(M-207) A Contemporary Management Issue Report on

MICROFINANCE Financing the poor (An Overview)

Submitted in partial fulfillment of the Requirement for the degree of MBA, (2007-09) INTERNATIONAL SCHOOL OF INFORMATICS AND MANAGEMENT, JAIPUR

Acknowledgement

Table of Contents

Pg. No.

1. Introduction

5 6 7 12 13 14 15 16 17 19

Elements of Microfinance

2. History of Microfinance 3. Microfinance Approach 4. 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

5. Types of Organizations and Composition of the Sector Formal sector

Semi Formal sector Informal sector What are MFIs and SHGs? 25 26 27 28 28 32 33 34 36 42 44 46 47 48

6. Can microfinance be profitable? 7. Why do MFIs charge high interest rates to poor people? 8. Impact of microfinance over poverty 9. Current Scenario of Micro - financing in India

Indian economy and microfinance Govt. role in supporting Microfinance Microfinance and capital requirement Challenges in Indian context

10. Status of microfinance in Rajasthan 11. Microfinance for Women in India Womens role in economy Women and Microfinance Womens Micro enterprises Womens participation in Microfinancing activities

Women can make Microfinance succeed in India 50 51 52 52 53

Rural finance for rural women Rural women at a glance o Rural finance & rural poverty o Need credit to rural women o Loan facilities to rural women

o Saving facilities to rural women Sources of finance available o Savings/Loans available in unofficial financial sector o Various obstacles to unofficial financial sectors efficiency o Official system : financial institution o Obstacles preventing access to official financial sector

54 55

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56 58

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o Agriculture organization providing financial services 60 o Rural womens access to facilities provided by agriculture organization 12. Conclusion 13. Bibliography Training of and information for rural women 60 61 61 63

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

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 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 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 selfemployment 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 mid1970s, 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 a 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 peMicro-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), for example, adopted this definition in explaining micro-insurance productsople and businesses not served by typical social or commercial insurance schemes.

2. History of Microfinance
1970s & 1980s: THE PIONEERS Informal financial mechanisms have traditionally serviced the billions of poor households in developing nations. These include informal arrangements like moneylenders, loan sharks, pawnshops, and saving and loan clubs. Another source for funds often comes from relatives. After World War II some economic development initiatives focused on providing agricultural credit to marginalized farmers. However, these loans were highly dependant upon weather and crop success. Therefore the repayment rates were not always high. Then, in the 1970-1980s, simultaneous efforts launched the microcredit movement and it started having an economic development impact in the lives of thousands of families. Three of the organizations in Small Fortunes were pioneers in the movement. A summary of their stories helps to see the varying ways that microcredit got its start. Grameen Bank In the mid-1970s Dr. Muhammad Yunus returned to Bangladesh to teach at Chittagong University after receiving a PhD in economics in the United States. He returned to a newly independent country devastated by war that was trying to deal with a multitude of economic problems. It was not long before Professor Yunus realized that the economic theories and practices he learned were useless in dealing with the abject poverty he saw every day as he commuted to and from his college office. He and some students interviewed 42 impoverished women and found that they were all hardworking people who were paying outrageous fees to suppliers because they could not pay in cash. The suppliers made money, but each of the women had very little money left after paying their suppliers back, or selling their products through them. Adding up the various capital requirements for all 42 of the women, Yunus found out that US$27 was all that was required for these women to be able to purchase their usual

supplies directly and bypass the creditors. He gave each of the woman the small amount of money needed, and within weeks was paid back-and each of the women had enough profit to continue to directly purchase their suppliesinstantly making more profit than they ever had before. This was the start of the first Grameen Bank (Bangla for Village Bank). Yunus repeatedly went to the formal Bangladeshi bankers to show them his progress in providing credit to the poor. Each time he was rebuffed with the comment, "The poor aren't credit worthy!" By the end of 2005 we estimate that the Grameen Bank will reach over 5 million borrowers. Ninety-six percent of Grameen Borrowers are women, with a loan recovery rate of 98.93 percent. The Grameen system has subsequently started providing other financial services (such as housing loans and educational loans) and has found unique ways to help Bangladeshi microentrepreneurs start new businesses (such as Grameen Phone). Not being secretive about their success, the Grameen system goes out of its way to share information about itself-helping to start hundreds of Grameen replication programs in many countries around the world. ACCION International In a similar case during the 1970s, a studentformed organization started providing microloans in Recife, Brazil. This later became ACCION International. Over time ACCION broadened its microcredit efforts and in 1992 helped form BancoSol in Bolivia, the first commercial bank dedicated solely to microenterprise. ACCION has been an innovator in creating similar organizations as a method for reaching large numbers of microentrepreneurs in their respective countries. ACCION is a key innovator at the forefront of efforts to bring microloans to microentrepreneurs through regulated financial institutions. In 2005, fifteen ACCION-affiliated, regulated financial institutions exist to provide microcredit services to impoverished families. Like the other pioneers mentioned in this overview, ACCION provides technical assistance to many other microfinance institutions worldwide.

