Analytic Study of Microfinance and Its Impact On Small Business in Mumbai Region
Analytic Study of Microfinance and Its Impact On Small Business in Mumbai Region
Analytic Study of Microfinance and Its Impact On Small Business in Mumbai Region
A project submitted to
University of Mumbai for partial completion of the degree of
Master in commerce
Under the faculty of commerce
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1.
2.
By
Shangavi Kannan
November-2018-19
Acknowledgement
I would like to acknowledge the following as being idealistic channels and fresh dimensions in the
completion of this project.
I take this opportunity to thank the University of Mumbai for giving me chance to do this project.
I would like to thank my Principal, Ms .Shobha Menon for providing the necessary facility required for
completion of this project.
I take this opportunity to thank our coordinator Ms.Parimala Srinivasan, for her moral support and
guidance.
I would also like to express my sincere gratitude towards my project guide Ms.Parimala Srinivasan whose
guidance and care made the project successful.
I would like to thank my College Library, for having provided various reference books and magazines
related to my project.
Lastly, I would like to thank each and every person who directly or indirectly helped me in the completion of
the project especially my parents and peers who supported me throughout my project.
Valia college of commerce, D.N. Nagar, Andheri(W), Mumbai-400053
Certificate
This is to certify that Ms/Mr has worked and duly completed his/her project work for the degree of master in
commerce under the faculty of commerce in the subject of project work-1 and her/his project is entitled,
“Analytical study on impact and its microfinance on small business in Mumbai region” under my
supervision.
I further certify that the entire work has been done by the learner under my guidance and that no part of it
has been submitted previously for any degree or diploma of any University.
It is her/his own work and facts reported by her/his personal findings and investigations.
Date of submission:
Declaration by learner
I the undersigned Miss. shangavi Kannan here by, declare that the work embodied in this project work titled
“Analytical study on and its impact on small business in Mumbai region”, forms my own contribution to the
research work carried out under the guidance of Mrs.Parimala Srinivasan is the result of my own research
work and has not been previously submitted to any other University for any other degree/diploma to this or
any other University.
Wherever reference has been made to previous works of others, it has been clearly indicated as such and
included in the bibliography.
I, here by further declare that all information of this document has been obtained and presented in
accordance with academic rules and ethical conduct
Certified by
Name and signature of the guiding teacher
SR. No CONTENTS PAGE NO
Chapter- introduction
1. meaning of finance 1
2. Origin of microfinance 3
4. Statement of problem 7
6. Concept of microfinance 12
7. Evolution of microfinance 13
12. Objectives 41
27. Hypothesis 65
30. Limitations 79
31. Suggestion 80
32. Conclusion 83
Meaning of finance
The process of finance is learning how people and groups act in managing their money, and most of all how
they manage making money, and making a profit, with spending money, or making a loss.
A group that makes more money than it spends can lend or invest the excess profit. On the other hand, a group
that makes less money than it spends can raise money by getting a loan or selling stock, or spending less, or
making more money.
A bank is where many people borrowing money meet people lending money. A bank gets money from lenders,
and pays interest. The bank then lends this money to borrowers. Banks allow borrowers and lenders different
sizes to meet .Corporate finance is about things like the sale of stock by a company to the public. Stock is
ownership in a company, broken up into pieces. The stock gives whoever owns it part ownership in that
company. If someone buys one share of XYZ Inc, and the company has 100 shares available, the buyer is
1/100th owner of that company and owns 1/100th (1%) of the profit.
Finance is used by people, by governments, by businesses, etc., as well as by all kinds of group .Finance is a
field that is concerned with the allocation (investment) of assets and liabilities over space and time, often under
conditions of risk or uncertainty. Finance can also be defined as the science of money management. Market
participants in the market aim to price assets based on their risk level, fundamental value, and their expected
rate of return. Finance can be broken into three sub-categories: public finance, corporate finance and personal
finance
Professor Muhammad Yunus, founder and managing director of Grameen Bank, said that if an institution
could make financial resources available to the poorest people in Bangladesh, then "these millions of small
people with their millions of small pursuits can add up to create the biggest development wonder." He and
Grameen Bank believe that credit should be a human right. Building on our rich Grameen Bank heritage,
Grameen Foundation is a leader in making microfinance work harder to help more people progress out of
poverty.
Microfinance is a proven tool for fighting poverty on a large scale. It provides very small loans,
or micro-loans, to poor people, mostly women, to start or expand very small, self-sufficient businesses.
Through their own ingenuity and drive, and with the support of the lending microfinance institution (MFI),
poor women are able start their journey out of poverty.
Unlike commercial loans, no collateral is required for a micro-loan and it is usually repaid
within six months to a year. Those funds are then recycled as other loans, keeping money working and in the
hands of borrowers. For example, a woman could borrow some amount to buy some raw material for producing
some garments, sell it and gradually expand her level of activity and at a later stage have her own distribution
network. As a borrower, she receives training, advice and support from the MFI that issues her loan, and
support from other borrowers just like her. Studies have shown that women use the profits from their
businesses to send their children to school, improve their families’ living conditions and nutrition, and expand
their businesses. The fruits of their businesses not only make an impact on themselves and their families, but
entire communities. Some MFIs also provide social services, such as basic health care for her and her children.
Microfinance clients boast very high repayment rates. MFIs are very client-focused. Some MFIs go directly
to the borrower’s place of business to issue loans and collect payments. Other MFIs host weekly borrowers’
meetings at the local center where the transactions and other social services take place. During these center
1
meetings, borrowers empower each other to stay on the path out of poverty by sharing successes and discussing
ideas for solving business and personal problems.
Microfinance programs are funded by loans, grants, guarantees and investments from
individuals, philanthropists, social investors, local banks, foundations, governments, and international
institutions. Microfinance programs have been increasingly promoted in India for their positive economic
impact and the belief that they empower women. Within the South Asian context, women empowerment is a
process in which women challenge the existing norms and culture, to effectively improve their well-being.
Most microfinance programs target women with the explicit goal of empowering them. However, their
underlying premises are different. Some argue that women are amongst the poorest and the most vulnerable
of the underprivileged. Others believe that investing in women’s capabilities empowers them to make choices,
which will contribute to greater economic growth and development. Finally, some proponents emphasize that
an increase in woman’s resources results in higher well-being of the family, especially children.
Naila Kabeer defines women’s empowerment as the process by which those who have been
denied the ability to make strategic life choices acquire such ability. This ability to exercise choices
incorporates three inter-related dimensions: resources which include access to and future claims to both
material and social resources; agency which includes the process of decision-making, negotiation, deception
and manipulation; and achievements that are the well-being outcomes.
The interpretation of women’s empowerment and its measurement varies across studies. Most
researchers construct an index/indicator of women empowerment. However, measuring women empowerment
by constructing indices is an inappropriate technique as it allows the use of arbitrary weights.
Most researchers, for instance, will agree that impact of a women’s decision to buy cooking
oil for the family is different in nature from her participation in a decision to buy a piece of land. Both these
decisions have different implications and magnitude of impact on her empowerment. As such giving equal
weight to both these decisions does not make sense. At the same time, suggesting an arbitrary weight for these
decisions is also inappropriate, as it is not for the researchers to decide the factor by which the latter decision
contributes more to women empowerment.
Other studies use decision-making power, and participation in household and societal decision
making as factors determining women empowerment. These studies have found that credit programs allow
women to take a greater role in household decision making; to have greater access to financial and economic
resources; to have greater access to financial and economic resources; to have greater social networks and
more bargaining power vis-à-vis their husbands; and to have greater freedom of mobility.
A woman’s practical needs are closely linked to the socially defined gender roles,
responsibilities, and social structures, which contribute to a tension between meeting women’s practical needs
in the short-term and promoting long-term strategic change. By helping women meet their practical needs and
increase their efficacy in their traditional roles, microfinance may in fact help women to gain respect and
achieve more in their socially defined roles, which in turn may lead to increased esteem and self-confidence.
Although increased self-confidence does not automatically lead to empowerment, it may
contribute decisively to a woman’s ability and willingness to challenge the social injustices and discriminatory
systems that they face. This implies that as women become financially better-off their self-confidence and
bargaining power within the household increases and this indirectly leads to their empowerment. Finally, given
that empowerment is a process, the impact of the microfinance program may take a long time before it is
significantly reflected on the observable measures of women empowerment.
2
Types of finance
Small finance and medium size enterprises
Small finance banks are a type of niche banks in India. Banks with a small finance bank license can provide
basic banking service of acceptance of deposits and lending. The aim behind these to provide financial
inclusion to sections of the economy not being served by other banks, such as small business units, small and
marginal farmers, micro and small industries and unorganised sector entities
Small and medium-sized enterprises (SMEs) or small and medium-sized businesses (SMBs)
are businesses whose personnel numbers fall below certain limits. The abbreviation "SME" is used by
international organizations such as the World Bank, the United Nations and the World Trade
Organization (WTO).
SMEs outnumber large companies by a wide margin and also employ many more people. For example,
Australian SMEs make up 97% of all Australian businesses, produced one third of total GDP, and employ 4.7
million people. In Chile, in the commercial year 2014, 98.5% of the firms were classified as SMEs[1]. In
Tunisia, the self-employed workers alone account for about 28% of the total non-farm employment and firms
with fewer than 100 employees account for about 62% of total employment.[2] In developing countries,
smaller (micro) and informal firms, have a larger share than in developed countries. SMEs are also said to be
responsible for driving innovation and competition in many economic sectors. Although they create more jobs,
there is also a majority of job destruction/contraction
4
BACKGROUND TO THE STUDY
Microfinance has been acknowledged as the only alternative mechanism for rural poor people to break out the
‘vicious cycle’ of poverty. The reason is that, it has the potential to improve users’ incomes and savings, and
accordingly, improve assets accumulation and reinforce far above the ground incomes (Atieno, 2001).
Although it is the main stream finance, institutions have a significantly helping the poor to improve their well-
being, poor people are excluded from formal financial systems. Such exclusion ranges from partial keeping
out in developed countries to full or almost complete elimination in less developed countries (LDCs) (Brau &
Woller, 2004).
Since days in the path of development, socio-economic and politic systems go through changes in their
institutional structures at different points of time. But, the pace and course of these changes may vary from
one system to another. The marketing things are not the same between developed and developing countries in
their economic organizations, interactions of the individuals and the institutions mediating relations.
Institutions and market together play the role of mediation, which facilitates transactions. Under many
circumstances, actual functions of the markets, however, deviate from the neo-classical position of perfect in
order with cost-less transactions (North 1989; Stiglitz 1989, 1990).
There has been a growing attention in the current past in micro-finance, particularly in 21st century, in the
context of reaching out to the World poorest families. Microcredit, or microfinance, has been defined as
banking the unremarkable, loan, come to a place credit, savings and other necessary financial services inside
the reach of millions of the people who are too poor to be served by regular banks, in most cases because they
are unable to offer adequate collateral. In general, banks are for the people with money, and not for people
without resource (Gert van Maanen, 2004).
The term microfinance is of recent origin. It has become a worldwide movement as it has the potential to
become an important component in addressing the issue relating to rural poverty. Two of the millennium
development goals (MDG) of the united nations announced in 2001, viz., MDG1 eradicating extreme poverty
and hunger, and MDG - ‘promoting gender equality and empowerment of women’ emphasized on the two
main objectives of microfinance viz., addressing poverty and empowerment of women.
While the year 2005 has been declared as ‘micro-credit year’ by the member states of the United Nations the
8 member states have just reaffirmed the crucial important of microfinance as a development tool. The action
plan of the G-8 countries mentions that “sustainable microfinance can be a key component in increasing sound
financial market structure in the world poorest countries”. The world bank-based consulates a group to assist
the poorest (CGAP) and also to support G-8 countries to launch global market based on microfinance
initiatives.
In India, the microfinance programme has gained rapid momentum since 1992 when an innovative bank
linkage programme of the National Bank For Agriculture and Rural Development (NABARD) through self
help group (SHGs), showed positive result in the process for development through microfinance in the rural
areas and enabling the rural poor to establish a closer link with the bank in the formal sector and to make an
easy access to microfinance from various economic actives. Recently, the year 2007 also witnessed the
national debate on the proposed ‘microfinance financial sector (development and regulation) Bill’ introduced
in the Indian parliament indicating the significance and values of But, all over the world the issue of addressing
poverty, particularly rural poverty, has engaged the attention of the planners, the economist and others social
scientists for decades. Poverty has many dimensions.
addition, illiteracy, gender, inequality, and environment degradation have all the aspects of being poverty.
This is observed to be more prevalent in Africa, Asia and Latin America countries. In today’s context, if one
looks at the growth of the economy, then one can observe a contrasting scenario. On the one hand, the Indian
economy has been growing at an accelerating pace. On the other hand, a larger section of the society remains
5
excluded from reaping the benefits of such economic growth and found living in abject poverty. According to
the ‘report of the group on agriculture indebtedness’ (Radhakrishna committee, 2006) rural indebtedness has
long been treated as distress phenomenon, which has pushed a large number of rural people to the abject
poverty. It is indeed a distress, if the debt taken was not used for productive purposes like purchase of inputs
that augment output or creation of assets that augment the earning base of the borrowers and instead is used
for consumption purposes or marriages and social ceremonies. Interests become a heavy liability if the loan is
taken from the non-institutional sources like the money lender at high rate of interest.
The accumulated liability of principal and compound interest can sometime become crippling burden, and the
borrower is forced to mortgage or sell his land losing thereby his only means of livelihood. Looking at the
source of debt among the rural households, it is observed from the report that the above mentioned total rural
household was estimated at Rs.1.13 lakhs crore in 2003, of which Rs. 65,000 crore was from institutional
agencies and Rs. 48,000 crore from non-institutional agencies. Private money lenders accounted for Rs.29,
000 crore and traders for Rs. 6,000 crore. About Rs. 18,000 crore of debt was from non-institutional sources,
and the major portion of which was from money lenders, carried an interest rate greater than 30 percent.
clearly, there is an urgent need to relieve the rural people from private debt in the informal sector, carrying
high interest rate by transferred it to institutional agencies in the formal sector.
Micro finance According to the ‘report of the committee on financial inclusion (RBI, 2007), at the country
level, ensuring access to banking services to at least one member of each family would mean 200 million
additional clients for the banking system. As against this, the number of loan accounts with the bank system
is an estimated 125 million. If the definition of financial inclusion is expanded to ‘providing access to all adult
members of the population’, at the least, the numbers of potential clients to be served would increase to about
600 million. All commercial banks put together carry 466 million deposits accounts in their books. The data
amply bring out the fact on the gap in banking services to be filled up in India. So, on the one hand here it
shows the acceleration in the pace of poverty eradication and rural development and the other hand, one can
see the burden of private debt on the rural people and also a large gap between the number of potential and
actual clients with the banking system. Here is where microfinance shows promise to fill the gap providing
the much needed comfort to the un-served and underserved rural poor in the country. When talking about
microfinance and its impact on poverty reduction, rural development, the experts and policy makers need to
integrate the issue with the those of poverty stricken and to those who are expected to provide microfinance
services, mainly the banks. In that respect, a much more needs to be done to increase the pace of
implementation of microfinance programmed in the rural parts of the country
6
STATEMENT OF PROBLEM
MSME's need both financial and non-financial services to enhance their productivity, profitability and growth.
The Microfinance industry has become a major backbone in the sustenance and survival of MSMEs in India.
