-finance institutions (MFIs) by March 2008. YES Bank, also launching its microfinance division YES Microfinance India today, has signed an MoU for technical collaboration with Bostonbased Accion International, a microfinance institution. YES Bank has set apart Rs 10 crore for the next two years for the microfinance division. The division will offer credit, savings, insurance and remittances in phases to the urban and rural poor.

International bank ABN AMRO also targeting to reaches 10 lac household by 2009 with maintaining a nil non performing assets portfolio.

4. Individual investor
Now microfinance is not merely social services, individual investor can earn money through investing money in micro finance sector. Many organizations like Calvert Foundation, IIRM offering the investment in microfinance sector.

Terms of investment
Interest rate- 2.0 per year Maturity- 12 month Security issuer- Calvert Foundation, IIRM etc. This security is not a mutual fund not FDIC or SIPC and has certain risk.

5. Biometric ATM backed microfinance initiative

For long, banks have been lenders to their rural customers. Now they have announced some rather unique ways in micro financing to get them to deposit savings, Citibank has launched the Pragati saving account for its micro finance customers. This account is similar to a no frills account and does not require any minimum balance. The bank will provide services through a biometric ATM that will also speak to customers in Hindi, Marathi, Tamil and Telugu. "As the customers start saving, there will be ability to sweep this money into deposits so that they earn better interest than the conventional saving account. As we start getting imprints of customers in terms of deposit behaviour we may be able to set them overdraft facilities as opposed to convention loan," says PS Jay Kumar, Business Manager Global Consumer Group, Citigroup India. Incidentally, ICICI Bank also has a micro saving product in Orissa for farmers. Other banks like Andhra Bank and Bank of India also offer

biometric ATM facility to their micro finance customers. In fact banks see this untapped segment not as philanthropy but as sound business, at a time when cheap deposits are hard to come by.








Governments have a complicated role when it comes to microfinance. Until recently, governments generally felt that it was their responsibility to generate development finance', including credit programs for the disadvantaged. Twenty years of insightful critique of rural credit programs revealed that governments do a very bad job of lending to the poor. Short term political gain is just too tempting for politically controlled lending organizations; they disburse too quickly (and thoughtlessly) and they collect too infrequently (unwillingness to be tough on defaulters). In urban areas, governments never really got into the act, and subsidized micro enterprise credit is still relatively rare when compare to its rural counterpart.

Now that microfinance has become quite popular, governments are tempted to use savings banks, development banks, postal savings banks, and agricultural banks to move microcredit. This is not generally a good idea, unless the government has a clear acceptance of the need to avoid the pitfalls of the past and a clear means to do so.

Many governments have set up apex facilities that channel funds from multilateral agencies to MFIs. Apex facilities can be quite complicated and there are few successful examples in microfinance. Successful apex organizations in microfinance tend to be built on the backs of successful MFIs, not the other way around. Finally, governments can also get involved in microfinance by concerning themselves with the regulatory framework that impinges on the ability of a wide range of financial actors to offer financial services to the very poor. This topic is treated below.

Microfinance and Capital Requirement

The demand situation in the microfinance market can be gauged from the Table:

At a Glance: Scale of Indian Microfinance Population of India (estimate - June 08) Microfinance Services - potential client outreach Microfinance Services - current client outreach (Mar. 08) Annual growth in Microfinance Services Microfinance loan portfolio (Mar. 08) financing needs - 4 year estimate (Sept. 08)
Table 2: Demand for micro-lending in Indian Source: Microfinance India (MFI) 2008

1,830 million 600 million 60 million 50% USD 25 billion USD 250 billion

Given these figures there is need for broad basing the reach of financial services to the people falling in the low income category, help them invest in and benefit from their skill sets and tide over the impact of adverse shocks in the process. The intentions might sound

quite philanthropic however microfinance is turning out to be a profitable market for commercial banks which is quite evident from their presence in this area. The new commercial banks do not have the infrastructure to ensure the last mile connectivity and have to rely heavily of microfinance institutions (MFI).