In the 1990s, ACCION USA, a subsidiary, was formed to bring microcredit services to large urban populations in the United States who likewise find it difficult to access credit through normal banking institutions. By the end of 2005, we estimate that the ACCION-affiliated programs will have reached over 5 million borrowers. ACCION borrowers have a historical repayment rate of 97 percent. FINCA International Meanwhile, in the 1980s, John Hatch was inspired with the same lending principles in Bolivia. While finding it increasingly difficult to provide agricultural loans, he got the idea of providing loans to women to finance their microbusinesses. He found success similar to Grameen and ACCION and formed the Foundation for International Community Assistance (FINCA). FINCA is the organization from which Sonia (mentioned at the beginning of this introduction) received her loan. In 2005 we estimate that FINCA will reach over 2 million borrowers. FINCA works in 23 countries, mostly with women, and has a loan repayment rate of 97 percent. Just as in Grameen and ACCION's cases, FINCA readily shares its Village Banking model with others. FINCA's Village Banking replication programs have been started in over 32 countries throughout the world. 1990s: A MOVEMENT In the 1990s the microcredit movement took hold and microcredit was established as a viable development tool. Networks and associations were started to facilitate the sharing of best practices, establish goals for the movement, and focus on innovations to improve microcredit practice. A pivotal moment occurred in 1997 when the first Microcredit Summit was held in Washington, DC and the Microcredit Summit Campaign was launched. Over 2,900 people from 137 countries attended, and a goal was set to reach 100 million of the world's poorest families by 2005. Sam Daley-Harris, the founder of the Microcredit Summit Campaign, is interviewed in Small

Fortunes. The Microcredit Summit Campaign has held a subsequent Microcredit Summit +5 conference in 2002 and multiple regional conference in intervening years. Specific reference to reaching the poorest means those borrowers living on less than US$1 a day or the bottom 50 percent of those living below a country's poverty line. At the end of 1999 the Microcredit Summit Campaign reported that 23.5 million borrowers had access to microcredit13.75 million of these were classified as the poorest. By the end of the 1990s microfinance institutions had taken on many forms such as nonprofit organizations, regulated financial institutions, and nongovernmental organizations (NGOs).

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

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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 banks too experienced that the rapid expansion of branch network was not contributing to an increasing volume of business to meet high transaction costs and risk provisioning, which even threatened the viability of banking institutions and sustainability of their operations. At the same time, it was not possible for them to allow a population of close to 300 million - even if poor - to remain outside the fold of its business. The search for an alternative mechanism for catering to the financial service needs of the poor was thus becoming imperative. Microfinance has 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. Microfinance approach

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Microfinance approach is based on certain proven truths which are not always recognized. These are:

That the poor are bankable; successful initiatives in micro finance demonstrate that there need not be a trade off between reaching the poor and profitability - micro finance constitutes a statement that the borrowers are not 'weaker sections' in need of charity, but can be treated as responsible people on business terms for mutual profit That almost all poor households need to save, have the inherent capacity to save small amounts regularly and are willing to save provided they are motivated and facilitated to do so That easy access to credit is more important than cheap subsidized credit which involves lengthy bureaucratic procedures - (some institutions in India are already lending to groups or SHGs at higher rates - this may prevent the groups from enjoying a sufficient margin and rapidly accumulating their own funds, but members continue to borrow at these high rates, even those who can borrow individually from banks) 'Peer pressure' in groups helps in improving recoveries.

4. 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.

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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.

3.1 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 selfemployed, 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. Access to conventional formal financial institutions, for many reasons, is directly related to income: the poorer you are the less likely that you have access. On the other hand, the chances are that, the poorer you are, the more expensive or onerous informal financial arrangements. Moreover, informal arrangements may not suitably meet certain financial service needs or may exclude you anyway. Individuals in this excluded and under-served market segment are the clients of microfinance.

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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.

As we broaden the notion of the types of services microfinance encompasses, the potential market of microfinance clients also expands. 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. As the definition of the types of services microfinance encompasses broadens, the potential market of microfinance clients also expands. 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.

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3.2 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. It can also be a powerful instrument for self-empowerment by enabling the poor, especially women, to become economic agents of change. 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.