Microfinance Institutions (MFIs), as part of their core business, provide credit to MSMEs. In addition to these
financial services, MFIs also provide non-financial services like business training, financial and business
management to help improve the capacity of their clients in managing the loan resources granted them.
A casual conversation with entrepreneurs in the SME industry revealed that there is great reliance on credit as
tool for business growth and profitability. However, most entrepreneurs asserted to the fact that they are faced
with a challenge of inadequate capital in their businesses and this inhibits their growth.
Some MFI institutions also believe that credit obtained by entrepreneurs are misappropriated. Another
constraint of most MSMEs is the lack managerial and business skills. There is the need to build these capacities
in addition to financial resources in order to achieve growth.
The number of Microfinance institutions in India continues to grow rapidly. However, their wide presence
does not correspond with the extent of reduction in the major challenges that affect the growth of MSMEs in
the country. This study is designed to analyse the effect of MFIs on the growth of MSMEs in India and to
propose a more effective approach that MFIs can adopt in order to meet the growth-oriented needs of MSMEs
The history of development interventions in India arises from multi-layered and distinctly different theoretical
underpinnings, in different phase of the time. During the pre Independence period in India. It could be traced
to the foundations of specific development interventions of the late nineteenth century some of which focused
on upliftment of the poorer section of the community
Later, in the 1950 and 1960s the social welfare approach was predominant. Simultaneously the Gandhian
approach combined social reforms with village development activities (Riddell Robinson, 1995). During the
latter half of the 1970s a more radical trend emerged. This approach was critical of the oppressive structure
and it wanted the oppressive structure to be changed through education and organization of the oppressed. So
poverty was viewed as a structural phenomenon and needed to be tackled through the active mobilization of
the poor. Development agencies continued their search for cost effective ways of poverty alleviation and in
the 1980s began trials in different parts of India to extent credit via women‘s groups. By the end of the1890s,
microfinance through women’s groups was emerging to be accepted as an effective means of promoting
individual and group income generating activities, and at lower costs than erstwhile microfinance enterprise
support programmed (karmaker, 1999). Acknowledging the success of functioning of self help group (SHGs)
in channelling development benefits to poor women, the government merged all the major poverty alleviation
programme in rural areas into a single self employment programme called (SGSY).
development benefits to poor women, the government merged all the major poverty alleviation programme in
rural areas into a single self-employment programme called (SGSY) to be implemented through SHGs at least
half of which would be women’s SHGs (ministry of rural development, 1999). Thus SHGs become the most
socially accepted channel for empowerment of poor in general and women in particular in rural areas. At the
same time, SHGs system for delivering microfinance to the poor has been increasingly found facilitating
financial efficiency and sustainability to the supplier of the finance. Even as more and more financial products
begin to be offered to the poor (the expending the realm of microfinance , credit into micro financial services
including credit, savings, insurance ) thus focus led to a minimalist approach, which assumes that the provision
of microfinance alone will unleash other forces that lead to poverty eradication (copestake, 2000).
7
The institutions common in less developed countries are not difficult enough to provide somewhere to stay
changes easily and hence, they arc characterized by institutional imperfections. The institutional framework
used for trade with these imperfections is also less effective. In these countries, market failures are quite
common and non-market ameliorating institutions are meagre (Stiglitz 1989). Thus, high transaction cost
prevents the economies to grow and societies to develop in those countries. In addition, informal institutions
like customs, caste and social sanctions. Micro-finance programmes have been promoted both by the
government and the nongovernmental organizations. India joins hands with other developing countries like
Bangladesh, Sri Lanka and Indonesia in this regard. These are small groups of poor women engaging in
activities of savings and lending operations. Such groups are called Self-Help Groups (SHGs) in India. The
concept of SHG is wider, and is not the same as the microfinance group. In the context of micro-finance, a
SHG consists of 10-15 members. SHG members can be both men and women. However, 90 per cent of the
SHGs in India have only women as their members (NABARD 2004), who periodically contribute a fixed
amount of savings and borrow from the savings fund thus created.
The bankers are ready to lend to these poor women groups as they exhibit a high repayment rate of more than
95 per cent (NABARD 2004) and also they are instructed from the central bank to earmark a certain proportion
of their lending to SHGs. Thus, the major bottleneck faced by the poorest, i.e., lack of access to credit to make
investment, is sought to be resolved through the establishment of micro-finance groups. In recent years,
development programs of the government have also sought to target the poor through the SHGs. Starting with
the Rashtriya Mahila Kosh and the Indira Mahila Yojana, the government has used the SHGs approach in
many of its anti-poverty projects. The most important district that uses the SHGs approach for the government
programme is the Vellore district and one such programme that uses SHGs is (Swarnajayanti Gram Swarojgar
Yojana (SGSY) launched in 1996.
Microfinance
is the cluster of banking services, relatively of lower monetary amounts, designed specifically to meet the
banking requirements of an unemployed or low-income people.
In other words, Microfinance is the arrangement of financial services including loans, savings, insurance,
money transfers and remittances offered to the lower income groups or poor entrepreneurs, who otherwise
cannot avail the standard banking services. The motive behind Microfinance is to give people in poverty a
privilege to become self-sufficient by offering them crucial banking services at a considerable smaller
monetary amounts.
Most often the Microloans are given for the development of micro or small enterprises that does not have any
collaterals against which the standard loan could be raised. The borrower is required to pay interest on the
borrowed amount, but the interest rate is minimal. Also, the Microloans are given to those who live in
developing countries and who are working in varied trades such as, carpentry, fishing, and transportation.
People often get confused in terms Microfinance and Microcredit. Although the concept of Microfinance
has its roots in Microcredit, but the former is a broader term that includes several banking services such as
savings account, loans, money transfers, insurance and other services. While the latter is only concerned with
the disbursement of small loans at a low rate of interest to the poverty-hit individuals. Microfinance is the
provision of savings accounts, loans, insurance, money transfers and other banking services to customers that
lack access to traditional financial services, usually because of poverty. Making small loans to individuals who
lack the necessary resources to secure traditional credit is known as microfinance.
8
Microfinance emerged as a noble substitute for informal credit and an effective and Powerful instrument for
poverty reduction among people, who are economically active, but financially constrained and vulnerable in
various countries. Microfinance covers a broad range of financial services including loans, deposits and
payment services and insurance to the poor and low-income households and their micro enterprises.
Microfinance institutions have shown significant contribution towards the poor in rural, semi urban or urban
areas for enabling them to raise their income level and living standards in various countries. In developing
countries like India the structure of economy is dualistic. The rich get richer and the poor get poorer. This
worsens the access of poor to economic opportunities and reaches for formal financial services. Small
enterprises in India suffer from a great deal of indebtedness and are subject to exploitation in the credit market
through high interest rates and lack of convenient access to credit. They need credit to fund their working
capital needs on a day-to-day basis as well as long term needs like emergencies or other income related
activities. So the need for financial assistance and business development services for the micro and small
enterprises is essential to alleviate poverty for consistent economic growth.
The focus of the study is to find out whether these micro and small enterprises in and around Coimbatore city
of Tamil Nadu were able to access Micro Finance Institutions (MFIs) for capital loans and services and utilize
it for their growth and development Microfinance is not a new concept. It dates back in the 19th century when
money lenders were informally performing the role of now formal financial institutions. Over the past two
decades, various
development approaches have been devised by policymakers, international development agencies, non-
governmental organizations, and others aimed at poverty reduction in developing countries. One of these
strategies, which have become increasingly popular since the early 1990s, involves microfinance schemes,
which provide financial services in the form of savings and credit opportunities . There are small entities /
MSME enterprises who find institutional finance difficult to come by. In order get finance, they look towards
financial institutions for help, but the existing financial Institutions are reluctant to offer help stating that giving
finance to them is more riskier on account of the uncertainty surrounding their business which is new and often
dependent on the rural economy. Financial Institutions fail to appreciate the fact that these organizations create
social value as are labour intensive and thus create employment opportunities in the rural areas and increases
their livelihood of the rural population by providing the capital to micro-enterprises & by providing insurance
that saves their lives and all this increases their standard of living. In order to offer help to such entities,
microfinance institutions (MFI) have been started. Today many big celebrities help these microfinance
institutions in India, to offer their products to entities that require financial help &support offering a wide
range of microfinance modes. The Government has started many programs under micro-financing that
includes group lending, individual lending and helps in saving the money of the rural customers. Microfinance
is seen as an important tool for poverty alleviation over the years and microfinance institutions (MFIs) over
the years have helped in achieving the objective of financial inclusion. The microfinance programs were
initiated by NABARD in collaboration with Banks and Non-Government Organisations (NGOs) for
population in unbanked areas through Self Help Group (SHG) - bank linkage program in 1992. The sector
evolved with private sector participation
9
leading to formation of microfinance institutions (MFIs). The MFIs accessed bulk funds from banks and did
on-lending to the end borrowers (either through SHG members or joint liability group 1 (JLG) members).
There on the microfinance activities were being implemented by the two channels - MFI model and SHG-
Bank linkage model. The sector has shown robust growth over the years amidst various challenges and has
been able to cater to lowest strata of the society which was earlier completely dependent on money lenders.
Looking at the important role being played by the MFIs in financial inclusion, RBI as a regulator has also been
supporting the sector through various measures and has shown faith in the sector and chosen eight MFIs for
conversion into Small Finance Banks out of the ten licenses being awarded.
Microfinance is a proven tool for fighting poverty on a large scale. It provides very small loans, or micro-
loans, to poor people, mostly women, to start or expand very small, self-sufficient businesses. Through their
own ingenuity and drive, and with the support of the lending microfinance institution (MFI), poor women are
able start their journey out of poverty.
Unlike commercial loans, no collateral is required for a micro-loan and it is usually repaid
within six months to a year. Those funds are then recycled as other loans, keeping money working and in the
hands of borrowers. For example, a woman could borrow some amount to buy some raw material for producing
some garments, sell it and gradually expand her level of activity and at a later stage have her own distribution
network. As a borrower, she receives training, advice and support from the MFI that issues her loan, and
support from other borrowers just like her.
Studies have shown that women use the profits from their businesses to send their children to school, improve
their families’ living conditions and nutrition, and expand their businesses. The fruits of their businesses not
only make an impact on themselves and their families, but entire communities. Some MFIs also provide social
services, such as basic health care for her and her children. Microfinance clients boast very high repayment
rates. MFIs are very client-focused. Some MFIs go directly to the borrower’s place of business to issue loans
and collect payments. Other MFIs host weekly borrowers’ meetings at the local center where the transactions
and other social services take place. During these center meetings, borrowers empower each other to stay on
the path out of poverty by sharing successes and discussing ideas for solving business and personal problems.
Microfinance programs are funded by loans, grants, guarantees and investments from
individuals, philanthropists, social investors, local banks, foundations, governments, and international
institutions. Microfinance programs have been increasingly promoted in India for their positive economic
impact and the belief that they empower women. Within the South Asian context, women empowerment is a
process in which women challenge the existing norms and culture, to effectively improve their well-being.
Most microfinance programs target women with the explicit goal of empowering them. However, their
underlying premises are different. Some argue that women are amongst the poorest and the most vulnerable
of the underprivileged. Others believe that investing in women’s capabilities empowers them to make choices,
which will contribute to greater economic growth and development. Finally, some proponents emphasize that
an increase in woman’s resources results in higher well-being of the family, especially children.
Naila Kabeer defines women’s empowerment as the process by which those who have been
denied the ability to make strategic life choices acquire such ability. This ability to exercise choices
incorporates three inter-related dimensions: resources which include access to and future claims to both
material and social resources; agency which includes the process of decision-making, negotiation, deception
and manipulation; and achievements that are the well-being outcomes.
The interpretation of women’s empowerment and its measurement varies across studies. Most
researchers construct an index/indicator of women empowerment. However, measuring women empowerment
by constructing indices is an inappropriate technique as it allows the use of arbitrary weights.
10
Most researchers, for instance, will agree that impact of a women’s decision to buy cooking
oil for the family is different in nature from her participation in a decision to buy a piece of land. Both these
decisions have different implications and magnitude of impact on her empowerment. As such giving equal
weight to both these decisions does not make sense. At the same time, suggesting an arbitrary weight for these
decisions is also inappropriate, as it is not for the researchers to decide the factor by which the latter decision
contributes more to women empowerment.
Other studies use decision-making power, and participation in household and societal decision
making as factors determining women empowerment. These studies have found that credit programs allow
women to take a greater role in household decision making; to have greater access to financial and economic
resources; to have greater access to financial and economic resources; to have greater social networks and
more bargaining power vis-à-vis their husbands; and to have greater freedom of mobility. A woman’s practical
needs are closely linked to the socially defined gender roles, responsibilities, and social structures, which
contribute to a tension between meeting women’s practical needs in the short-term and promoting long-term
strategic change. By helping women meet their practical needs and increase their efficacy in their traditional
roles, microfinance may in fact help women to gain respect and achieve more in their socially defined roles,
which in turn may lead to increased esteem and self-confidence.
Although increased self-confidence does not automatically lead to empowerment, it may contribute decisively
to a woman’s ability and willingness to challenge the social injustices and discriminatory systems that they
face. This implies that as women become financially better-off their self confidence and bargaining power
within the household increases and this indirectly leads to their empowerment. Finally, given that
empowerment is a process, the impact of the microfinance program may take a long time before it is
significantly reflected on the observable measures of women empowerment.
Microfinance is defined as
Microfinance is defined as a financial activity that includes provision of financial service to rural population
in the form of business and individual credit facilities, savings and insurance to low income individuals who
11
fall just above the nationally defined poverty line and poor individuals who fall below the poverty line with
the goal of creating social value and insurance, capacity building and agricultural business development
services that constitute the lifeline of the rural economy.
According to International Labour Organization, “Microfinance is an economic& financial development
approach that involves providing financial services through institutions to low income clients/ rural clients,
thus providing upliftment opportunities to a section that was denied such facilities in the past.”
In India, Microfinance has been defined by The National Microfinance Taskforce, 1999as “Microfinance
institutions get involved in the provision of thrift, credit and other financial services and products of very small
amount to the poor in rural, semi- urban or urban areas for enabling them to raise their income levels and
improve living standards by entering into different types of commercial activities related to the agricultural
sector”.
CONCEPT OF MICROFINANCE
Microfinance enables the poor and excluded section of people in the society who do not have an access to
formal banking to build assets, diversity livelihood options and increase income, and reduce their vulnerability
to economic stress. In the past, it has been experienced that the provision for financial products and services
to poor people by MFIs can be practicable and sustainable as MFIs can cover their full costs through adequate
interest spreads and by operating efficiently and effectively. Microfinance is not a magic solution that will
propel all of its clients out of poverty. But various impact studies have demonstrated that microfinance is really
benefiting the poor households (Littlefield and Rosenberg, 2004). Microfinance is defined as a development
tool that grants or provides financial services and products such as very small loans, savings, micro-leasing,
micro-insurance and money transfer to assist the very or exceptionally poor in expanding or establishing their
businesses (Robinson, 1998). In addition to financial intermediation, some MFIs provide social intermediation
services such as the formation of groups, development of self confidence and the training of members in that
group on financial literacy and management (Ledgerwood, 1999). There are different providers of
microfinance (MF) services and some of them are; Non Governmental Organizations (NGOs), savings and
loans cooperatives, credit unions, government banks, commercial banks or non banking financial institutions.
The target group of MFIs are self employed low income entrepreneurs who are; traders, seamstresses, street
vendors, small farmers, hairdressers, rickshaw drivers, artisans blacksmith etc ( ledgerwood, 1999).