Challenges in the Indian context

Traditionally banks have usually not provided financial services to clients with little or no cash income. Banks must incur substantial costs to managing a client account, regardless of how small the sums of money involved. For example, the total revenue from delivering one hundred loans worth $1,000 each will not differ greatly from the revenue that results from delivering one loan of $100,000. But it takes nearly a hundred times as much work and cost to manage a hundred loans as it does to manage one. A similar equation resists efforts to deliver other financial services to poor people. There is a break-even point in loan and deposit sizes below which banks lose money on each transaction they make. Poor people usually fall below it. In addition, most poor people have few assets that can be secured by a bank as collateral. As documented extensively by Hernando de Soto and others, even if they happen to own land in the developing world, they may not have effective title to it. This means that the bank will have little recourse against defaulting borrowers. Seen from a broader perspective, it has long been accepted that the development of a healthy national financial system is an important goal and catalyst for the broader goal of national economic development.

However, national planners and experts focus their attention mainly on developing a commercial banking sector dealing in high-value transactions, and often neglect the delivery of services to households of limited means, even though these households comprise the large majority of their populations. Because of these difficulties, when poor people borrow they often visit their relatives or the ubiquitous local moneylender. Moneylenders often charge over 10% a month, or even a few percentage points 'a day' for their money. While they often demonized and accused of usury, their services are convenient and fast, and they can be very flexible when borrowers run into problems. Hopes of quickly putting them out of business have proven unrealistic, even in places where microfinance institutions are very active. In nations with lower population densities, meeting the operating costs of a retail branch by serving nearby customers has proven considerably more challenging. 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 aspects to formal sector.

10. Status of microfinance in Rajasthan

Rajasthan is the largest state in India and the peculiar natural, social and economic features of Rajasthan define the need and scope for a strong microfinance movement. The primary sector dominates the essentially agrarian economy, with 2/3rd of the population dependent on agriculture and allied activities for their livelihoods. As per the Human Development Index, Rajasthan comes at 12th rank among 15 major states in India. In terms of availability of credit from RFI the state is among the least privileged states. This is reflected in the number of bank outlets per lakh population, per capita bank deposits, per capita bank credit and, over all credit deposit ratio. In all these respects Rajasthan is lagging. For example, per capita bank deposit in Rajasthan is Rs 6151, as against Rs. 12922 for the country as a whole; per capita bank credit in Rajasthan is Rs. 3355, as against Rs. 7486 for the country. Overall bank penetration is also low.

Current Situation of Microfinance and important issues

In Rajasthan, microfinance is almost synonymous with Self Help Groups. There is no other model of mF in the state. There are approximately 1.5 lakh self help groups of women. Department of women and child development has promoted about 50% of these groups. Other government departments under developmental schemes like SGSY, Watershed Development etc, have organized another 2025% group. NGOs have promoted remaining 25-30% groups. The Self Help Movement started more as social mobilization of women for their better place in family and society rather than microfinance movement in Rajasthan. Many voluntary organizations had been working with poor organizing them in village development committees. But participation of women in these VDCs was sub optimal. So they started a separate group of women Mahila Smooh/ or Mahila Mandals as subset of larger village institution purely with a purpose of having increased participation of women in development. Most development practitioners and policy makers realized that mere women participation through MM/MS is not adequate and some direct action in terms of improving economic status of women is needed. The assumption was that if women have access to income/money, their status in family and society would be better. Many voluntary organizations and government (together and/or separately) started organizing women in to groups to take up small business (IG Activities) collectively. Most of these activities were Off Farm like

sewing, dari, galicha, candle, chalk, agarbatti, achar, bidi, papad, handicrafts, etc. But due to lack of proper marketing networks and many other reasons, there was mixed experience. Except some success stories at highly micro level, no significant impact is seen. It is probably a case of Double Fault First pushing poor to become entrepreneur and that too in a collective way.

Yearly progress in SHG-Bank linkage(NABARD) Year March03 March04 March05 March06 March07 No. of SHGs credit linked 22742 33846 59906 98219 137837 Annual loan amount in lac 2184 2587 6723 9725 12558 Cumulative loan amount 4685 7213 13936 23661 36219

Voluntary Organization in Rajasthan

In every district, there are about 5-10 voluntary organizations. That are organizing SHGs either on their own or in collaboration with government. Most of the voluntary agencies have promoted 50 to 100 SHGs. However there are a few agencies that have substantial number (300 to 800 SHGs) of groups. For example: PEDO in dungarpur, Lupin Foundation in Bharatpur, PRADAN in Dausa, Dholpur, IBTADA in Alwar, ASSEFA IN Baran and Banswara,

URMUL in Bikaner, Sewa Mandir in Udaipur, Navyuvak Mandal in Bhoruka etc.