3.3 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.

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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 cycle. Most often, the poor not only have low income, but also irregular income flows. Thus, to maximize the savings propensity of the poor, institutions must provide flexible opportunities--- both in terms of amounts deposited and the frequency of pay ins and pay outs. This represents an important challenge for the microfinance industry that has not yet made a concerted attempt to profitably capture tiny deposits.

3.4 When is microfinance NOT an appropriate tool?

Microfinance increasingly refers to a host of financial servicessavings, loans, insurance, remittances from abroad, and other products. 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

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currently designed. Extremely poor people who do not have any stable incomesuch as the very destitute and the homelessshould 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. At some level, the very cause of poverty is the lack of a sustained, regular, and significant income. Even though a family may have a significant income for extended periods, it may also face months of no income, thereby reducing its ability to enter into the type of commitment demanded today by most MFIs. Some people are just too poor, or have incomes that are too undependable to enter into today's loan products. These extremely poor people at the bottom percentiles of those living below the poverty line need safety net programs that can help them with basic needs; some of these are working to incorporate plans to help graduate recipients to microfinance programs. Often times governments and aid agencies wish to use microfinance as a tool to compensate for some other social problem such as flooding, relocation of refugees from civil strife, recent graduates from vocational training, and redundant workers who have been laid off. Since micro credit has been sold as a poverty reduction tool, it is often expected to respond to these situations where whole classes of individuals have been made poor. Micro credit programs directed at these types of situations rarely work. Credit requires a 98% hit rate to be successful. This means that 98% of recent vocational school graduates or returning refugees would need to be successful in establishing a micro enterprise for repayment rates to be high enough to allow for a program's overall sustainability. This is simply unrealistic. Running a program with substantial default rates undermines the very notion of credit and destroys credit discipline among those who could repay promptly but who look foolish given that many do not. 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

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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. 4.1 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%. 4.2 Semi - formal Sector The majority of institutional microfinance providers in India are semi-formal 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 non-profit companies.

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4.3 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.

4.4 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. Most of these constitute a group that is commonly referred to as "best practice" organizations, ones that employ the newest lending techniques to generate efficient outreach that permit them to reach down far into poor sectors of the economy on a sustainable basis. 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

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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.
How MFIs are doing Growing faster than SGHs... Year 2001 2002 2003 2004 2005 Outreach 3 10 11 37 67 Outstanding 64 215 327 433 1095

Client outreach in lakhs, outstanding in crores.

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

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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

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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 be able to priorities the loan applications, fix repayment schedules, fix appropriate rate of interest for the loans advanced and closely monitor the repayment of the loan installments from the loaned. The group should operate a group account preferably in their service area bank branch, so as to deposit the balance amounts left with the groups after disbursing loans to its members. 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.

Growing but not fast enough In 2005, 5.39 lakh SGH received Rs. 2994 cr.in bank loans

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SGH financed during the year rate of growth of loans to new SGHs (%) No. of SGH. Receiving repeat loans Proportions of repeat loans in total loans(%) Bank loans disbursed during the year (cr.) of which, disbursed as new groups of which, disbursed as repeat loans Average loan size-new (Rs) Rrepeat loans (Rs.) Source:- NABARD

2002 1,97,653 32 41,413 17 545 453 92 22,919 22,215

2003 2,55,882 29 1,02,391 29 1,023 691 332 27,005 32,425

2004 3,61,731 41 1,71,669 40 1,855 1,158 698 32,013 40,660

2005 5,39,365 49 2,58,092 32 2,994 1,727 1,268 32,019 49,130

2006 6,20,109 15 3,44,502 36 4,499 2,330 2,169 37,574 62,960

Figure are outstanding loans in Rs. crore

5000 4000 3000 2000 1000 0 2001 2002 2003 Year 2004 2005 SGHs MFIs

YEAR 2001 2002 2003 2004 2005

SGHs 500 1000 1500 2700 4750

MFIs 100 200 300 500 1200

Source: Sa-Dhan

Figure are outstanding loans in Rs. Crore SGH and MFI are primary resource of lending the poor in rural area

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6. 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. The microfinance institution could subsidize the loans to make the credit more "affordable" to the poor. Many do. However, the institution then depends on permanent subsidy. Subsidy-dependent programs are always fighting to maintain their levels of activity against budget cuts, and seldom grow significantly. They simply aren't sustainable, especially if other microcredit operations have shown that they can provide credit and grow on the basis of high rates of interestand along the way serve far greater numbers of clients. Evidence shows that clients willingly pay the higher interest rates necessary to assure long term access to credit. They recognize that their alternatives even 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. Many of the economic activities in which the poor engage are relatively low return on labor, and access to liquidity and capital can enable the poor to obtain higher returns, or to take advantage of