12
EVOLUTION OF MICROFINANCE
Microfinance as an Industry evolved in all the third world countries almost at the same time span. World over,
it was getting widely recognized that improving income levels of low income community is essential to
improve their well-being During the 1970s and 1980s, the microenterprise movement led to the emergence of
Non- Governmental Organizations (NGOs) that provided small loans for the poor. One of the significant
events that helped it gained in the 1970s was through the efforts of Mohammad Yunus, a microfinance pioneer
and founder of the Grameen Bank of Bangladesh. In 2006, Prof. Yunus was awarded Nobel Peace prize for
his efforts to create economic and social development. Microfinance in India started in the early 1980s with
small efforts at forming informal Self Help Groups (SHGs) to provide access to much-needed savings and
credit services. From this small beginning, the microfinance sector has grown significantly in the past decades.
National bodies like the Small Industries Development Bank of India (SIDBI) and the National Bank for
Agriculture and Rural Development (NABARD) are devoting significant time and financial resources to
microfinance. The strength of the microfinance organizations (MFOs) in India is in the diversity of approaches
and that have evolved over time. e working poor (Johnson and Rogaly, 1997).
Role of Microfinance
Microfinance helps poor households meet basic needs by getting involved in agriculture related productive
activities and offering to protect the rural population and also lead to the stability and growth of small and
medium enterprises. Microfinance empowers women and promotes gender equality which results in improving
the household well being of the rural sector. This was a prominent way of making the population especially
the females self-reliant
The banking industry has shown tremendous growth during the last few decades. Despite the progress and
improved profitability of banks, Indian banks have not been able to include vast segment of the population,
especially the underprivileged sections of the society, into the fold of basic banking services (Thorat, 2007).
The share of rural credit in the total credit disbursement by commercial banks, which grew from 3.5 to 15
percent from 1971 to 1991, declined again to 11 percent in 1998 (Sa-Dhan, 2004). The fall in the availability
of credit from formal financial system led to the emergence of informal sources as well as SHGs and MFIs
(Fisher and Sriram, 2002). At this juncture Micro Finance services are doing well in bringing excluded
population to the main stream of formal banking system.
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Different Microfinance Models in India
India has a number of institutions that offer microfinance exclusively. Each institution uses a particular model
or a blend of different models in order to provide microfinance to applicants. These microfinance institutions
have embraced both conventional and advanced ideas of lending in order to distribute credit evenly in the
society without uneven accumulation of credit among the rich people. There are many microfinance models
in the country and this could be because of the high number of social and cultural groups, the large
geographical size of the nation, the presence of multiple economic classes, and a solid existence of non-
governmental organisations that are dedicated to uplifting the socio-economic condition of the disadvantaged
people of the country.
The main six categories of microfinance models that are followed in India include:
1. Self-help group model
A self-help group (SHG) is described as a group of 5 to 20 individuals who belong to the low-income class.
Each group member typically contributes funds from their own savings and then this money is pooled in
together. These funds are then utilised to support their common goal of improving their lifestyles and to make
themselves financially secure.
They can use this money to obtain training to create superior-quality products. They receive training not only
to make products, they also get trained on how to market, promote, and sell their products. Many of the poor
people are not aware of how to reach out to customers. Some of them may not know how to assess their
creation and fix an appropriate price for their product. Hence, many of them may fail to make profits when
they sell products without proper knowledge. Being a part of a self-help group will give them proper awareness
about how to make a product, price it, package it, promote it, market it, and sell it to the end-customer
efficiently.
In the self-help group model for microfinance, the members of the group are encouraged to meet on a regular
basis to discuss their savings, new developments, and credit operations. The members can also plan future
activities for achieving their big goals step by step.
2. Grameen model
The Grameen model to distribute microfinance originated in Bangladesh. After seeing the success of the model
in Bangladesh, many institutions in India started to adopt it by making some adjustments. A few of the
institutions that acquired the principles of the Grameen model are CASHPOR Financial and Technical
Services Limited, SHARE Microfinance Limited, Activists for Social Alternatives (ASA).
This particular model believes in providing a mandatory training course to the group members for at least 7
days. The model will offer microfinance to an applicant without asking for any collateral at low costs. The
loan application process has minimum or zero paperwork and is processed very quickly keeping in mind the
urgency for funds.
Some groups that apply the Grameen model have a Group Recognition Test (GRT) that refers to a screening
process to divide group members into serious and non-serious groups. Every member must compulsorily save
some money every week. This model is very particular about group discipline. This is generally achieved with
the help of peer pressure. Each group member motivates the other to be very careful with the money that they
borrow from their lender. Under this model, a loan typically ranges from Rs.4,000 to Rs.10,000.
3. Co-operative credit union model
These organisations apply the co-operative model to offer microfinance in rural areas. The Cooperative
Development Forum (CDF), Hyderabad has applied the co-operative credit union model successfully by
15
giving primary importance to savings. The main entities in the CDF are women’s or men’s thrift co-operatives
(WTCs and MTCs). They have small groups of individuals wherein each group has a particular leader who
heads group meetings, accumulates the savings of each group member, and looks into the repayment of loans.
The group leader is responsible for making sure all small loans are repaid promptly by each member.
The Cooperative Development Forum (CDF), Hyderabad began functioning with units of small size. Soon,
they started to create larger units in order to increase the impact. The CDF encourages members to focus more
on their thrift cooperatives instead of the group goals. Each group’s size can differ. This will depend on the
group leader’s ability and the leader will be appointed according to the votes of group members.
16
masses of the society. These federations of self-help groups assist these NGOs to bring a change to the society
effectively even though they do not have adequate resources.
Some of the organisations in the nation that apply the federated self-help group model include Chaitanya,
PRADAN, Dhan Foundation, SEWA, and lots more. These federated self-help groups have the competency
to handle the constraints experienced by single self-help groups. Most of these federations are incorporated
under the Societies Registration Act.
These federated self-help groups enable members to apply for bigger loan amounts. Moreover, these groups
assist members to save more money efficiently. Due to the large scale at which these groups function, they
have the ability to offer additional financial services to members such as micro insurance.
Micro insurance for microfinance is extremely necessary and helpful. It protects the borrower’s funds against
damage, loss, or any other troubles. When there is micro insurance, the borrower need not worry about its
security. When one takes a loan, especially a micro loan, he or she will need to be very careful and ensure that
it is safe and secure. One needs to understand that a micro loan is offered to the less fortunate sections of the
society. In such a case, when the funds are stolen or lost or misplaced, it is very tough for the borrower to get
a loan again. He or she will also have difficulty in recovering the lost funds.
With a micro insurance policy which is offered at very low premium rates, the borrower can have a peace of
mind without worrying about the safety of the funds. Even if something unfortunate happens with the
microfinance borrowed from a federation of self-help groups, then this micro insurance cover will take care
of everything. The unforeseen losses and costs will be compensated and reimbursed by the micro insurance
policy at an affordable price.
A federation of self-help groups also takes care of something very important, which is the prevention of idle
funds. Many small self-help groups sometimes face the issue of having too many idle funds or even insufficient
amount of funds. With a federated self-help group, there is no scope for the formation of idle funds. They use
well-planned techniques to direct the flow of money accurately. When there is a proper flow of funds, there
will not be any chance for the creation of idle funds. These federations always work to make sure that the
demand for micro loans is lesser than the actual supply of funds that is obtainable. In single self-help groups,
demand for credit is more when compared to the availability of funds. A federation of self-help groups works
towards maximising the distribution of local capital in order to gain maximum returns on this capital.
Federations of self-help groups also assist individual self-help groups in recovering loans proficiently. They
also encourage and promote new or upcoming self-help groups. They function in a very flexible and relaxed
manner. They promote financial as well as non-financial exchanges between different groups. They encourage
collaboration of various groups in order to achieve goals together. They also help other self-help groups in
establishing and sustaining relations with agencies and NGOs.
These federations encourage self-help group members to save money in different ways. The federations
recommend multiple savings methods to members so that they can make savings with the help of the group
and also through other modes. A few of these federations have designed certain savings schemes that allow
members to deposit their money and earn savings over a particular period. They also attract funds from external
sources and lend them to members.
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Microfinance Options for Women
There are many households that have irresponsible male members who do not contribute towards saving
money for the family. They tend to use money senselessly on things that are absolutely not required. Many of
them spend money on alcohol, gambling, tobacco, etc. without keeping in mind about other expenditures. In
such households, the female members are more responsible with money. They are very careful with the little
money that they earn and spend it very judiciously. They make sure that the money is not within the reach of
the men of the house.
Keeping this in mind, there are many banks, NBFCs, and microfinance institutions that extend microfinance
exclusively to women in India. These women borrowers treat microfinance as their saviour and utilise the
funds very sensibly.
These microfinance options for women also help in empowering women. There are many households where
the men do not permit women to handle money. They expect women to only take care of domestic chores.
However, the truth is that many women in several households have proved to be more financially responsible
when compared to men. They do not waste money on unnecessary purposes.
Women also make sure that their children attend school sincerely without dropping out of school. When these
women take microfinance for their various needs, they will ensure that the funds are utilised for a good
purpose. They will ensure that their kids go to school, and this, in turn, will help brighten the future of the
society.
One thing is for sure that women will repay their micro finance loans on time. Each in installments of the loan
will be paid promptly without any delay. This is a great relief for microfinance lenders. Microfinance loans
can be repaid through equated monthly instalments (EMIs) promptly. Moreover, women will make well-
planned decisions for the household.
There are many self-help groups in Indian rural places that are made by women for women. Only women
manage these groups and help each other in starting new low-cost business ventures such as handicraft
ventures, horticultural ventures, artistry, pickle business ventures, paintings, trinket making activities, and
many other business activities that they are good at doing. Since many of them are naturally talented at
developing these creations at low costs, they can produce them on a large scale and sell them on various
platforms and make profits gradually. The capital for these small business ventures can be generated from
microfinance options. The borrower can repay the funds on a monthly basis through installments.
Most importantly, microfinance helps in job creation for women. In most regions of the country, women are
forced to be unemployed and are not allowed to step out of their homes. They are restricted to the limits of
their house. With the generation of microfinance, women are given an opportunity to showcase their
entrepreneurial skills and management abilities. Microfinance also brings women together and encourages
them to work as a team to achieve the ultimate goal of being independent. They do not have to rely on men
for money or for other aspects. They also do not have to wait for the approval of the male member in the house.
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Prospects of small businesses and microfinance Institutions
According to the research done by the World Bank, India is home to almost one third of the world’s poor
(surviving on an equivalent of one dollar a day). Though many central government and state government
poverty alleviation programs are currently active in India, microfinance plays a major contributor to financial
inclusion. In the past few decades it has helped out remarkably in eradicating poverty. Reports show that
20
people who have taken microfinance have been able to increase their income and hence the standard of living.
Thus Microfinance plays a major role in upliftment of Indian economy in following ways:-
Poverty Alleviation:-
Due to micro finance poor people get employment. It also helps them to Improve their entrepreneurial skills
and encourage them to exploit business opportunities. Employment increases income level which in turn
reduces poverty.
Women Empowerment:-
Normally more than 50% of SHGs are formed by women. Now they have greater access to financial and
economical resources. It is a step towards greater security for women. Thus microfinance empowers
poor women economically and socially.
Economic Growth:-
Finance plays a key role in stimulating sustainable economic growth. Due to microfinance, production of
goods and services increases which increases GDP and contributes to economic growth of the country.
Mobilisation of Savings:-
Microfinance develops saving habits among people. Now poor people with major income can also save and
are bankable. The financial resources generated through savings and micro credit obtained from banks are
utilised to provide loans and advances to its members. Thus microfinance helps in mobilisation of savings.
Development of Skills:-
Micro financing has been a boon to potential rural entrepreneurs. SHGs encourage its members to set up
business units jointly or individually. They receive training from supporting institutions and learn leadership
qualities. Thus micro finance is indirectly responsible for development of skills.
Social Welfare:-
21
With employment generation the level of income of people increases. They may go for better education,
health, family welfare etc. Thus micro finance leads to social welfare or betterment of socie
22
MAJOR SCHEMES OFFERED BY MFIs:
1. GIDKA (Group Insurance Scheme for Khadi Artisan)
With a view to provide safe and secured life to Khadi Artisan a Group Insurance Scheme for Khadi
Artisans has been introduced. The Scheme covers all the spinners, weavers, pre-spinning artisans and
post weaving artisans engaged in Khadi activity, associated with Khadi Institutions (NGO‟s)
throughout the Country.
2. DRDA (The District Rural Development Agency)The district Rural Development Agency is
visualized as specialized and professional agency capable of managing the antipoverty Programmes of
the Ministry of Rural Development on the one hand and to effectively relate these to the overall effort
of poverty eradication in the district.
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Objectives and Goals of Microfinance
Microfinance primarily works towards making the disadvantaged population self-determined without
having to depend on their relatives or friends for funds.
It aims to bring a financial change among the poor people with the help of a community-based
approach.
It intends to organise and conduct simple training programmes for unemployed people so that they
have some means of livelihood.
Microfinance also intends to assist disabled people who are economically underprivileged. It aims to
help them find some source of employment or artistry so that they can fend for themselves.
Microfinance aims to help women of poor families. Institutions that offer microfinance believe that
women are more responsible with money and hence, they have exclusive microfinance loan options
specially designed for women borrowers.
Microfinance intends to bring gender equality by encouraging women to equally take part in household
decision making, financial decision making, and also earn money independently by engaging in any
form of employment.
It intends to enhance operations and activities at the grass root level.
Microfinance lays emphasis on optimum utilisation of local resources available in nearby areas and
villages in order to minimise transportation costs for bringing resources, etc.
24
Microfinance aims to raise the wages of the underprivileged people so that their lives can be improved
at least a little.
Microfinance aims at attaining socio-economic development at the most basic level of the society.
It serves as a great instrument to eradicate poverty.
It aims to offer loans, accounts, and other financial services to people without asking them for
collaterals such as a mortgage or any immovable property or guarantors.
Institutions in India
Indian Microfinance Institutions are predominantly NGOs i.e., nearly 80 % of the Microfinance Institutions
operate under the Society/Trust form which is for the not-for-profit sector with a clear development agenda.
Apart from this, other important legal forms are being used by Indian Microfinance Institutions. 10 % of
organizations operate under the company structure; 5% are section 25 companies (Section 25 of the Indian
Companies Act, 1956); 2% as Cooperatives; 2% as Non Banking Finance Companies (NBFCs); and 1% as
Local Area Banks The Organization Structure of existing Micro Finance Institutions in India is given below
(http://www.nabard.org/microfinance/ mf_institution.asp) accessed on June 25, 2012
a.) NGO - Microfinance Institutions - 400 to 500 – Registered under Societies Registration
Act, 1860 or similar provincial Acts Indian Trust Act, 1882
b.) Non-profit Companies - 10 – Registered under Section 25 of the Companies Act, 1956
c)Mutual Benefit Microfinance Institutions
d.) Mutually Aided Cooperative by State Government Societies (MACS) and similarly set up
institutions - 200 to 250 – Registered under Mutually Aided Cooperative Societies Act
enacted by State Government
e)For Profit Microfinance Institutions
f) Non-Banking Financial Companies (NBFCs) - 6* - Registered under Indian
Companies Act, 1956 Reserve Bank of India Act, 1934
(Note: The estimated number includes only those Microfinance Institutions, which are actually
undertaking lending activity. Source: www.nabard.org (http://www.nabard.org/microfinance/
mf_institution.asp) accessed on 25.6.2012
*The number of for profit NBFCs operating in India as of 2008 is 25 (Bharat Microfinance
Report The major barrier to the development of Micro and Small Enterprises is access to credit. These
enterprises differ in the level in which they are and the products and services offered to them by the MFIs. The
micro and small enterprises need to be financed differently and the financing is determined by whether the
firm is in the start-up phase or existing one and also whether it is stable, unstable, or growing. Stable survivors
are those who benefit in having access
25
MICRO ENTERPRISES
to the financial services provided by MFIs to meet up with their production and consumption needs. Unstable
survivors are groups that are considered not credit worthy for financial services to be provided in a sustainable
way and Growth enterprises are Micro and Small Enterprises with high possibility to grow.