Need of financial services:

It has been well researched and documented that poor have temporary surpluses and they are in need of services to keep their savings safe. A poor family may get the payment for their labour or they sell their small assets or crops etc. The money received from such transactions would have small temporary surplus, which they would use over next few days/ months. If they do not have access to a place where they can save that safely, it might result in to expenses on less critical items or even on things like drinking etc. It has been noticed that due to lack of access to banks or SHGs, they keep the money in cash and it does not earn any interest.

Financial needs and financial services.

In developing economies and particularly in the rural areas, many activities that would be classified in the developed world as financial are not monetized: that is, money is not used to carry them out. Almost by definition, poor people have very little money. But circumstances often arise in their lives in which they need money or the things money can buy.

In Stuart Rutherfords recent book The Poor and Their Money, he cites several types of needs:

Lifecycle Needs: such as weddings, funerals, childbirth,

education, home-building, widowhood, and old age. Personal Emergencies: such as sickness, injury, unemployment, theft, harassment or death. Disasters: such as fires, floods, cyclones and man-made events like war or bulldozing of dwellings. Investment Opportunities: expanding a business, buying land or equipment, improving housing, securing a job (which often requires paying a large bribe), etc.

Poor people find creative and often collaborative ways to meet these needs, primarily through creating and exchanging different forms of non-cash value. Common substitutes for cash vary from country to country but typically include livestock, grains, jewellery and precious metals.

Need of financial services:

It has been well researched and documented that poor have temporary surpluses and they are in need of services to keep their saving safe. A poor family get the payment for their labour or they sell their small assets or crops etc. the money received from such transaction would have small temporary surplus, which they would use over next few days/ months. If they do not have access to a place where they can save that safety, it might result in to expenses on less critical items or even on things like drinking etc. it has been noted that due to lack of access to banks or SHGs they keep the money in cash and it does not earn any interest.

Category Description Very Poor Landless, SC/ST, Single women HH Migrants Small and Marginal Farmers, Traditonal services trades Medium farmers, shopkeepers Large farmer, permanent/semipr manent job holders,traders

Credit For

Loan Size



Better off

Food, cloth Consumptio Illness, HH n consumption loans up to Rs 2000/Food, health, Consumptio marriage and n other social and obligations, productive equipments loans up to Rs 10000/Working Productive capital, agri loans up to inputs, and Rs small assets 25000/Big assets- More than vehicle to pay Rs old loans,to 25,000 advance loans loans, may be up to Rs. 2,00,000

Source credit Money lenders,


Money lenders, SHGs, friends, relatives SHG, PACS Banks, moneylender s Commercial banks, coop banks

The major issues that need to be addressed are:

1. Access of poor to formal financial institutions. 2. Quality of the existing Self Help Groups- only 30% SHGs have been Able to take Loan from Banks.

3. Spread of the movement: About 80% of SHGs are located in 30% of The districts. 4. Outreach: Large number of poor is still beyond the reach of SHGs and Formal financial institutions. 5.Microfinance is limited to micro savings and credit. 6.Human resource challenge: Perspective and capacities of mf promoters is very Limited, Numbers of skilled persons in microfinance is very less. 7.Most mf products and services offered are pre determined and they are not based On the needs of the clients. 8. There is double reporting (same group being reported by different SHG Promoters), There are also cases where one person is member of many groups. 9. Largely the SHGs are promoted to meet project requirements/ targets 10. Still there are many operational problems in SHG-Bank linkage 11. Inadequate financial support so far on SHG formation, it needs at least 3 years, and about Rs.8-10, 000/- per SHG for promoting a good quality SHG.

11 Women and micro finance

Although men, as well as women, face difficulties in establishing an additional enterprise, women have barriers to overcome. Among them are negative socio-cultural attitudes, legal barriers, practical external barriers, lack of education and personal difficulties. In spite of this, for women and especially for poor women,

microentreprise ownership has emerged as a strategy for economical survival. One of the most essential factors contributing to success in microentrepreneurship is access to capital and financial services. For various reasons, women have had less access to these services than men. In this context, credit for microentreprise development has been a crucial issue over the past two decades. Research has shown that investing in women offers the most effective means to improve health, nutrition, hygiene, and educational standards for families and consequently for the whole of society. Thus, a special support for women in both financial and non-financial services is necessary. Regarding limited-access to financial services, women depend largely on their own limited cash resources or, in some cases, loans from extended family members for investment capital. Smaller amounts of investment capital effectively limit women to a narrow range of lowreturn activities which require minimal capital outlays, few tools and equipment and rely on farm produce or inexpensive raw materials.