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economic opportunities. The return received on such investments may well be many times greater than the interest rate charged. 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. A long series of studies has shown that many programs that charge subsidized interest rates end up using rationing mechanisms to distribute credit in response to excess demand. These mechanisms cause the borrower to have to jump through hoops; increasing the time and money s/he must put out to get the loan. In fact, these transactions costs are frequently higher than the interest costs, which take away the advantage to the borrower of the interest rate subsidy. However, while increased access to credit for the poor on a long term and sustainable basis can bring significant benefits, MFIs must continue to work to improve efficiency levels, and to increase scale. This will bring down the cost of providing loans, and the benefits transferred to the poor in terms improving loan products, better access to loans, and lower borrowing costs.

7. 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

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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 microclients can be sustainable once they have matured, and if they commit to that path. The evidence supports this position.

8. 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

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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 microfinance 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 microfinance 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; On clients participation in social and political processes, on social relations within households and neighborhoods.

9. Current Scenario of Micro - financing in India

9.1 Indian Economy and Microfinance

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Home to about 1.1 billion people as of 2007, 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.

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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. While 10 % lending to weaker sections is required for commercial banks, they neither have the network for lending and supervision on a large scale nor the confidence to offer term loans to big MFIs. The non poor comprise of 29 % of the outreach. Considerable gap between demand and supply for all financial services Majority of poor are excluded from financial services. This is due to, inter-aria, the following reasons

1. Bankers feel that it is fraught with risks and uncertainties. 2. High transaction costs 3. Unfavorable policies like caps on interest rates which effectively limits the viability of serving the poor.

While MFIs have shown that serving the poor is not an unviable proposition there are issues that have constrained MFIs while scaling up. These include.

1. Lack of an appropriate legal vehicle 2. Limited access to equity 3. Difficulty in accessing low cost on-lending funds (as of now they are unable to offer savings services in a legitimate manner. Limited access to Capacity Building support which is an important variable in terms of quality of the portfolio, MIS, and the sustainability of operations. About 56 % of the poor still borrow from informal sources. 70 % of the rural poor do not have a deposit account 87 % have no access to credit from formal sources. Less than 15 % of the households have any kind of insurance.

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Negligible numbers have access to health insurance (0.4 %) and crop insurance (0.2 %).

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 Less reliance on collateral (only 16.5% of households report providing collateral against the loan)

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9.2 What is the governments role in supporting microfinance?

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

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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.

9.3 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 07) Microfinance Services - potential client outreach Microfinance Services - current client outreach (Mar. 06) Annual growth in Microfinance Services Microfinance loan portfolio (Mar. 06) financing needs - 4 year estimate (Sept. 06)
Table 2: Demand for micro-lending in Indian Source: Microfinance India (MFI) 2007

1,129 million 350 million 40 million 50% USD 2 billion USD 7 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).

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MFIs face the impediments of high cost of service associated with the lowvalue, high volume and cash intensive nature of the business and the high fixed and variable costs associated with putting in place the physical infrastructure required to broaden the reach. The presence of high transaction costs is compounded by the fact that MFIs are not capital rich. The MFIs have begun to graduate from grant based organizations to capital based organizations. Equity and Securitization came forth as good methods of sourcing capitals for the microfinance initiatives.

9.4 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

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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 access to formal sector finance.

Appropriate legal structures for the structured growth of MF operations Finding adequate levels of equity for the new entities to leverage loan funds Ability to access loan funds at reasonably low rates of interest. Ability to attract and retain professional and committed human resources. Design of apt MIS including user friendly software for tracking accounts and operations. Appropriate loan products for different segments. Ability to innovate, adapt and grow.

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Bring out a compendium of small and micro enterprises for the MF clients. Identify and prepare a panel of locally available trainers. Ability to train trainers. Capacity to provide backward linkages or create support structures for marketing.

10. Status of microfinance in Rajasthan

Background
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

35

organized another 20-25% 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, badi, 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.

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

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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.