In identifying the market, MFIs consider whether to focus on already existing entrepreneurs or on potential
entrepreneurs seeking for funds to start up a business venture. Working capital is the main hindrance in the
development of already existing SMEs and to meet up, the borrow finance mostly from informal financial
services which have high interest rates and services offered by the formal sector or not offered by these
informal financial services. The business activity of a microenterprise is equally as important as the level of
business development. There are three main primary sector where an enterprise may be classified; production,
agriculture and services. Each of these sectors has its own risk and financing needs that are specific to that
sector.
26
Microfinance is considered a tool for socio-economic development, and can be clearly distinguished from
charity. Families who are destitute, or so poor they are unlikely to be able to generate the cash flow required
to repay a loan, should be recipients of charity. Others are best served by financial institutions.
It is debatable which of these characteristics, if any, are necessary conditions for a program to be considered
microfinance. The first feature, small loans, is likely the most necessary, though lending itself is not essential;
some microfinance programs focus on mobilizing savings (although few focus entirely on savings without
engaging in any lending). Although MFIs often target microentrepreneurs, they differ as to whether they
require this as a condition for a loan. Some MFIs visit borrowers’ places of business to verify that loans were
used for entrepreneurial activities while other MFIs disburse loans with few questions asked—operating more
like consumer credit lenders. In addition, some MFIs require collateral or “collateral substitutes” such as
household assets that are valuable to the borrower but less than the value of the loan. Group lending, too, while
common practice among MFIs, is certainly not the only method of providing micro-loans. Many MFIs offer
individual loans to their established clients and even to first-time borrowers. Grameen Bank, one of the
pioneers of the microfinance movement and of the group lending model has since shifted to individual lending.
The focus on “poor” clients is almost universal, with varying definitions of the word “poor.” This issue has
been made more important recently due to legislation from the United States Congress that requires USAID
to restrict funding to programs that focus on the poor. Some argue that microfinance should focus on the
“economically active poor,” or those just at or below the poverty level (Robinson 2001). Others, on the other
hand, suggest that microfinance institutions should try to reach the indigent (Daley-Harris 2005). Most, but
not all, microfinance programs focus on women. Women have been shown to repay their loans more often and
to direct a higher share of enterprise proceeds to their families.4 Worldwide, the Microcredit Summit
Campaign reports that 80% of microfinance clients are female. However, the percentage of female clients
varies considerably by region, with the highest percentages in Asia, followed by Africa and Latin America,
with the fewest women served by microfinance institutions (MFIs) in the Middle East and North Africa. This
focus on the poor, and on women, along with the simple application process and the provision of financial
services in clients’ communities together form financial access, that is, the provision of financial services to
the Higher repayment rates for females is commonly believed but not well documented. In evidence from
27
consumer loans in South Africa (Karlan and Zinman 2006c), women are three percentage points less likely to
default on their loans, from a mean of fifteen percent default. Little is known, however, as to why this is so.
unbanked—those who have been excluded from financial services because they are poor, illiterate, or live in
rural areas. Finally, microcredit loans are designed to be offered at market rates of interest such that the MFIs
can recover their costs but not so high that they make supernormal profits off the poor. This is an important
concept because institutions that charge high interest rates can be scarcely cheaper than the moneylenders they
intended to replace, and institutions that charge subsidized rates can distort markets by undercutting other
lenders that are attempting to recover their costs. This has implications for impact assessments because the
less clients must pay in interest the more they could be expected to show in increased income. If we compare
the impact of institutions that fall outside of “normal” microfinance interest rates, we could end up drawing
unreasonable conclusions about the effectiveness of one program versus another, since each type of program
attracts different clients and imposes different costs on their borrowers. Note that sustainability of an
organization (as defined roughly by de facto World Bank policy) does not require each and every product or
target market is sustainable but rather that the organization as a whole is sustainable. Thus organizations could
charge lower interest rates for indigent or particularly poor individuals, as long as there were sufficient profits
from lending to the not-so-poor to be able to cross-subsidize such an program. Such programs may, in the long
run, be sustainable (if the initially-subsidized program leads to client loyalty and a long-term relationship with
the MFI)
Figure outlines the different features between for banking channels and micro finance channels. In contract to
formal banking, micro-credit is characterized by small size, shorter loan duration, emphasis on thrift and the
absence of collateral security and informal procedures. In absence of collateral security and formal documents,
there can in the formal banking system. While the banking system is a purely commercial organization, the
lower tiers in the micro finance system are social organizations and motivated by non-economic objectives.
As we discussed in earlier chapters microfinance operation is not a new concept in the financial transactions.
There were different forms of credit and lending activities existed in different parts of the world since the
development of human history3. It includes individual money lending, various types of chitties, and also
kurikkalyanam in Malabar area of Kerala. All these indigenous financial institutions were conducted
microfinance activities in one way or the other. But modern types of microfinance were started its development
since later half of 20th century especially after 1970. Our country also witnessed the development of such like
institutions int he same period. Government’s initiative to reduce poverty by improving access to financial
services to poor started since independence. India‘s overwhelming majority of poor is located in rural areas
and this motivated the government to give special attention to rural credit. Following the report of All India
Rural Credit Survey in mid 1950’s, the government took crucial steps in reviewing Cooperative structure
including the partnership of State in cooperatives. Also the policy initiative of ‘social banking’ concept led to
the nationalization of commercial banks, adoption of direct lending programmes to rural areas and
development of credit institutions such as Regional Rural Banks (RRBs) and National Bank for Agriculture
and Rural Development(NABARD) .The microfinance sector has emerged mostly from the efforts of Non
Governmental Organizations (NGOs), and as a response to the failure of existing structures to deliver financial
services to the poor. The efforts by NGOs have emerged from grassroots and represent diversity. They do not
fit into a strait jacket. Therefore, unlike the other structures like cooperatives, Regional Rural Banks RRBs)
and commercial banks, it is difficult to get statistics on microfinance. It is also difficult to make policy
recommendations that impact the sector as a whole.
28
There are different channels for microfinance services in the country.
SHG(Self Help Group)-Bank Linkage Channel (SBLC) is the first one, which was developed early 1990s by
NABARD. More recently, many Non Governmental Organizations (NGOs), Community Based Organizations
(CBOs) and Self Help Groups have started micro finance delivery systems successfully in rural areas. These
organizations motivate the poor to join the credit groups, helps to manage the savings, loan-deposit and
recovery process and may also provide an interest free loan to the group that acts as a start-up fund4.The
second channel is Micro Finance Institution (MFI). The MFI in India was first introduced in 1974, but the
momentum was achieved only during the 1990s. In the country Self Employed Women’s Association (SEWA)
Bank is the oldest micro Finance organization. It was founded in 1974 in Ahmadabad, Gujarat as a trade union
first, started organizing self-employed women. Initially the formal financial institutions were reluctant to be
involved with the MFIs, and social entrepreneurship was also in short supply. But after 1990s banks and other
financial institutions, helped by supportive public policies, have become more aware of the commercia liability
of the micro finance services. Innovative partnership models have been developed between the banks and the
MFIs. These have pumped huge funds to the sector and have subsequently enabled MFIs to increase their
scale of operations and outreach. It has witnessed tremendous growth of microfinance over the last two decades.
A Microfinance Information Exchange5 (MIX) survey involving 78countries revealed that India’s
microfinance sector saw the largest per-MFI percentage increase in active borrowers in 2005 than any other
country. According to microfinance Sector report of the ACCESS alliance, the MFI operations expanded by13
times in four years to end the year 2009. Whereas there was only one for-profit MFI in the country in the
middle of the 1990s, this number had spiralled to 149registered micro finance institutions by 2009. Of these,
about 11 per cent of the large micro finance companies had a disproportionally larger share in the credit
market ,having 82 percent of the clients and controlling about 88 per cent of the loan portfolio6.There are
several legal forms of MFIs. However, firm data regarding then umber of MFIs operating under different forms
is not available. Therefore it is no uniformity in the number of MFIs we got from different sources. Rangarajan
(2008)7estimated that there are about 1,000 NGO-MFIs and more than 20 Company MFIs .Further, in Andhra
Pradesh, nearly 30,000 cooperative organizations are engaged in microfinance activities. However, the
companies MFIs are major players accounting for over 80% of the microfinance loan portfolio. There are more
than 2000 NGO involved in the NABARD SHG-Bank linkage program. Out of these, approximately
800NGOs are involved in some form of financial intermediation. Further, there are 350 new generation co-
operatives providing thrift and credit services. During the last decade, the union and state governments has
considered microfinance as a tool to meet the financial service requirements of the poor8. It has framed policies
that enable the increased access to financial services for the poor. Series of measures are introduced for the
same. The following have been the
significant initiatives:
(NABARD) to set targets for the self-help group (SHG) – Bank linkage
programme
3. The pronouncements of the Reserve Bank of India (RBI) from time to time –
such as
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including lending to SHGs as a part of priority sector targets
exempting non-profit companies doing microfinance from registering
as an NBFC
of NGOs
Routing some poverty oriented schemes such as the Swarna jayanti Gram
size of loan Small and tint size of credit Medium and large size of credit
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Participants in the Microfinance System
1) National Bank for Agricultural and Rural Development (NABARD) NABARD is an apex institution,
accredited with all matters concerning policy, planning and operation in the field of credit for agriculture and
other economic activities in rural area in India. NABARD was established in 1982 as a Development Bank, in
terms of the preamble of the Act, "for providing and regulating credit and other facilities for the promotion
and development of agriculture, small scale industries, cottage and village industries, handicrafts and other
rural crafts and other allied economic activities in rural areas with a view of promoting integrated rural
development and securing prosperity of rural areas and for matters connected therewith or incidental thereto."
The corporate mission set by NABARD for making available microfinance services to the very poor envisages
coverage of the one-third of the rural poor through one millions SHGs by the year 2006-07 In November 1998,
a high-powered task force on supportive policy and regulatory framework for microfinance (henceforth
referred to as the Task Force) was set up by NABARD at the instance of RBI. The objective of the task force
were among others, to come up with suggestions for a regulatory framework that brings the operations of the
microfinance institutions into the mainstream, to access the possible role of self regulatory organization and
to explore the need for a separate legal framework for microfinance.
(RBI) The earliest reference to micro credit in a formal statement of monetary and credit policy of RBI was
in former RBI President Dr. Bimal Jalan's monetary and credit policy statement of April 1999. The policy
attached importance to the work of NABARD and public sector banks in the area of micro-credit. The banks
were urged to make all out efforts for provision of microcredit, especially forging linkages with SHGs, either
at their own initiative or by enlisting support of Non Government Organization (NGOs). The microcredit
extended by the banks is reckoned as part of their priority sector lending, and they are free to device
appreciation loan and saving products in this regard. In 1994, the RBI constituted a working group on SHGs.
On the recommendation of SHGs would be reckoned as part of their lending to weaker sections and such
lending should be reviewed by banks and also at the State Level Banker's Committee (SLBC) level, at regular
interval. Banks were also advised that SHGs, registered or unregistered, which engaged in promoting the
saving among their members, would be eligible to open savings bank accounts with banks irrespective of their
availability of credit facilities from banks.
The origin of SHGs is from the brainchild of Grameen Bank of Bangladesh, which was founded by
Mohammed Yunus, SHG was started and formed in 1975. The establishment of SHGs can be traced to the
existence of one or more problem area around which the consciousness of rural poor is built and the process
of group formation initiated. SHG are considered a new lease of life for the women in villages for their social
and economic empowerment. SHG is a suitable means for the empowerment of women. Since SHGs have
been able to mobilize savings from persons or groups who were not normally expected to have any 'saving'
and also to recycle effectively the pooled resources amongst the members, their activities have attracted
attention as a supportive mechanism for meeting the credit-needs of the poor (NABARD 2004). The main
characteristics of SHG are as follows:-
a) The ideal size of an SHG is 10 to 12 members (In a bigger group, numbers cannot actively participate).
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b) The group need not be registered.
c) From one family, only one member (More families can join SHGs this way).
d) The group consist of either only men or of only women (Mixed groups are generally not preferred).
e) Women's groups are generally found to perform better. f) Members have the same social and financial
background (Members interact more freely this way).
Function of SHGs :
1) The amount may be small, but savings have to be a regular and continuous habit with all the members.
'Savings first - credit later' should be the motto of every group member. 2) The savings to be used as loans to
members. The purpose, amount, rate of interest etc. to be decided by the group itself. Enabling SHG members
to attain loans from banks, and repaying the same.
3) Every meeting, the group will discuss and try to find solution to the problem faced by the members of the
group.
A range of institutions in public sector as well as private sector offers the microfinance services in India. Based
on asset sizes, MFIs can be divided into following categories:-
1) 5-6 Institutions which have attracted commercial capital and scaled up dramatically when last five years.
The MFIs which include SKS, SHARE and Grameen style program but 2000, converted into for-profit,
regulated entities mostly Non-Banking Finance Companies (NBFCs).
2) Around 10-15 institutions with high growth rate, including both news recently form for-profit MFIs. Some
of MFIs are Grameen Koota, Bandhan and ESAF.
3) The bulk of India's 100 MFIs are NGOs struggling to achieve significant growth. Most continues to offer
multiple developmental activities in addition to microfinance and have difficulty accessing growth trends.
Private MFIs in India, barring a few exceptions, are still fledging efforts and are therefore unregulated. They
secure microfinance clients with varying quality and using different operating models. Regulatory framework
should be considered only after the sustainability of MFIs model as a banking enterprise for the poor is clearly
established.
The Non Government Organizations involved in promoting SHGs and linking them with the Formal Financial
Agencies (FFAs) perform the following functions :-
Training and helping them in the organizational, managerial and financial matters.
Helping them across micro credit and linkage with formal financial agencies.
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Channelizing the group effort for various developmental activities.
Helping them in availing opportunities, widening the options available for economic development.
Helping them in sustaining the group effort independently even after withdrawal of the NGO.
Benefits of Microfinance
Customarily, one had to apply for a loan in order to start a business, but that proved to be an obstacle to people
with poor credit. However, microfinance institutions now offer basic financial services like savings, insurance
and loans to unprivileged people. Microfinance institutions provide such services to the less fortunate; it can
be a commercial bank, credit union, credit cooperative, or a financial non-government
organization .Microfinance is the practice of extending a small loan or other form of credit, savings, checking,
or insurance products to individuals who do not have access to this type of capital. This allows individuals
who are living in poverty to work on becoming financially independent so they can work their way into better
living conditions. Since a majority of the world is forced to survive on the equivalent of just $2 per day,
microfinance becomes a solution that can help more people be able to improve their living conditions. These
are the benefits of microfinance in developing countries and why everyone should consider getting involved
in this form of lending.