In general, women need access to small loans (especially for working capital), innovative forms of collateral, frequent repayment schedules more appropriate to the cash flows of their enterprises, simpler application procedures and improved access to saving accounts. Surveys have shown that many elements contribute to make it more difficult for women in small businesses to make a profit. These elements are:

Lack of knowledge of the market and potential profitability, thus making the choice of business difficult. Inadequate bookkeeping. Employment of too many relatives which increases social pressure to share benefits. Setting prices arbitrarily. Lack of capital. High interest rates. Inventory and inflation accounting is never undertaken. Credit policies that can gradually run their business (many customers cannot pay cash; on the other hand, suppliers are very harsh towards women).

o o

o o o o o

Women can make micro-credit succeed in India:

'India has to understand that micro-finance is workable and

sustainable anywhere where there is poverty. And to make it successful, it needs to emphasize and mobilize the role of women in

each rural and poor household,' the chief architect of Bangladesh's Grameen Bank told a conference organized by the Federation of Indian Chambers of Commerce and Industry (FICCI). 'India and Bangladesh have no major difference in poverty. If micro-finance or micro-credit is successful in Bangladesh, it can be successful in India as well,' Yunus emphasized. 'The Grameen Bank and the work that we do is not something extraordinary and neither is it a model. It is a rather simple way of solving the complex problems of poverty,' the 66-year-old economist said.

'Bangladesh is very close to achieving the UN millennium development goal of eradicating poverty. And we have been able to successfully reach 80 percent poor households. India has a long way to go, but it can come out with excellent results only if it catches the pace,' he reiterated.

How to increase and support women's participation in micro-finance activities?

Both governments and donors should explore ways of developing innovative credit programs using intermediary channels or institutions closer to the target groups such as co-operatives, women's group associations and other grassroots organizations. Savings and credit programs should be designed in a way not to exclude women from participating. Additionally, there is a need to examine the impact of structural adjustment policies on men and women at the family level as well as

within various sub-sectors of the labour market and within the small enterprise sector itself. In general terms, in order to facilitate the participation of women in micro and small enterprise, donors should: * Encourage micro enterprise programs to develop specific strategies for recruiting women as clients, from within their existing target groups. * Encourage micro enterprise programs to expand their target groups to include the sizes and types of enterprise activities in which women engage and/or experiment with assistance strategies, business and technical assistance needs of these types of enterprises. * Consider expanding support to a broader range of organizations, especially poverty-focused organizations active in rural areas. Support for these organizations should include technical assistance and training in programs planning, management and in developing teams of female staff to assist clients in business planning and management.

Rural Finance for Rural Women

Poverty hits hardest at the female half of humankind. If woman living in a rural area of a developing country, they are likely to be poorer than a man, more vulnerable, own no land, be less educated and in

poorer health. And you are unlikely to live as long. Struggling to combine a 'double day' of low-paid work with care for the home, rural women often have to cope with frequent pregnancies and child mortality. For women, perhaps the cruelest reality of all is that they have less chance than men to escape from poverty. A rural woman is likely to have little or no say in the way the family spends its income. Discrimination in education is the start of the vicious spiral of poverty. A girl may be deprived of schooling and literacy for no other reason than that she is female. Seventy per cent of poor women in India cannot read or write. Illiteracy often excludes people from written knowledge and decision-making. Some rural women have been affected by trade liberalization they are unable to participate in the marketing of export crops as they lack land rights and access to essential farm inputs. On the other hand, some women have gained by securing jobs in new export activities. Investment in rural women pays off. * Indian population is 48.1% women and 51.9% men * Female illiteracy is 62% whereas the male illiteracy rate is 34% * The labour force participation rate of women is 22.7%, less than half of the men's rate of 51.6% * In rural India, agriculture and allied industrial sectors employ as much as 89.5% of the total female labour * Women have extensive work loads with dual responsibility for farm and household production * Women's work is getting harder and more time-consuming due to ecological degradation and changing agricultural technologies and practices

* Women have an active role and extensive involvement in livestock production, forest resource use and fishery processing * Women contribute considerably to household income through farm and non farm activities as well as through work as landless agricultural labourers * Women's work as family labour is underestimated * There are high degrees of inter-state and intra-state variations in gender roles in agriculture, environment and rural production.