Preliminary Observations on Credit Needs of Rural People Category

Very Poor

Description
Poor Landless, SC/ST, Single women HH, Migrants Small and Marginal Farmers, Traditional services trades Medium farmers, shopkeepers

Credit For
Food, Clothes, Illness, HH consumption Food, health, marriage and other social obligations, equipments Working capital, agro inputs, small assets Big assetstractors, vehicles, to pay old loans, to advance loans,

Loan Size
Consumption loans up to Rs. 2000/Consumption and productive loans up to Rs. 10,000/Productive loans up to Rs. 25,000/-

Source of Credit
Money lenders,

Poor

Money lenders, SHGs, friends, relatives

Average

SHG, PACS, Banks, moneylenders

Better off

Large farmers, permanent/ semi permanent job holders, traders

More than Rs. 25,000 loans, may be up to Rs. 2,00,000

Commercial Banks, Coop Banks, Coop

SHG Status: Major SHPIs: Sr. No. SHPIs

Scheme/ Project

Remarks

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1.

Department of Women and Child Development Department of Rural Development NABARD and Banks

ICDS

2. 3. 4.

SGSY Watershed Development Programs SHG-Bank Linkage

Groups are organized by Anganwadi workers and sathins BPL groups- through NGOs A few RRBs Through NGOs

Voluntary Organizations With support from Donor agencies and government programs

Under SGSY: (from Department of Rural Development- Till November 2005)

Till November 2005, total 26263 SHGs have been organized. (Max in Dungarpur-3636 and Min in Dholpur- 309) Of these 11212 SHGs are women SHGs. SHGs passed grade-I are 13951 and SHGs passed Grade-II are 4372 Groups taken up economic activities (entrepreneurship) are 2873 of which 192 are women SHGs

SHG Bank Linkage: (From NABARD)

Year 2002-03 2003-04 2004-05 2005-06 (till Nov. 05) Nos. of SHG Credit Linked 22742 33846 59906 79584 Loan amount (Rs. Lakhs) 2184.12 2587.61 6723.28 4344.18 Refinance (Rs. Lakhs) 1472.28 992.13 2864.77 924.52

Department of Women and Child Development (DWCD): (till October 2005)

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Total SHGs formed:

100424 (Max 10269 in Jaipur and Min 623 in Jaiselmer)

Total savings in the groups: Nos. of Groups taken loan from banks:

Rs. 4633.78 Lakhs 38138 (Max 3994 in Bhilwara and Min 28 in Rajsamand)

Amount of loan taken from banks: Nos. of groups engaged in IG activities:

Rs. 7182 Lakhs 5926 (in 23 districts)

Voluntary Organizations: 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 and Bhoruka Charitable Trust in Churu, and a few others.

District Poverty Initiative Project (DPIP): in 7 districts (Churu,

Baran, Dholpur, Dausa, Jhalawar, Rajsmand and Tonk): Under DPIP more than 20,000 common interest groups (CIG) have been formed. Though as per the project norms these groups are supposed to function as SHGs but these groups are working as activity groups. Very few groups are doing regular savings and inter loaning. Lately efforts are being made to transform CIGs in to SHGs.

Credit Cooperative Structure: There is a formal cooperative structure

to extend credit to farmers. As of 30th June 2003, the recovery rate at the apex level is 95.46%, at the DCCB level it is 77.24%, and at the PACS level it is 62.75%. The financials often do not reflect the true picture. Short-term

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agricultural loans, for example, are converted into medium term loans, once they fall overdue. They are then not part of the current or overdue demand of the PACS, and this helps the PACS report better recoveries than have actually been achieved. The total membership of all PACS in Rajasthan is 4.59 million persons, as of 2001-02. The PACS were envisaged to cover in their fold all agricultural families in the villages. The average share of members that currently borrow from PACS across Rajasthan was at 37% in 2002-03.

Microfinance and Livelihood: The share of agriculture and allied

activities in to GSDP is reducing and people engaged in primary sector are also looking for employment in wages and in non-farm sector. On an average a person need around Rs. 10-15,000/- for initiating a micro enterprise. It is difficult for these people to get the credit from formal institutions. As they do not have assets to offer as collateral, informal sources (moneylenders) also do not give them the credit. Many of these people end us as wage earners.

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.

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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. Microfinance for Women in India

Overview In 1980s, microfinance programs have improved upon original methodologies and extended beyond conventional thinking. First, microfinance demonstrated that poor people, and especially women, had excellent repayment rates (and often, rates that performed better than those in formal financial sectors). And second, that the poor were willing and able to pay interest rates that would allow the microfinance institutions (MFIs) to cover costs. Microfinance A type of banking service that is provided to unemployed, lowincome individuals or groups who would otherwise have no other means of

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gaining financial services. Ultimately, the goal of microfinance is to give low income people an opportunity to become self-sufficient by providing a means of saving money, borrowing money and insurance. Micro financing is not a new concept. Small microcredit operations have existed since the mid 1700s. Although most modern microfinance institutions operate in developing countries, the rate of payment default for loans is surprisingly low - more than 90% of loans are repaid.