Typically, the less privileged acquire financial services such as loans through an informal relationship, which
might prove to be costly and unreliable. In addition, most banks do not view the unprivileged as viable clients
due to employment history or unstable credit and lack of financial security. Microfinance institutions often
dismiss such requirements by providing small loans at flexible rates.
Unprivileged people might have profitable business plans, but they lack sufficient funds to meet the start-up
costs. These loans give clients enough capital to get their plans off the ground and then begin turning revenue.
They can pay off their loans in time then continue to gain revenue from the business indefinitely.
3. Manage risk
Microfinance can give unprivileged people enough capital stability, which gives them financial security from
sudden monetary problems. Also, savings allow for improved nutrition, reduced illness, better living
conditions and educational investment.
4. Empower Women
Microcredit also empowers women since they are the major beneficiaries. In the past, women were not able
to participate in economic activities. Microfinance institutions now provide women with the capital they
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require to start business projects. This gives them more confidence and allows them to participate in decision
making, thereby encouraging gender equality.
Microfinance allows for an added level of resiliency in the developing world. Even when households are able
to work their way out of poverty, it often takes just one adverse event to send them right back into it. It’s often
a health care issue that causes a return to poverty. By allowing entrepreneurs to become more resilient through
their own efforts at their own business, it gives them the opportunity to make it through times of economic
difficulty.
Most of the households that take advantage of the microfinance offers that are available in developing
countries live in what would be considered “abject poverty.” This is defined as living on $1.25 per day or less
– though some definitions extend this amount to $2 per day or more. About 80% of that amount goes to the
purchase or creation of food resources.
By offering microfinance products that can be repaid with that remaining 20%, more households have the
opportunity to expand their current opportunities so that more income accumulation may occur.
Muhammad Yunus, who is often credited as the modern father of microfinance, once gave $27 to women out
of his own pocket because he saw how the cycle of debt affected their work crafting bamboo chairs. Most
banks will not extend loans to someone without credit or collateral because of the risks involved in doing so,
yet those in poverty do not have any credit or collateral. extending microfinance opportunities, people have
access to small amounts of credit, which can then stop poverty at a rapid pace. has always believed that credit
is a fundamental human right. There are certainly some financial institutions which may disagree with his
assessment. Yet without credit, it can be difficult, if not impossible for someone in poverty, to pursue an idea
that could bring about a giant payday one day. Microfinance makes that pursuit possible.
In many developing nations, the primary recipient of microloans tends to be women. Up to 95% of some loan
products are extended by microfinance institutions are given to women. Those with disabilities, those who are
unemployed, and even those who simply beg to meet their basic needs are also recipients of microfinance
products that can help them take control of their own lives.Women are key figures in leadership roles in
business, even in the developed world. Catalyst has reported that companies with female board directors are
able to obtain returns that are up to 66% better in returns on invested capital and 42% better in terms of sales
returns than companies with male board members only.
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Women also develop others more frequently when it comes to entrepreneurial roles. This comes from coaching,
feedback, or investments. Even in the developed world, women helping women is an economic force that
poverty can’t stop.
8. It offers a better overall loan repayment rate than traditional banking products.
When people are empowered, they are more likely to avoid defaulting on a loan. Women are also statistically
more likely to repay a loan than men are, which is another reason why women are targeted in the microfinance
world. There’s also the fact that for many who receive a microloan, it is their only real chance to get themselves
out of poverty, so they’re not going to mess things up .Zenger Folkman published a survey regarding ratings
of high integrity and honesty in leadership roles that was separated by gender. The mean percentile of women
displaying these traits was 55%, while for men, it was just 48%. In business, the bottom line is this: integrity
matters. Microfinance institutions have recognized this and approached women because of this.
As a side effect of this approach, many developing countries are taking a new look at what role women should
play in society. Instead of treating a woman as a second-class citizen, or the “barefoot in the kitchen and
pregnant” attitude that has been prevalent in the past, the success of women in bring their households out of
poverty is evidence that proves women not only have an initiative to get things done, but they produce
consistent results. For these reasons, microfinance institutions see total repayment rates of higher than 98%,
though there can be several accounts that are overdue at any given time.
Children who are living in poverty are more likely to have missed school days or to not even be enrolled in
school at all. This is because the majority of families who live in poverty are working in the agricultural sector.
The families need the children to be working and productive so their financial needs can be met. By receiving
microfinancing products, there is less of a threat of going without funding, and that means more opportunities
for children to stay in school.
This is especially important for families with girls. When girls receive just 8 years of a formal education, they
are four times less likely to become married young. They are less likely to have a teen pregnancy. In return,
this makes girls more likely to finish schooling and then either obtain a fair-paying job or go onto a further
educational opportunity.
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The problem with poverty is that it is a cycle that perpetuates itself. When there is a lack of money, there is a
lack of food. When there is a lack of clean water, there is a lack of sanitary living conditions. When people are
suffering from malnutrition, they are less likely to work. A lack of sanitation creates the potential of illness
that prevents working days.
Microfinance changes this by making more money available. When basic needs are met, families can then
invest into better wells, better sanitation, and afford the time it may take to access the health care they need.
As these basic needs are met, it also means that there are fewer interruptions to the routine. People can stay
more productive. Kids can stay in school more consistently. Better healthcare can be obtained. This creates a
lower average family size because there are more guarantees of survival in place. And when that happens, the
possibility of future investments will occur because there is more confidence in being able to meet basic needs.
How much risk is there with a $100 loan? Some investors might pay that for a decent dinner somewhere. Yet
$100 could be enough for an entrepreneur in a developing country to pull themselves out of poverty. This
small level of working capital is sustainable because it’s essentially a forgettable amount. If there is a default
on that money, the interest and high repayment rates of other microloans will make up for it. Then repayments
are reinvested into communities so that the benefits of microfinance can be continually enhanced. Each
repayment becomes the foundation of another potential loan.
This is why many microfinance products have relatively high interest rates. Some institutions may charge the
equivalent of a 20% APR, but others have interest rates which exceed 800%. Although interest is high,
recipients are invested into making these products work because virtually all institutions put repayments back
into new loans that target the most vulnerable households in the developing world.
Microfinance is also able to let entrepreneurs in developing countries be able to create new employment
opportunities for others. With more people able to work and earn an income, the rest of the local economy also
benefits because there are more revenues available to move through local businesses and service providers.
It’s not just the entrepreneurial level that benefits from job creation through microfinance. Grameen Bank in
Bangladesh employs over 21,000 people and their primary financial products are related to microfinance.
That’s tens of thousands of jobs that are created by the industry with the sole purpose of being able to drag
people up and out of poverty.
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13. It encourages people to save.
Microloans are an important component of microfinance, but so is saving money. When people have their
basic needs met, the natural inclination is for them to save the leftover earnings for a future emergency. This
creates the potential for more investments and ultimately even more income for those who are in the
developing world. Some microfinance institutions have seen an extraordinary number of savings occur when
products are extended. The Unit Desai of Bank Rakyat Indonesia counts 28 million savers to just 3 million
microloan borrowers. Now saving isn’t always seen, especially from borrowers, but this is part of the expected
microfinance process. Small loans make small financial improvements for households living in poverty. The
difference between making $1.90 per day and $2.30 per day is not much in reality, but by definition, that
amount takes someone out of extreme poverty. Instead of big improvements, microfinance allows for small
improvements. When enough of those improvements occur, then there is a safe place for people to store their
income thanks to this industry.
There is a valid argument to be made that some microloans go to cover household expenses instead of business
needs. Some are using these loans to pay bills or purchase food. It’s true. Yet without this product available,
there wouldn’t be an ability to pay bills or purchase food. So even though it may not always be used for
business purposes, it still serves a purpose by reducing stress. Stress cannot be underestimated when it comes
to poverty. Even in the developing world, the stresses of poverty can be overwhelming. It causes people to
seek out coping mechanisms that are not always healthy. And, in some cases, it may even cause families to
break apart. Sometimes childbirth is a coping mechanism for poverty simply because an extra set of hands
means an extra chance for income. By reducing these stress markers, households can focus on the job at hand
to provide for themselves, even if that means net income levels for that family may not rise in the near future.
The feeling of receiving a credit product for the first time cannot be ignored. It’s a feeling like you’ve made
it. That you really are somebody because you’ve been trusted with credit. This feeling applies to everyone,
even in the developed world. When a person feels like they matter, it changes who they are at a core level.
Instead of focusing on how they can just survive, then begin to look for ways to thrive. This brings us back to
the stress that poverty creates on people. People, when they are approved for a microloan for the first time,
will often have a reaction that is similar to Steve Martin’s reaction in The Jerk when he discovered his name
in the phone book. And this is why Yunus feels that credit is a fundamental right. Without credit, survival is
often the best possible outcome. With credit, there is hope that anything can be possible.16. It offers
significant economic gains even if income levels remain the same.The gains from participation in a
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microfinance program including access to better nutrition, higher levels of consumption, and consumption
smoothing. There is also an unmeasurable effect which occurs when women are empowered to do something
in their society when they might not normally be allowed to do so. As spending occurs, these benefits also
extend outward to those who may not be participating in the program so that the entire community benefits.
The most important weakness of microfinance is that the effects of raising income levels for the poor can often
be questionable. Although it raises the possibility of income accumulation and savings, microfinance products
also raise the possibility of creating a further indebtedness that may potentially extend the cycles of poverty
for an infinite period of time. Although some may look at consumption in a negative view, those who have
gone without for so long will see improved consumption as a sign that things are getting better. Consumption
smoothing allows an entire community to realize the benefits that microfinance can provide. It isn’t always
about the money. Sometimes economic success comes from stability. Yet if you were to ask the average person
who was the recipient of a microloan how they felt about the experience, you would be told that they were
happy the loan was available. This happiness is reflected in the high repayment rates that are almost always
seen in programs offered within developing countries. That in itself shows that the benefits of microfinance,
at a core level, are almost always leaving a positive effect.
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Products and services of microfinance
1.credit services, small credit and Microinsurance, small insurance, Family health and sanitation
small business credit health insurance, loan for housing, education, financial education,
education, and health. micro entrepreneur training.
2.deposits services, voluntary
saving services mandatory savings.
Microfinance products
Offering financial services to poor people in developing countries is expensive business. The cost is one of the
biggest reasons why traditional banks don´t make small loans, the resources required for a 50$ loan is the same
as for a 1000$ loan.
MFIs also have big personnel and administration costs. Field staff managers must perform village surveys
before entering a village, conduct interviews with potential borrowers, educate the borrowers in credit
discipline, travel to the villages every week to collect interest and distribute loans and control that the loans
are being used for the given purpose.
The microcredit loan cycles are usually shorter than traditional commercial loans with terms from typically
six months to a year with payments plus interest, payed weekly. Shorter loan cycles and weekly payments help
the borrowers stay current and not become surprised by large payments. Clearly the transaction-intense nature
of weekly payment collections, often in rural areas, is more expensive than running a bank branch that provides
large loans to economically secure borrowers in a metropolitan area. As a result, MFIs must charge interest
rates that might sound high.
In order to be able to lend out money, the microfinance institutions must in addition borrow from the traditional
finance sector with commercial perspective. There´s always about 1-2% loss on loans due to people not paying
back. To be able to expand business the MFIs must also make some profit, at least 1-2%. All in all it´s easier
to understand why the MFIs charge their customer interest rates which in first sight might appear high. With
a growing market, better economics of scale and increasing efficiency the cost will reduce and lower interest
rates are able.
For a financial institution to scale and remain sustainable, at a bare minimum it has to cover its costs. A large
bank can charge lower rates in order to recoup its costs. Because of smaller loan size and more transactions,
the MFI has to charge higher minimum rates.
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Data from the Micro Banking Bulletin reports that 63 of the world’s top MFIs had an average rate of return,
after adjusting for inflation and after taking out subsidies programs, of about 2.5% of total assets. This lends
to the hope that microfinance can be sufficiently attractive for investors, as well as the mainstream in the retail
banking sector.
The Income Generating Loan is used for a variety of activities that generate income for their families. Clients
submit a loan application and based on approval receive the loan after one week. Loans are paid in 50 equal,
weekly installments. After completion of a loan cycle, the client can submit a loan application for a future loan.
The approach with smaller short-term loan is to avoid long-term economic problems with bigger loans.
The Mid Term Loan is available to clients after 25 weeks of repaying their IGL loan. A client is eligible for a
MTL if the client has not taken the maximum amount of the IGL. The residual amount can be taken as a MTL.
The terms and conditions of the MTL are otherwise exactly the same as IGL.
The Emergency Loan is available to all clients over the course of a fiscal year. The loan is interest free and the
amount and repayment terms are agreed upon by the MFI and the client on a case by case basis. The amount
is small compared to the income generating products and is only given in times of dire need to meet expenses
such as funerals, hospital admissions, prenatal care and other crisis situations.
The Individual Loan is designed for clients and non clients that have specific needs beyond the group lending
model. Loans are given to an individual outside of the group lending process. Amounts are typically higher
than that of the income generating loan and repayments are less frequent. Applicants must complete a strict
business appraisal process and have both collateral and a guarantee
40
RESEARCH AND METHODOLOGY
OBJECTIVES OF STUDY
Nobel Laureate Muhammad Yunus is credited with laying the foundation of the modern MFIs with
establishment of Grameen Bank, Bangladesh in 1976. Microfinance in India started in the early 1980s with
small efforts at forming informal self-help groups (SHG) to provide access to much-needed savings and credit
services to the marginal population more importantly in rural areas. From this small beginning, the
microfinance sector has grown significantly in the past decades. National bodies like the Small Industries
Development Bank of India (SIDBI) and the National Bank for Agriculture and Rural Development
(NABARD) are devoting significant time and financial resources to Microfinance sector.
The World Bank has called South Asia the “cradle of microfinance.” Statistics indicate that some 45% of all
the people in the world who use microfinance services are living in South Asia. However, the overall
percentage of the poor and vulnerable people with access to financial services remains small, amounting to
less than 20 % of poor households in India.
With financial inclusion emerging as a major policy objective in the country, Microfinance has occupied
centre stage as a promising conduit for extending financial services to unbanked sections of population The
microfinance sector has emerged as one of the most promising tool for ameliorating poverty in India. The
microfinance in India involves forming self help groups, usually a group of 5 to 20 persons and providing
them credit through bank linkage. Therefore in India, it is often called as SHG Bank linkage programme.
NGOs in microfinance sector, also called as microfinance institution provide that linkage between banks and
self help groups. With the help of credit and guidance from NGOs, the SHGs strive to come out of the quagmire
of poverty. Another advantage found in Indian SHG movement is that most of the beneficiaries are women
and thus it is becoming an important instrument of bridging the gulf of gender inequality. With the growth of
microfinance industry many small and large Microfinance Institutions (MFI) had emerged in India and the
largest MFI is SKS Microfinance Ltd which is also listed in the stock market, only such institution in India.
The microfinance sector is having a healthy growth rate and it is currently a Rs.20,000 Cr. industry. The SHG-
Bank Linkage Programme and the Microfinance Institutions put together achieved a growth in their customer
base by about 10.8 percent. The combined borrowing customer base increased to 93.9 million from 86.3million
in the previous year.
Despite of healthy growth over the years, there number of concerns have emerged related tothe sector, like
regulation, transparent pricing, low financial literacy etc. In addition to these concerns there are a few emerging
41
concerns like cluster formation, insufficient funds, multiple lending and over-indebtedness which are arising
because of the increasing competition among the MFIs.