Rural Women at a glance

Rural women comprise more than one quarter of the total world population. 500 million women live below the poverty line in rural areas... Women perform 30 per cent of the agricultural work in industrialized countries. Rural women the world over are an integral and vital force in the development processes that are the key to socioeconomic progress. Rural women from the backbone of the agricultural labour force across much of the developing world and produce 35-45% of Gross Domestic Product and well over 50% of the developing world's food. Yet, half a billion rural women are poor and lack access to resources and markets."

Need credit to rural women

Rural women play a fundamental role in daily management of agricultural activities and of the family unit. They are however often









Consequently, they try to optimize their possibilities of accessing credit from the various existing rural finance services: The "unofficial" system (an alternative established by community members) The "official" system (banks and other official financial institutions), and Farmers' organizations which give loans to their members Rural women fulfill multiple functions on a daily basis: they are mothers providing for their family's well-being, farmers producing food for the family, shopkeepers supplying indispensable additional income. They are also in charge of natural resources management which ensures future food security for their families. Although rural women represent a fundamental pillar for survival and management of the family unit, they are confronted with real difficulties in accessing additional resources such as credit. Various barriers arise when they try to undertake or develop any incomegenerating production activities.

Loans facilitates to rural women

Loans play an important role in the economic, social and political improvement of the situation of women throughout the world.

Improving rural women's access to finance gives them a chance to become autonomous. This can contribute to increase agricultural productivity, development of income-generating activities alongside their production activities, better control of production methods, and improved natural resource management. As a result they will be able to ensure food security for the future of which they are the guarantors. Additional sources of finance can help in developing necessary commercial agriculture within the national and international context, whilst retaining subsistence farming for the community's daily needs. By increasing their economic power, they will be able to organize themselves more efficiently, to affirm their position as rural women farmers, to participate in decision making processes and to draw up policies which concern them; as well as defending their own interests with public authorities and other relevant institutions.

Savings facilitate for rural women

Savings are seen as insurance against foreseeable future difficulties (constituting a dowry, bridging a difficult period, etc) or completely unpredictable (food shortages, natural weather phenomenon, foodstuffs sold cheaply because of the death or accident of a member of the family, etc). Rural women therefore insure themselves against future risks by saving in the form of land, herds, trees, gold jewellery, or by hoarding money, which also include risks such as theft, the compulsory gift of a sum to a member of the family in difficulty, a livestock epidemic, etc. Access to safe and secure savings is an important part of addressing short-term, medium-term and long-term unforeseen circumstances.

These savings allow them to protect their own funds and, as a result, to undertake other income-generating activities. Allowing them to control their incomes and to be paid for these activities is to participate in granting autonomy to rural women.

12. Conclusion
In concluding way microfinance is a good tool for combating to the poverty and facilitates poor to the financial services. Some valuable lessons can be drawn from the experience of successful Microfinance operation. First of all, the poor repay their loans and are willing to pay for higher interest rates than commercial banks provided That access to credit is provided. The solidarity group pressure and sequential lending provide strong repayment motivation and produce extremely low default rates. Secondly, the poor save and hence microfinance should provide both savings and loan facilities. These two findings imply that banking on the poor can be a profitable business. However, attaining financial viability and sustainability is the major institutional challenge. Deposit mobilization is the major means for Microfinance institutions to expand outreach by leveraging equity. In order to be sustainable, microfinance lending should be grounded on

market principles because large scale lending cannot be accomplished through subsidies. A main conclusion of this paper is that microfinance can contribute to solving the problem of inadequate housing and urban services as an integral part of poverty alleviation programs. The challenge lies in finding the level of flexibility in the credit instrument that could make it match the multiple credit requirements of the low income borrowers without imposing unbearably high cost of monitoring its end-use upon the lenders. A promising solution is to provide multi-purpose loans or composite credit for income generation, housing improvement and consumption support. Consumption loan is found to be especially important during the gestation period between commencing a new economic activity and deriving positive income. Careful research on demand for financing and savings behavior of the potential borrowers and their participation in determining the mix of multi-purpose loans are essential in making the concept work. Eventually it would be ideal to enhance the creditworthiness of the poor and to make them more "bankable" to financial institutions and enable them to qualify for long-term credit from the formal sector. Microfinance institutions have a lot to contribute to this by building financial discipline and educating borrowers about repayment requirements.

13. Bibliography:
1. 2.

3. 4. 5. 6. 7. 8. 9.