1. Like conventional banking operations, microfinance institutions must charge their lenders interests on loans. While these interest rates are generally lower than those offered by normal banks, some opponents of this concept condemn microfinance operations for making profits off of the poor. It is a tool for empowerment of the poorest; the higher the income and better the asset position of the borrower, the lower the incremental benefit from further equal doses of micro-credit is likely to be. 2. Delivery is normally through Self Help Groups (SHGs). 3. It is essentially for promoting self-employment; the opportunities of wage employment are limited in developing countries - micro finance increases the productivity of self-employment in the informal sector of the economy - generally used for (a) direct income generation (b) rearrangement of assets and liabilities for the household to participate in future opportunities and (c) consumption smoothing. 4. It is not just a financing system, but a tool for social change, specially for women - it does not spring from market forces alone - it is potentially welfare enhancing - there is a public interest in promoting the growth of micro finance - this is what makes it acceptable as a valid goal for public policy.

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5. Because micro credit is aimed at the poorest, micro-finance lending technology needs to mimic the informal lenders rather than the formal sector lending. It has to: a) provide for seasonality (b) allow repayment flexibility (c) eschew bureaucratic and legal formalities (d) fix a ceiling on loan sizes. 6. It is a tool for empowerment of the poorest; the higher the income and better the asset position of the borrower, the lower the incremental benefit from further equal doses of micro-credit is likely to be. It is not just a financing system, but a tool for social change, specially for women - it does not spring from market forces alone - it is potentially welfare enhancing - there is a public interest in promoting the growth of micro finance - this is what makes it acceptable as a valid goal for public policy.

11.1 Women's Role in Economy All over the world, the significant of women entry into the workforce over the past three decades has produced profound transformations in the organization of families, society, the economy, and urban life. Since the late 1950s, women's economic activities have been steadily increasing. Women have always actively participated in their local economies. In Africa, for example, women produce 80 percent of the food and in Asia 60 percent and in Latin America 40 percent. In many cases, women not only produce the food but market it as well, which gives them a well-developed knowledge of local markets and customers. This is a small example of the importance of women's work in society. It does not illustrate the real extent of women's contribution, especially in developing

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countries, not only to the labour force, but also their role as a significant income-source for the family. For instance, in Africa all tasks related to a family's support are the responsibility of women. Due to cultural and traditional aspects, a woman's presence has been a question of survival of her family. Women, especially poor mothers, must divide their time between work "productive role" and family "reproductive role", and balancing all the demands. Time is valuable for these women, as their livelihoods depend largely on their ability to fulfill the multiple demands of the household and the marketplace. In spite of the remarkable importance of women's participation, their jobs have been considered as an "extra income" to family survival or simply to improve its living conditions. Moreover, micro enterprises owned by women have been considered as a way to meet primary needs instead of a profitable source of income. Unfortunately, labour markets have followed this perception and have offered less favorable conditions to women. Women workers consistently earn less than their male partners do. That is the case of Cameroon women who work, for example, up to 10 hours a day, but at the end of the month, their income is far below the Cameroon monthly minimum wage of 29000 CFA francs (US$ 60). Women have had to fight against an adverse environment, which traditionally had been minimizing and exploiting their capacities. As a consequence of this reality, in some cases, women are just satisfied with the non-financial benefits, such as the psychological satisfaction of "social contact". 11.2 Women and micro finance

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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 low-return 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:

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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

11.2.1 Women's Micro-enterprises Considering the entrepreneurial environment, women's activities are very interesting as they offer a great source of knowledge and innovation. For example: there is no single type of female micro-entrepreneur, they differ in social background, educational level, experience and age. Another interesting factor is their strong social coherence that allows them to maintain strong communications-channels at all levels. One important element, and perhaps the only characteristic that men will never have, is the possibility to transfer "motherhood skills" to job. These include fostering of other people's development through guiding, monitoring, and sharing information. Women are experienced in balancing claims, in organizing and pacing, and in handling difficulties. In general terms, female-led microenterprises tend to be associated with activities that provide part-time employment. They are small in size and have loose, informal structures, require very little start-up capital, and little or no

46

formal education. On the other hand, many women entrepreneurs in the developing world remain illiterate and live in poor rural communities. Businesswomen in developing and countries share the following general characteristics:
o

They are concentrated in market sectors that have low barriers to entry and low levels of outside communication (transfer to other markets). They focus on trade, services, and light manufacturing activities. Their businesses are smaller than others, employing less than five employees. The owners have relatively little previous working experience. They use traditional technologies. Most employees are family-related They are often home based. Business growth strategies are affected by household responsibilities. Owners tend to have lower levels of education and literacy. Women start their enterprises with less professional work experience and knowledge of their sector than their male counterparts.

o o

o o o o o

o o

11.2.2 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-

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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.