On a national level there has been a spate of actions taken to strengthen the regulation of MF sector including,
enactment of microfinance regulation bill by the Government of Andhra Pradesh, implementation of sector-
specific regulation by Reserve Bank of India and most recently, release of Draft Microfinance Institutions
(development and regulation) Bill .RBI credit policy capped household income at Rs. 120000/- and credit limit
at Rs. 50000 for all MFI customers. This is to better target the beneficiary population to the bottom quartile
population.
Major challenges faced by microfinance in India are challenges related to access to finance, governance and
management, demand for low interest rates and managing competition. It further adds that:
• The single biggest challenge for microfinance lies in the area of training and capacity development;
• On the supply side, there is a lack of service providers and comprehensive, integrated and relevant training
modules
• Limited reach in the northern and eastern parts of the country
• Range of products tends to be limited to simple credit offerings
• On the demand side, not enough attention is being paid to training for senior management
• Absence of social audit in many cases
For the improvement of MF in India, Malegam Committee recommended measures to improve functioning of
MFIs regarding the prevalent practices of MFIs in regard to interest rates, lending and recovery practices to
identify trends that impinge on borrowers’ interests, to delineate the objectives and scope of regulation of
NBFCs undertaking microfinance by the Reserve Bank and the regulatory framework needed to achieve those
objectives. Few recommendations were accepted by the government but more reforms are needed in the sector
to assure sustainable and pro-poor growth of the industry.
International Finance Corporation has itself launched an MFI namely Utkarsh in Uttar Pradesh and Bihar for
the development of the MF in two of the most poor states in India. It is poised to to increase access to finance
and microfinance services in relatively under-served areas. With IFC’s support, Utkarsh is working to diversify
its products, develop sound internal systems and processes, and introduce a system of social audit. The
company aims to reach an estimated 250,000 women borrowers by June 2013.
The potential of microfinance to ensure financial inclusion and thereby inclusive development is not hidden
from anybody and therefore aforesaid challenges must be redressed on urgent basis. a better understanding of
the diversity of women’s livelihood and a better understanding of the range of constraints, motivations, skills
and capabilities of women through the livelihood framework might help in better operation of microfinance
services. The interest rates are deregulated not only for private micro finance institutions but also for formal
banking sector. In the context of softening of interest rates in the formal banking sector, the comparatively
higher interest rate (10%-24% per annum) charged by the micro-financial institutions has become a
contentious issue. The high interest rate collected by the micro financial institutions from their poor clients is
perceived as exploitative. It is argued that raising interest rates could undermine the social and economic
impact on poor clients. Since, most of the micro financial institutions have lower business volumes, and their
transaction costs are far higher than that of the formal banking channels. The cost structure of micro financial
institutions would affect their sustainability in long run. Self Help Groups, as micro financial invitation
emerged as an impetus for community action. An informal supplementary credit delivery mechanism by
lending at group level, the SHGs are in existence the scope of study influenced by the chief objective to study
the income generating activities and how it contribute to the empowerment of poor.
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Microfinance Operations:
a. Marketing Strategy and Microfinance Clients Targeting Methodology.
b. Microfinance Products, Services and Lending Procedures.
c. Microfinance Lending Methodology: Individual and Group Lending.
d. Micro finance Indian Lending Methodology. Institutional Business Planning for Microfinance Program.
Financial Planning & Analysis
f. Savings and Credit Management.
g. Program Operational Policies and Procedures.
h. Accounting and Record Keeping.
i. Auditing for Microfinance Operation.
j. Management Information System.
k. Branch Manager Leadership Training: Managing, Controlling, and Reporting Tools.
l. Detection of Fraud and Internal Control.
m. Monitoring and Supervision System.
n. Delinquencies and its Management.
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Functioning of microfinance
Mahajan vijay and nagasri G (1999) emphasized that India is the largest emerging market for
microfinance. However, the demand needs to be organized and converted into effective demand. The need for
credit by the poor should be backed by willingness pay to the price for the financial services. Only then the
demand is sustainable. MFIs should offer sustainable financial services and reach a stage of a high access
sustainability, which is decided level. There is emerging price competition from main stream banks as they
are able to cross subsidize their microcredit operations charge interest rates below cost.
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REVIEW OF LITERATURE
Microfinance emerged as a parallel to the formal finance especially for the financially
excluded poor households. Access to financial services such as savings and credit
facilitated poor households to bridge their income and expenditure gaps. A
comprehensive review of literature provides insights about the research undertaken by
other researchers on the subject elucidating their opinion. Microfinance is not only about
provision of small loans to the financially excluded poor households, but it also creates
externalities which have become the subject matter of various impact studies undertaken
by researchers all over the world. On one hand, there are studies revealing the positive
impact of microfinance such as mitigation of poverty, increase in income, expenditure
and savings, betterment of health, nutrition, education, housing and above all
empowerment of women. And on the other, there are studies highlighting the negative
impact of microfinance such as indebtedness, increased workload of women borrowers
and domestic violence. This chapter explores all these issues presented by other
researchers.
Activities in Microfinance
Microcredit:
It is a small amount of money loaned to a client by a bank or other institution .Microcredit can be offered,
often without collateral, to an individual or through group lending.
Micro savings:
These are deposit services that allow one to save small amounts of money
for future use. Often without minimum balance requirements, these savings accounts allowhouseholds to
save in order to meet unexpected expenses and plan for future expenses.
Micro insurance:
It is a system by which people, businesses and other organizations make a payment to share risk.
Access to insurance enables entrepreneurs to concentrate more ondeveloping their businesses
while mitigating other risks affecting property, health or the ability to work.
Remittances:
46
These are transfer 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.
Product Design:
The starting point is: how do MFIs decide what product s to offer? The actual loan products need to be
designed according to the demand of the target market. Besides the important question of what risks to cover,
organizations also have to decide whether they want to bundle many different benefits into one basket policy,
or whether it is more appropriate to keep the product simple. For marketing purposes, MFI‘s sometimes prefer
the basket cover, since it can make the policies sound comprehensive, but is that the right approach for the
low-income market? After picking products, one must also understand how they are priced. What assumptions
do the organizations make with regard to operating costs, risk premiums, and reinsurance ,and how did they
come to those conclusions? Would their clients be willing to pay more for greater benefits? From price, the
logical next set of questions involves efficiency. Indeed, given the relative high costs of delivering large
volumes of small policies, maximizing efficiency is a critical strategy to ensuring that the products are
affordable to the low-income market. One way is to make the products mandatory, which increases volumes,
reduces transaction costs and minimizes adverse selection. What does an organization lose by offering
mandatory insurance, and how does it overcome the disadvantages? MFI‘s can combine a mandatory product
with some voluntary features to make the service more us to mar-oriented while.
Techniques of Product Design:
To design a loan product to meet borrower needs it is important to understand the cash pattern of the borrowers.
Cash pattern is important so far as they affect the debt capacity of the borrowers. Lenders must ensure that
borrowers have sufficient cash inflow to cover loan payments when they are due efficiency depends less on
the delivery model than on the simplicity of the product or product menu. Simple products work best because
they are easier to administer and easier for clients to understand. Another efficiency strategy is to use
technology to reduce paperwork, manual processing and errors.
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Features of Microfinance
Microfinance is typically offered to anyone who does not have a stable source of income due to
unemployment. It is also given to those who are involved in contract labour or who work part-time.
It is also given to anyone who does not have a proper credit history that can be verified. Lack of credit
history will be mostly due to lack of access to acquire credit.
There are also some applicants who may have a poor credit history due to high debts. They may have
entered into debt situations due to shortage of funds to repay. They may also have got into debt troubles
due to scams planned by unregistered moneylenders who tend to take advantage of poor people since
they do not have much financial knowledge.
Microfinance typically does not require loan applicants to submit any collateral while applying for the
loan. These loans are usually unsecured in nature. Even if a microfinance institution does ask for a
collateral, they are very reasonable. They understand the financial condition of the applicant.
Microfinance is also offered to people living below poverty line (BPL) since they do not have access
to other forms of financing.
Microfinancing promotes simplified and small savings among poor people. It encourages them to build
their funds step-by-step.
Microfinancing offers repeat loans to applicants. This helps borrowers repay their loan promptly as the
repayment tenure is very short. Once the small loan is repaid on time, the applicants will receive their
next loan. A repeat loan is always offered to someone who has already borrowed and shown their
capability in repaying it on time.
Microfinance also intends to assist to individuals in securing good medical treatment when they have
health issues.
Generally, microfinance institutions approach clients instead of waiting for clients to approach them.
They want impoverished people to be aware that there are inexpensive forms of financing.
Microfinance institutions have easy and quick loan application processes.
The interest rate for microfinance is very low.
When a micro loan is offered, the lender does not ask the applicant for the purpose of lending. The
loan can be utilised for any purpose.
Some microfinance options also come with micro insurance. Micro insurance is offered as it helps the
borrower in protecting his or her credit extensively. The micro insurance facility is very reasonably
priced.
Microfinance aims at developing financial sustainability among economically downtrodden people.
Microfinance helps in creating more and more jobs. It enables uneducated people to be involved in
some source of employment instead of staying idle.
Microfinance institutions aim to eliminate interest rate ceilings as they believe that these ceilings can
restrict poor people from securing finance.
Microfinance focuses on offering financial transparency by offering loans to individuals without any
hidden costs or fees or charges.
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Microfinance believes that poor people need a broad set of financial services apart from just loans. It
also holds that these financial services should be simplified, easily accessible, economical, and flexible
in nature. These services include cash transfer facilities, savings schemes with minimal or zero deposit,
and micro insurance.
Microfinance for farmers are exclusive microfinance loans that are provided to marginal farmers who
need funds for enhancing their productivity of crops. This can be done when they invest in superior
quality fertilizers, excellent farming tools, quality check processes, marketing of their crops, packaging
of their output, transportation of their output, storage of their output in safe and hygienic warehouses,
and proper sales techniques in order to secure the profits that they are entitled to after putting in so
much effort for several months.
Many farmers in India do not have sufficient funds or knowledge to invest in these aspects of farming.
Microfinance loans aim to guide farmers by providing them with accurate information and funds
required to enhance their output.
Keeping this in mind, there are many banks, NBFCs, and microfinance institutions that extend
microfinance exclusively to women in India. These women borrowers treat microfinance as their
saviour and utilize the funds very sensibly.
These microfinance options for women also help in empowering women. There are many households
where the men do not permit women to handle money. They expect women to only take care of
domestic chores. However, the truth is that many women in several households have proved to be more
financially responsible when compared to men. They do not waste money on unnecessary purposes.
Women also make sure that their children attend school sincerely without dropping out of school.
When these women take microfinance for their various needs, they will ensure that the funds are
utilized for a good purpose. They will ensure that their kids go to school, and this, in turn, will help
brighten the future of the society.
One thing is for sure that women will repay their micro finance loans on time. Each installment of the
loan will be paid promptly without any delay. This is a great relief for microfinance lenders.
Microfinance loans can be repaid through equated monthly installments (EMIs) promptly. Moreover,
women will make well-planned decisions for the household.
There are many self-help groups in Indian rural places that are made by women for women. Only
women manage these groups and help each other in starting new low-cost business ventures such as
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handicraft ventures, horticultural ventures, artistry, pickle business ventures, paintings, trinket making
activities, and many other business activities that they are good at doing. Since many of them are
naturally talented at developing these creations at low costs, they can produce them on a large scale
and sell them on various platforms and make profits gradually. The capital for these small business
ventures can be generated from microfinance options. The borrower can repay the funds on a monthly
basis through installments.
Most importantly, microfinance helps in job creation for women. In most regions of the country,
women are forced to be unemployed and are not allowed to step out of their homes. They are restricted
to the limits of their house. With the generation of microfinance, women are given an opportunity to
showcase their entrepreneurial skills and management abilities. Microfinance also brings women
together and encourages them to work as a team to achieve the ultimate goal of being independent.
They do not have to rely on men for money or for other aspects. They also do not have to wait for the
approval of the male member in the house
Microfinance Strategic
Strategic Management:
Strategic management is a field that deals with the major intended and emergent initiatives taken by
general manager on behalf of owners, involving utilization of resources, to enhance the performance
of rams in their external environments. It entails.
Understanding microfinance strategies:
This report explores strategic issues shaping the future of the MFI sector in India. The study
approached CEOs of select MFIs with a set of issues ranging from concerns to competition and sought
their opinions about future strategies. The report draws from their responses, and states that:
Future strategy is about being strong on processes and being overtly client-centric Success is a
prudential combination of three factors, namely, culture, beliefs and aspirations;
Culture is about the degree of trust rather than the rate of interest;
Risk management systems of economically weaker families are built on their beliefs about
dependability and access;
Micro credit stories have revealed ingenious ways that clients have used their loans for purposes
that satisfied their aspirations. Finally, the sector, at about Rs. 14,000 crore (approximately
US$3 bn) looks large, but is small by any business sscale. Competition and unhealthy practices
are overshadowing the good work and reputation earned over many years. MFIs in India need
to overcome these challenges in the future.
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Strategic Policy Initiatives:
Some of the most recent strategic policy initiatives in the area of Microfinance taken by the government
and regulatory bodies in India are: Working group on credit to the poor through SHGs, NGOs,
NABARD, 1995.The National Microfinance Taskforce, 1999.Working Group on Financial Flows to
the Informal Sector (set up by PMO), 2002.Microfinance Development and Equity Fund, NABARD,
2005.Working group on Financing NBFCs by Banks- RBI
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The term „Micro Finance‟ is of recent origin though we do not find
this word in text books dealing with finance and financial management. But, now a days, it is freely used in
the media, national/international forums, literature relating to development and prosperity of relatively
disadvantaged sections of the society etc. Microfinance (MF) has become, in recent years, a fulcrum for
development initiatives for the poor, particularly in the third World countries. It has been practiced in varying
forms in different countries and it has been regarded as an important tool for poverty alleviation. Although
micro finance could possibly include a range of financial services targeted to the poor, in common parlance,
however, micro-credit and MF are often used interchangeably with emphasis on provision of credit to the
poor.
Problems:
Challenges in the microfinance industry are widely varying in terms of their shape and nature over the last 30
years without regulation.
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disbursement and increasing outreach.
Lack of intention to serve in the apparently inaccessibly location: Despite the rapid growth of the microfinance
sector and disbursement of a large volume of money, yet there are many parts of the country out of the network
of microfinance institutions. Experience shows that NGO MFIs do not intend to operate in many distant places
(i.e. Char areas) that are termed as inaccessible and not cost-effective. They feel it as a burden, a complicated
job and also hard-to-profit activity.
The current scenario of micro finance in Bangladesh has shown that the industry is at the juncture of evolution.
The following factors or phenomena could be regarded as indicators to the same:
As the microfinance industry has now become more competitive, MFIs should be careful in loan disbursement.
Sectoral loan disbursements in profitable ventures should be identified and analysed properly through
employing experts on various sectors. Microfinance institutions should concentrate on other income
generating activities (i.e. micro-enterprise) to sustain and improve their revenue portfolio.
53
Microfinance Training & Capacity Building Methods:
1. Microfinance Training Methodology and How to Build Efficient Workforce?
2. Staff Motivation & Built in Cost effective Training Component.
3. Human Resource Planning and Development.
4. Good Governance.
OPPORTUNITIES
1.Huge Potential Market.
2.Scope of introducing livelihood related services.
3.Financial crunch is helping organisation to be cost conscious and effective.
.THREATS
1.Financial crisis.
2.Increasing competition.
3.Increasing competition.
4.Poor banking infrastructure.
5.Political instability.
The typical micro finance clients are low-income persons that do not have access to formal
financial institutions. Micro finance clients are typically self-employed, often household-based
entrepreneurs. In rural areas, they are usually small farmers and others who are engaged in small income-
generating activities such as food processing and petty trade. In urban areas, microfinance
activities are more diverse and include shopkeepers, service providers, artisans, street
vendors, etc. Micro finance clients are poor and vulnerable non-poor who have a
r e l a t i v e l y unstable source of income. Access to conventional formal financial institutions, for
many reasons, is inversely 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.More over, informal arrangements may not suitably meet certain
financial service needs or may exclude anyway.
Individuals in this excluded and under-served market segment are the clients of micro finance. As
we broaden the notion of the types of services micro finance encompasses, the potential m a r k e t
of micro finance clients also expands. It depends on local conditions and political
climate, activeness of cooperatives, SHG & NGOs and support mechanism. For instance, microcredit 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
consumedo v e r s e v e r a l m o n t h s b y t h e r e q u i r e m e n t s o f d a i l y l i v i n g . C e n t r a l g o v e r n m e n
t i n I n d i a h a s established a strong & extensive link between NABARD (National Bank for Agriculture &
Rural Development), State Cooperative Bank, District Cooperative Banks, Primary
Agriculture &Marketing Societies at national, state, district and village level.
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SIGNIFICANCE OF THE STUDY
This study is an eye opener to all micro finance providers. If the recommendations given in this study implemented then
there will be proper utilisation of the funds given by the Government. This study will also help in ensuring proper
training, demonstration or any other skill developmental activities to the SHGs. This study will also helpful in smooth
and effective functioning of process of microfinance. This will also helpful in the improving recovery performance of
the providers of microfinance. This study will also help in improving the financial performance of the microfinance
providers. This study helps in self sustainability of the micro finance providers. This study will also helpful in achieving
the goal of the financial inclusion by reaching to the rural customers.
In August 2015, Religare Capital Markets published a report titled ‘Indian Microfinance - Crisis Brewing’.
The brokerage house pointed out “multiple weak spots” in the sector including “alarmingly high” penetration
levels for microfinance companies in certain markets.
This rapid growth has also attracted a fair share of unregistered and unregulated lenders, said Paul
while adding that such entities are flouting rules and “playing tricks” on people by luring them to
borrow more than they should.
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The advent of microfinance in national development, women’s empowerment, poverty reduction and
microenterprise growth and sustenance in developing countries and Ghana in particular will continue to
revolutionalize the banking platform and democratize access to financial services. This is because the poor
and rural dwellers are given the chance to also have access to capital to support their activities, interestingly
without the constraint of collaterals. This study is believed to be of immense help to government and policy
makers, microfinance institutions and practitioners, SMEs and all stakeholders in planning in a number of
ways, among which are:
i. It will enable policy makers in charting the way forward for integrating various MFIs in national
development agenda;
ii. It will also serve as a guide to MFIs on the need to upgrade their services to meet required standards;
iii. MFIs will also be informed on the types of assistance needed by SMEs and the training required to
help their clients on sustainable basis and;
iv. It will contribute to the body of knowledge on similar studies and serve as reference for future
research.
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• Banks taking ownership of MFI non-banking financial companies (NBFCs). Each of the major banks that
hold major debt in these companies can convert that into equity and become majority owners. Alternatively,
banks that have NBFC subsidiaries can launch microfinance operations, hiring trained staff from MFI NBFCs.
• The new MFI Act enables MFI NBFCs to offer thrift/savings products. This empowers banks to launch small
savings products which today are inaccessible to the poor within the mainstream banking space.
• Money transfer is another area where MFI NBFCs can offer superior services by combining the bank’s
network across the country.
• There are further possibilities for banks to graduate seasoned borrowers with successful enterprises to more
substantial products such as loans against property and home loans, etc. In short, banks can leverage the group-
lending model created by MFIs to create many rural banks modelled on the Grameen Bank across the country
to achieve financial inclusion.
Banks will bring in the much-required transparency, holistic customer service and robust governance in the
MFI sector while providing the much-required funding support at the same time.
The Reserve Bank of India will also find it easy to let banks-led MFIs offer thrift and other products than
private sectors MFIs fuelled by private equity firms. Banks are affected by political intervention and lack of
ownership/commitment by the staff who do not have the requisite skills to deal with MFI customers, often
resulting in poor recovery rates. Without a doubt, this makes MFIs the ideal vehicle for microfinance as they
have consistently demonstrated superior recovery rates of 98%.
The opportunity for banks to take lead in the turning point of the microfinance sector is here. They should act
now. The question is that of using this opportunity.
Prof. (Ms.) Gazia Sayed, Dr. Pankaj Trivedi “Role of Micro Finance Institutions in Development of
Micro-Enterprises (MSMEs) in Mumbai - An Empirical Study”
This research paper is based on the evolution of microfinance institutions (MFIs) and their Contribution to
the development of Micro-Enterprise viz. micro, small and medium scale enterprises (MSMEs) in Mumbai.
This study sought to fill in the gap by examining the impact of microfinance institutions on growth and
development of small and medium enterprises. A survey was conducted on 110 SME owners using structured
questionnaire. Data from the respondents was analysed and translated into useful information using the
statistical package for social sciences (SPSS). Frequency distributions, Crosstabs and Chi square were used to
draw conclusions. The study established that 85 SMEs out of 110 SMEs surveyed obtained credit from MFIs.
Results show that increased on business sales volume, profits and physical assets are the impact of adequate
microfinance access (statistically significant at P ≤ 0.05 level of significant). Statistically the finding shows
that the increased of business capital structure has no direct relationship with microfinance access
(insignificant by 0.104 when P ≤ 0.05 level of significant).
Neha & Pathak / “A Comprehensive Review of Literature of Micro and Tiny Finance with the Help of
MFIs and SHGs in India”
overview of microfinance in India” In a country like India where 70 percent of its population lives in rural
area and 60 percent depend on agriculture (according to the World Bank reports), micro-finance can play a
vital role in providing financial services to the poor and low income individuals. Microfinance is the form of
a broad range of financial services such as deposits, loans, payment services, money transfers, insurance,
savings, micro-credit etc. to the poor and low income individuals. The importance of micro-finance in the
developing economies like India cannot be undermined, where a large size of population is living under
59
poverty and large number of people does not have an access to formal banking facilities. The taskforce on
Supportive Policy and Regulatory Framework for Microfinance constituted by NABARD defined
microfinance as ― the provision of thrift, saving, credit and financial services and products of very small
amount to the poor’s in rural, semi urban and urban areas for enabling them to raise their income level and
improve their standard of living.‖ (Sen, 2008) Micro-finance is regarded as a useful tool for socio-economic
up-liftmen in a developing country like India. It is expected to play a significant role in poverty alleviation
and development. There are two broad approaches that characterize the microfinance sector in India is Self
Help Groups (SHGs)-Bank linkage programme and Microfinance Institution (MFIs). In India microfinance is
dominated by Self Help Groups (SHGs)-Bank linkage programme aimed at providing a cost effective
mechanism for providing financial services to the unreached poor. The present paper aims at identifying the
current status and role of microfinance in the development of India.
Manish Kumar, Narendra Singh Bohra and Amar Johari (2010) “Micro-Finance as an Anti Poverty
Vaccine for Rural India”
India falls under low income class according to World Bank. It is second populated country in the world and
around 70 % of its population lives in rural area. 60% of people depend on agriculture, as a result there is
chronic underemployment and per capita income is only $ 3262. This is not enough to provide food to more
than one individual. The obvious result is abject poverty, low rate of education, low sex ratio, and exploitation.
The major factor account for high incidence of rural poverty is the low asset base. According to Reserve Bank
of India, about 51 % of people house possess only 10% of the total asset of India .This has resulted low
production capacity both in agriculture (which contribute around 22-25% of GDP) and Manufacturing sector.
Rural people have very low access to institutionalized credit from commercial bank.
Madhubala swami, ―
A critical study of self-help groups and their microfinance activity in thane city” Self-help groups in Thane
city represent a slice of the urban poor. Promoted by different agencies (SHPIs) these SHGs display distinct
socio economic profile of the urban poor. The present study is undertaken with the main objective of examining
the microfinance activities of self-help groups, affiliated or non-affiliated to an SHPI in Thane city. It has been
found that these SHGs operate more or less like ROSCAs except for the fact that they are registered with a
government body (TMC). Unlike their counterpart in the South Indian states, they are not organized into larger
federations, have limited linkage with the financial institutions such as banks or MFIs. Except for SHGs
promoted by the TMC for implementation of SJSRY, the SHG
bank linkage of the majority of SHGs is limited only to depositing the thrift of SHGs in the bank. In the
absence of standardized products manufactured by SHGs and assured markets for their products, survival of
their business is doubtful. This is one of the main reasons that banks are shy of providing finance to them.
Though some of the SHGs were established five to six years back but they have not reached a take off stage
yet due to various factors coming in the way of their scaling up. All SHGs, irrespective of their BPL or APL
status, can scale up their activities if they get organized into federations, have tie-ups with financial institutions,
technical institutions providing training to set up micro enterprises and business houses to gain from their
business acumen in production and marketing of products. For this to happen, the government bodies, NGOs
and business houses committed to corporate social responsibility have to come forward to be the torch bearers
and lend their support to SHGs to break vicious cycle of poverty.
Mr. Ravi Verma Ms. Rajni Sinha .
“Micro–finance – a critical analysis of rural India” Rural is often looked down upon as a not a healthy place
to live, where that place is a secluded place for the underprivileged and where only the down Neha & Pathak
/ “A Comprehensive Review of Literature of Micro and Tiny Finance with the Help of MFIs and SHGs in
India” Contact Us : [email protected] ; submit paper : [email protected] download full paper :
www.arseam.com 8 trodden people can live. On the other side, micro is a word that has its presence that
reflects only the small and the underprivileged. Lack of access to finance is often cited as a key reason why
poor people remain poor. This paper will throw light on the Indian rural sector as the emerging and vibrant
sector which will take India to fulfill the dream of the developed country. India can be divided into two parts
on the basis of development: one is Developed India and other is Undeveloped India, there arises a need of
Development of the underdeveloped Area .The research will focus to determine that, what various Factors are
contributing to the development of Rural India. It will focus on how the micro finance Institutions can help
the people of Rural India, so that they can get the Equal opportunity for the Industrial and Agriculture growth.
Sowmyan Jegatheesan, Sakthi Ganesh, and Praveen Kumar S.
Research study about the role of microfinance institutions in the development of entrepreneurs‖ The Case
Study is to have its Focus for entrepreneurs who want to run a business and yet can't afford a piece of
equipment and merchandise. A research where by providing equipment or merchandise to enable the project
to run a self funding profitable project. In turn, A share in the project plus getting the full costs of the asset
equipment or merchandise including an interest. So, direct seed finance is not needed to be put in a project.
Microfinance is the provision that provides access to various financial services such as credit, savings, micro
insurance, remittances, leasing to low-income clients including consumers and the self employed, who
traditionally lack access to banking and related services. Its main objective is to provide a permanent access
61
to appropriate financial services including insurance, savings, and fund transfer. As Micro finance becomes
more widely accepted and moves into main stream, the supply of services to poor may also increase, improving
the efficiency and outreach while lowering the costs. Priyanka, Richa Verma and Meenu Microfinance in India
The purpose of this study was to understand micro finance in India The main objective of this research paper
is analysis to the Microfinance in India as a powerful tool for poverty alleviation. There are many societies,
companies, trusts and bodies corporate and such other institutions which are engaged in providing micro
finance services to the poor households as a complementary to the banking system. There are two broad
approaches that characterize the microfinance sector in India— SHG–bank linkage (SBL) and Microfinance
Institutions (MFIs). SBL is a larger model than MFIs in India, contrary to the global practices of other MFIs.
Microfinance total loan growth is estimated to have risen by around 30% year on year in fiscal 2012/13 (April-
March). The Central Government have felt that since these institutions lack a formal statutory framework for
providing such micro finance services, The Micro Finance Institutions (Development and Regulation) Bill,
2012 has passed on 11 February, 2014to provide a statutory framework for the promotion, development,
regulation and orderly growth of such Micro Finance Institutions (MFIs) and thereby facilitate financial
inclusion.
62
3(3)Fields, G.S. (2010)
this article is based on Fields (forthcoming) and on NCEUS (2009): The paper was presented in two parts. The
first part of the paper deals with the issue of global poverty and how the global poor work for their survival.
The research concluded that as many as 6 1/2 times the number of the unemployed constituted of working
poor, which indicated that the world had a major unemployment problem. This was true for India too. The
second part of this research dealt with the manners to be adopted for combating poverty in India and
internationally. The policies discussed here included effective workplace protections norms, harnessing the
energies of the private sector, pursuing sustained and planned economic growth, introducing effective labour
market policies for generating more paid employment, and also for raising self-employment earnings.
(3) Fe Bureau (2009):
This paper concluded that the population living in abject poverty could fall to a mere 6% by 2025 if aggressive
reforms are implemented globally. It states that most countries need an effective transitional process to change
the prevailing labour markets and speed up the poverty removal programs. This transition process includes
focus on farm to non-farm sector, from the rural to urban sector, from unorganized to organized sector and
from subsistence to self employment with a decent wage rate. The report further added that 60% of country‘s
workforce is engaged in agriculture activities and was generating 18% of the gross domestic product.
Agriculture has been responsible for pushing many Indian farmers to abject poverty because of low farm and
related labour productivity. The key step that the country should take to enable the transition from farm to
non-farm employment is to move public expenditure from input subsidies like fertilizers, seeds, power and
water that benefit only large farmers to rural infrastructure that is extremely critical for a continuous and stable
growth of the rural sector.
(4) Nedumaran et al. (2001):
They did an empirical study on the impacts of SHGs in Tamil Nadu, India. For this, study two districts of
Tamil Nadu, namely Erode and Tiruchirapalli were selected. One hundred and fifty members from 30 SHGs
promoted by two NGOs – MYRADA and LEAD were surveyed. Primary data was collected through personal
interview method during March April 2001. The study showed that the average amount of group loans availed
was positively associated with the group age of the borrowers. The study indicated that the annual net family
income of the members in post-SHG situation increased by 23 per cent over the pre-SHG situation. The study
also indicated a considerable improvement in the social and economic conditions of SHG participants after
joining the related group activities. The researchers then recommended the promotion of SHGs in rural areas,
giving training to members and involvement of local NGOs in building SHGs is the key for the overall
improvement of the household.
(5) Puhazhendhi and Badatya (2002) B:
The study concluded that institutional credit had deepened and widened among the rural poor, while there had
been substantial reduction of loans from local money-lenders and other informal sources. The findings of this
study showed that 52 per cent of sample households registered 23 per cent rise in annual income and 30 per
cent increase in asset ownership in post-SHG situation. It was concluded that 72 per cent of the bank loan was
used for income generating purpose, termed as productive and the remaining 28 per cent was for consumption
or unproductive and other social functions and contingency purposes. The estimated employment days per
household worked out to 405 person days during post-SHG situation that had registered an increase of 34 per
cent between pre- and post-SHG situations. Activity-wise, per cent increase was higher for non-farm activities
(121 per cent) followed by off-farm activities (21 per cent) and farm activities (19 per cent). The social
empowerment of sample SHG members in terms of self-confidence, involvement in decision-making, better
communication, etc. improved in a significant way. It was also found that members in the older groups of five
years and above were more socioeconomically benefited as compared to the members in newly formed groups.