11.2.3 How to increase and support women's participation in microfinance 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 subsectors 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

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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.

11.3 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 lowpaid 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

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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.

11.3.1 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 socio-economic 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."

Rural finance and rural poverty

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More than a billion poor people lack access to the basic financial services which are essential for them to manage their precarious lives. Good management of even the smallest assets can be crucial to very poor people, who live in precarious conditions, threatened by lack of income, shelter and food. To overcome poverty, they need to be able to borrow, save and invest, and to protect their families against risk. But with little income or collateral, poor people are seldom able to obtain loans from banks and other formal financial institutions. And even when they do have income or collateral, the amounts they require are often too small to appeal to banks. Microfinance is one way of fighting poverty in rural areas, where most of the world's poorest people live. It puts credit, savings, insurance and other basic financial services within the reach of poor people. Through microfinance institutions such as credit unions and some non-governmental organizations, poor people can obtain small loans, receive remittances from relatives working abroad and safeguard their savings. Accessing small amounts of credit at reasonable interest rates gives people with the willingness and know-how an opportunity to set up a small business. Records show that poor people are a good risk, with higher repayment rates than conventional borrowers.

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 confronted with numerous obstacles when applying for credit. 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)

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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 income-generating 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.

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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 shortterm, 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.

11.3.2 Sources of finance are available to rural women

Women have several possible sources of finance at their disposal, each with its own advantages and disadvantages. The unofficial sector has always played an important part in financing rural women's activities. The different players in this sector are families, relatives or friends, private lenders including loan sharks, rural shopkeepers, and rural solidarity arrangements. The loans are thus either in money or in kind (for example loans of inputs reimbursed by harvested agricultural produce). A new system of "semi-unofficial" micro-financing has also appeared during the last decade: the system set up by the non-government organizations which provide savings/loans to local rural and/or urban populations allowing populations who do not have access to the official sector to obtain loans at

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rates which are much better than in unofficial systems. We are including this finance model within the unofficial system as it was inspired from this system to better respond to the needs of the population. It attempts to correct the negative aspects whilst retaining the main operational methods. The official sector includes country's various official banks (national banks, rural banks, etc). These official finance institutions are dealt with in the second section of this document. Farmers' Credit Institutions exist alongside the systems mentioned above. They are specific to farmers' organizations and take the form of agricultural loans/savings institutions and cooperatives which we will deal with in the third section. Whenever possible rural women use several savings/loans strategies simultaneously, depending on their requirements, the amounts they may consider necessary, their reimbursement capabilities according to redemption dates, and as a function of their assessment of the risks they are taking in borrowing from the different finance systems. At present, National economies are in the process of addressing the phenomenon of internationalization and its implications for the rural economy. Savings/loan systems can play an important role in avoiding the marginalization of rural women by their partial or total lack of integration into economic and marketing streams at the local, provincial and national level.

Savings/ Loans in the unofficial Finance sector

Small farmers have always set up unofficial micro-finance systems, even before experts in the field of development made this one of its favorite themes. To begin with, these were only bartering systems, before the

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unofficial finance system developed into proper loans which could be large sums of money. Despite the constraints of this system, the unofficial sector is still today widely used and very useful for small producers and for rural women in particular. Moreover, since there are numerous obstacles preventing access to the official credit system, many people retain the unofficial system as a source of savings and loans even if this alternative has a number of negative implications.

Various obstacles to the unofficial finance system's efficiency

Numerous studies, mainly carried out by universities and non-government organizations, have highlighted obstacles in the unofficial savings/loans systems. According to purely economic criteria, the impact of loans is limited, partly because unofficial systems imply limited capital and high costs which do not permit the development of large-scale activities. Moreover the system usually lacks reliability through insecurity of deposits and the lender's more or less good management of his finance system. Although the loans are granted at high interest rates, there is virtually no remuneration for savings. Apart from the development of community relationships, one of the possible negative points that can be noted is the social dependence which comes about due to the existing relationships with the person who has facilitated and/or made the loan. Finally, by using the unofficial finance system, rural women are not integrated into the official finance system and their economic activities

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continue to be marginal. Therefore, their activities remain on a small scale and cannot develop in a satisfactory manner. The unofficial finance system is interesting in that it constitutes recourse in the event of sudden difficulties. Its impact remains limited also because of the essential role of the personal relationships played in granting loans.

Official system: Finance Institutions

The official system (public or private national banks, rural banks, or development banks) can ensure more ambitious financial services than unofficial systems. However, using them may be difficult for rural women. As rural women are increasingly in charge of the family farm's general management (rural exodus of men) and have to deal with the official finance system, facilitating access to loans could be a driving force in developing their production and processing activities, and in progressing towards agriculture for the local market.

Obstacles preventing rural women's access to the official finance system

Rural women have little access to information concerning official savings/loans institutions. In fact banks have a considerable communication problem with the rural environment in general, and with women in particular. The rare extension programs concern their operating and financial services, targeting mainly farmers, without worrying about the specific nature of female problems. This means that rural women have a very limited idea of the nature of institutional savings/loans facilities. Rural women are often considered as being insolvent because they are subsistence farmers, and are seen as a high-risk population for finance institutions.

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Banks and financial institutions hesitate to grant loans to women, as they are usually small loans and do not provide a good enough return for the banks. They are heavy institutional constraints such as administrative procedures and the necessity for guarantees (land ownership title deeds). With the problems of illiteracy and the lack of management knowledge, rural women are discouraged from accessing these financial services. Of course groups of women have a better chance of being provided with credit, but this necessitates organizing women inside the community and this is not yet common practice. Perhaps the most difficult of obstacles to be cleared are those of a sociocultural nature. It is particularly complex for rural women to address the social practices of their communities and is a long-term challenge. These include standards and social rules (including land rights and inheritance procedures), religious practices and cast systems, social taboos, prejudice against women and rural women in particular. Lastly is the classical difficulty of all rural populations, and not necessarily specific to rural women. Banks rarely have agencies in rural zones and women therefore have to go to towns which often mean walking for many hours. This is the case not only to open an account or ask for a loan, but also whenever they make a deposit, require information, or have a request. To add to the cost in time and in transport, one must also add the social cost as many prejudices exist concerning rural women going to the town and the economic cost of their absence from their families with regard to their daily domestic tasks and production. Difficulties in accessing loans encountered by rural women reduce the scope of their initiatives; block their economic and social development, with the result that they are kept in a state of dependency and daily insecurity.

Agricultural organizations which provide Finance services

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Specialized in the rural sector's problems, agricultural organizations are characterized by the fact that they are set up, owned, managed and controlled by their members. As they are independent and democratically operated, they can set up credit policies and programs which are better adapted to rural environments and to rural women when their voices are heard. They are consequently an extremely important element for implementing rural policies and defending the interests of all farmers, women and men. Agricultural organizations have multiple sectors of intervention and can set up genuine rural development programs. Loans are one of the tools used in a general rural development policy, working towards solving the various economic, political, technical, social and cultural difficulties of this sector. However, setting up such a program of associating savings/loans for the development of other income-generating activities or parallel activities (training, techniques, nutrition, health etc) requires several conditions for success.

Rural women's access to facilities provided by agricultural organizations

A rural development program including financial services should associate these services with improved access to inputs, land, technologies and training. It is very important for rural women to have full and direct access to the different services as members in their own right and not as wives of member farmers. This would enable them to have real control over the use of these facilities, in particular with respect to finance granted to them.

11.3.4 Training of and information for rural women

As regards training, extension and information on credit facilities from agricultural organizations, these should be adapted to the differences in men and women's knowledge, to their different activities and to their daily

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planning (schedule and length of meetings are an important element in optimizing the presence and participation of rural woman). Agricultural organizations must therefore take into consideration the issues of rural women when drawing up policies which are more in keeping with their needs and requirements and thereby reducing the existing inequalities between men and women's access to their various facilities. Under these conditions, finance can have a considerable direct impact on the life of farming families and on women in particular.

12. Conclusion
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

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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.

Bibliography:
WEBSITES
1. www.microfinancegateway.org

2. www.coolavenues.com 3. www.wikipedia.com 4. www.wikianswers.com 5. www.indianmba.com 6. www.wikipedia.org 7. www.thehindubusinessline.com 8. www.hindu.com 9. www.littleindia.com JOURNALS AND MAGAZINES 1. Centre for microfinance, Jaipur 2. Article by N.Kavitha (SSM College of Engineering, Komarapalyam) 3. Working Paper No. 3 of Development Finance Impact

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Assessment planning workshop 4. Ajai Nair- Sustainability of Microfinance Self Help Groups in India: Would Federating Help (2005) 5. Chakrabarti, Rajesh: The Indian Microfinance Experience-Accomplishments and Challenges (2004)

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