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(6) Develtere and Huybrechts (2002):
Land program-related barriers. While assessing the social impact of the program it was found that the program
had a positive effect on women participants with regard to women’s status, their involvement in family
decisions, expanding knowledge and awareness, and the improved situation for their children. These changes
were momentous keeping in mind the participants belonged to the lower income group. It was also found that
the microfinance program not only affected its members but also the non- members in the program villages
and their surrounding villages through a positive spill over effect in different spheres of their social and
economic life in the form of increased awareness, better practices of health, improved sanitation, increased
family planning, reduced rate of interest and increased wages. Thus affecting the economic and social status
of the population observed in their paper focused on the economic and social impact of the activities of micro-
finance institutions on the clients of Grameen Bank and BRAC in Bangladesh. The authors overviewed
different studies conducted in Bangladesh by different researchers. The study revealed that Grameen Bank and
BRAC had succeeded in reducing their members’ economic vulnerability of their clients by controlling
consumption and income variability and had prevented them from falling further into abject poverty. However,
there was no consensus on whether the two institutions reduced poverty as per se. Most of the poorest (bottom
poor) people in Bangladesh had not been able to take part in a micro-credit program due to various client-
related
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Research Design
For this paper, exploratory research was used to conduct this study; the questionnaire was filled up by different
background people.
SAMPLE TECHNIQUES
Convenience Sampling is a Non¬-Random sampling which is used in this study. Data Collected by primary
as secondary sources.
SAMPLE SIZE
Sample size for this study was 50, covering the Mumbai city..This study is based on the primary as well as on
secondary data. Secondary Research: It is done by studying research journals, business magazines,
microfinance reports, newspaper, reports, websites and surveys conducted in the area of microfinance. , age
group and with different level of experience through a detailed questionnaire. 3. Data Analysis Data processing
is done using appropriate software like Microsoft excel and Statistical Package for the Social Sciences (SPSS).
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Data Analysis And Findings
1. Key characteristics of the respondents To understand the demographics of the respondent‟s univariate
analysis is done using Frequency Tables. The key analysis is as
A . age of respondents
Frequency Percent Valid percent
AGE OF RESPODENT
18yrs to 25
16%
26yrs to 45
46yrs to 46yrs to above
above 26yrs to 45
18yrs to 25
24% 60%
Interpretation:
From the frequency table, we observe that out of 50 respondents, 72 respondents i.e. 60% of respondents
belongs the age group of 26 years to 45 years; whereas 24% respondents or 16% of respondents are above
46 years of age and 16 respondents or 14.5% of respondents belongs to the age group of 18 years to 25 years.
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b. Gender of the respondents
Frequency percent Valid percent
Male 36 72 72
Female 14 28 28
Total 50 100.0 100.0
GENDER
female,
28%
male
female
male-72%
Interpretation:
From the above frequency table , we observe that out of 50respondents, 36 respondents i.e. 72% of
respondents are male; whereas28 respondents or 28% of respondents are female.
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C. marital status
Frequency percent Valid percent
Married 28 56 56
Single 22 44 44
Total 50 100.0 100.0
MARITAL STATUS
single, 44 married
married, 56 single
Interpretation:
From the above table, we observe that out of 50 respondents,56 respondents i.e. 56% of respondents are
married; whereas 22 respondents or 44% of respondents are single.
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Awareness level of respondent:
1. Did you heard about Microfinance?
Responses Frequency percent Valid percent
Yes 43 86 86
No 7 14 14
Total 50 100 100
no
14%
yes
86%
Interpretation:
From the above table , it is clear that 86%of people living in Mumbai city have heard about microfinance
Institutions, where as 14% of people unaware about microfinance Institutions in Mumbai.
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2.Did you know about the benefits and the services which are offered by the microfinance?
Responses Frequency Percent Valid percent
yes 11 22 22
No 19 78 78
Total 50 100 100
yes
22%
yes
no
no
78%
Interpretation:
From the above table it is clear that people that 22%of the people have heard about microfinance but are not
aware of its products. A total of 78%are not aware of their existence. This means microfinance institutions are
unable to reach the masses with information on their Activities.
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3.Interest rate charged by the microfinance is high or low?
Response Frequency Percent Valid percent
High 14 28 28
Low 36 72 72
Total 50 100 100
INTEREST RATES
high
28%
high
low
low
72%
Interpretation:
From the above table we observe that there are 50 respondent out of 28% People agrees with the interest
charged by the microfinance institutions. Another 78% feel the rates are not appropriate to encourage
borrowings from the,
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4. As a customer from where would you like to take a loan:
a) Banks b) Microfinance institutions
Responses Frequency percent Valid percent
Banks 38 76 76
Microfinance 12 24 24
Total 50 100 100
microfinanc
e
24%
banks
microfinance
banks
76%
Interpretation:
From the above table we observe that out of 50 respondent , It is clear out of that 24% people would prefer to
take loan from MFI’s.76% of the people would like take loan from banks.
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5. Do you think Microfinance institutions helped unemployed women?
a) Yes b) No
Responses Frequency percent Valid percent
Yes 42 84 84
No 8 16 16
Total 50 100 100
no
16%
yes
no
yes
84%
Interpretation:
Above table depicts out of 50 respondent 42% of the people accepts that the microfinance instituitions helped
the unemployed women , microfinance institutions have a key role to alleviate unemployment, especially
amongst women providing them with an opportunity to earn their livelihood and support their families.
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6.microfinance has good scope over the banks?
Responses Frequency percent Valid percent
Yes 41 82 82
No 9 18 18
Total 50 100 100
no
18%
yes
no
yes
82%
Interpretation:
From the above table it is clear that out of 50 respondent 82% people assume that banks have good scope
through microfinance. They can reach a larger population if they are offer facilities to microfinance activities.
and 9% of people said that microfinance has no scope over the banks
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7. According to you, factors are more crucial for rapid growth of microfinance institutions?
Responses Frequency percent Valid percent
Low interest rate 12 24 24
Availability 14 28 28
Processing and sanctioning 8 16 16
Installment factor 16 32 32
Total 50 100 100
low interest
low interest rate
installment rate
factor 24%
32% availability
processing and
sactioning
processing
and installment factor
availability
sactioning 28%
16%
Interpretation:
According above table analysis, the most crucial factors for rapid growth of microfinance institutions is
installment factor. Is about 32%
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8.Do you think microfinance in reducing the poverty?
Responses Frequency percent Valid percent
Yes 42 84 84
No 8 16 16
Total 50 100 100
no
16%
yes
no
yes
84%
Interpretation:
From the above table, it is clear that microfinance eradicate poverty.
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9. Do you think microfinance is in the direction of public welfare?
Yes No
Responses Frequency percent Valid percent
Yes 31 62 62
No 19 38 38
Total 50 100 100
no
38%
yes
yes no
62%
Interpretation:
From the above table, it is clear that only 62% of people think that microfinance is in direction of public
welfare.
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10. How do you anticipate the future of microfinance; rate on the scale between 1-5?
Responses Frequency Percent Valid percent
1. Poor 5 10 10
2. Average 6 12 12
3. Good 9 18 18
4. Very good 21 42 42
5. Excellent 9 18 18
Total 50 100 100
poor
excellent 9%
18%
average
12%
poor
average
good
18% good
Interpretation:
The graph depicts future of microfinance is glorious.
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KEY FINDINGS
• The formal sources of microfinance are still new in India. Not many people are aware of microfinance
industry in Mumbai.
• Microfinance charges (13-15)% interest rate for loans whereas banks charges only (9-10)%. As huge
difference is there between the interest rates of both (i.e. banks and microfinance institutions), people prefer
to take loan from banks rather than microfinance institutions.
• Micro-finance institutions provide employment opportunity.
• Micro-finance institutions help in decreasing the poverty rate.
• Bandhan micro-finance has many products for their customers.
• All micro-finance gives loans to women’s as to increase women entrepreneurs.
• Micro-finance institution while giving loans they make the group of minimum 5 known women’s to each
other and then disbursed the loan amount, this is done to decrease the risk.
• Bandhan micro-finance is the best for women’s to take loan as they have different products for different
customer with minimum documentation and less time for sanction.
• Documentation needed are voter id card/pan card/passport/driving license/ Aadhar card with this address
proof and any id proof of their husband is compulsory.
LIMITATIONS
• This research has been conducted by convenience survey technique; therefore There might be some
biasness.
• As the survey was conducted under selected areas of Mumbai hence the results of this survey was not
generalize.
• It is difficult to say that the secondary data which has been taken from different sources are up to date or not.
• It was difficult to find good response from the bank managers they were busy in their schedule, and collection
of data was very difficult. Therefore, the study had to be carried our based on the availability of response.
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SUGGESTIONS
Presently, there is no distinctive regulatory framework for the MFIs in India. Regulation of the MFIs
is largely in the purview of the state governments. So there is a need of an exclusive regulation to
regulate to MFIs in India.
The MFIs need to strengthen the capacity building initiatives that help promote credit use and recovery.
This will educate borrowers on the proper utilization and investment of borrowed funds. This will in
turn lower the default rate on credit.
MFIs should provide a complete range of Products including micro credit, micro saving, micro
insurance and micro service like training and reinforcement. As MFIs are acting as a supportive
institution for banks for the development of rural poor where people are not able to access to banks,
providing a complete range of product will enable poor people to get into the main fold of financial
service.
MFIs trends shows that the reach of microfinance has been saturated because the transformation effect.
Many of microfinance institution are transformed from non-profit to profit entities. This transformation
may offer quality service with increased service avenues but it is not poor-friendly method to safeguard
the interest of poor in rural and urban. It may give another meaning in terms of violating the objective
of establishing and providing microfinance service to the poor. The regulators of microfinance
institution should have a policy that will regulate the rate of interest charged and government needs to
focus on special programmes that disburse funds to the poor to ensure sustainability of such
programmes.
One challenge facing most of district, relates to developing products, services, and delivery
mechanisms that meet the financial needs of a wider spectrum of households. To expand and deepen
outreach and impact, the microfinance field is challenged to develop products that respond to the needs
of clients from poorer households. Product development could involve both improving the terms and
conditions of existing products and developing new products. Most of the population living in rural
and they don’t have the 187 knowledge about microfinance products and services therefore, a special
campaign must be stated to familiarize the poor people about this facility.
Microfinance Institution should be encouraged for opening new branches and increase the outreach in
rural area penetration by offering financial aid. This will assist the borrowers to obtain multiple loans.
This will also increase rural penetration of microfinance in the state.
It is significant to note that credit alone is often deficient in ensuring development and small business
growth, especially when people engage in such activities lack basic skills and knowledge related to
business management. So providing credit to them with limited skills and knowledge defaulters will
increase and riskier proposition for MFIs. Consequently, institutions should arrange mechanisms to
improve business skills and technical skills of the poor through training, loan utilization, and awareness
program. This will amplify their business skills to use credit and establish market channels for their
products.
The progresses observed in poverty reduction through Microfinance models can be further enhanced
through different ways set up to offer loans and other financial capacities of clientele needing loans
could be developed. The problem of the maximum loan size ceiling decided by MFI by most group
members should be made pliable to allow groups to acquire loans. Microfinance Institution decides the
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maximum loan size of the group members and it should be made flexible to groups to take loans. The
Microfinance Institution offers different products, i.e. loan sizes, matching varying borrowing powers
of customers may meet credit and business needs have diversified clientele.
MFIs need to lay a great deal of attention to ensure that income-generating activities of their loan
recipients are profitable and loan products appropriately. Otherwise, loan recipients may require
converting what they have saved as assets into cash to repay their loans.
The bank must create an awareness program to the people regarding banking services through
advertisement and financial inclusion campaign. The banks should offer all applications and forms in
the regional language of the customers. ATMs are one of the most effective instruments and cost
effectiveness to reach the rural poor. Thus, new biometric ATMs have to be reputable to assist the
customers who are incapable to memorize PIN. The bank should offer no frills account in order to turn
un bankable into bankable for financial inclusion. The banks should appoint a business correspondent
to propagate its service to the unreached area. Technology can play a major part in bringing down the
cost of availing financial services. Technology can play a major role in financial inclusion by reducing
the cost of financial services. Therefore, banks should adopt advanced technology for banking service
delivery.
Suggestions to the Government: The government ought to include financial literacy in the curriculum
of schools and colleges. The government must raise the Financial Inclusion technology fund and a
Financial Inclusion fund to achieve banking services to the unbanked areas. The government should
pay all the social security payments through the bank account of the beneficiary.
An integrated access is taken along the role of Lead Bank as a consortium leader with respect to
assessing the potency of the district and meeting out the credit demands of the target groups. The
problem in the operation and preparation of Annual Credit Plans should overcome through constructive
and pragmatic approach. • Bank allocation and household survey like NGOs and SHGs should be
undertaken in villages. • Estimation of setting credit targets and evaluating the need of financial
products for lending to priority sector like small scale industries, agriculture and allied sector. •
Preparation of district action plans for different products in terms of the target like issue of General
Credit Cards and Kisan Credit Cards for farmers, openings of no frills account and offering overdraft
facilities, Formation of SHGs, micro insurance and pensions.
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40 Indur Intideepam Federation Ltd (IIMF).
41 Welfare Organization for Multipurpose Mass Awareness Network (WO
42 Pragathi Mutually Aided Cooperative Credit and Marketing Federation Ltd(PMACS)
43 Indian Association for Savings and Credit(IASC)
44 Sewa Mutually Aided Cooperative Thrift Societies Federation Ltd (Sewa)
45 Initiatives for Development Bangalore, Foundation (IDF)
46 Gandhi Smaraka Grama Seva Kendram (GSGSK)
47 Swayamshree Micro Credit Services (SMCS)
48 ASOMI
49 Janodaya Trust
50 Community Development Centre (CDC)
CONCLUSIONS
Microfinance Institution fullfills the diverse needs of poor group of people in terms of offering different
products like micro credit, micro saving, micro insurance and micro finance training both for personal and
business loans. Micro credit will enable expansion of microenterprises and reduce reliance on expensive
informal sources. Micro saving enables to purchase of productive assets and confidentiality. Micro insurance
reduces impact of external shocks and life protection. Training for development of business and proper
utilization of funds. Microfinance Institution should provide multiple purpose loans or composite credit for
income generating activities and consumption purposes and it is important for commencing new economic
activity and deriving affirmative income. Therefore, taking adequate steps to bridge the gap between exclusion
and inclusion in accessing and usage is necessary through microfinance institutions for financial inclusion.
The Government has considered that financial inclusion programs are an important measure to bring
financially excluded people within the fold of the formal financial sectors. In order to bring financially
excluded people to the financial inclusion group, both central and state governments promoted micro-finance
institutions, Intermediaries and Service Agencies such as NABARD, Commercial Banks, Co-operative Banks,
Regional Rural Banks, on-Government Organizations (NGOs) and Non-Banking Financial Companies
(NBFC). All commercial banks and cooperative banks actively involved in rural and urban branch expansion
for financial inclusion and also with the help of business correspondents and business facilitators. The banks
should encourage the people to access banking services by ways of no frills account and financial inclusion
campaign for achieving sustainable economic development. The government should encourage the banks to
implement financial inclusion by advertising, financial assistance and awareness program. To accomplish the
purpose of financial inclusion and inclusive growth in India.
The Mumbai market is unique and needs to be approached in a different way by MFIs. Loan sizes should
depend on the cash flows of clients; and clients who wish to take higher loan amounts will need to show better
cash flows. Since Mumbai is a busy place, MFIs need to make their operations efficient and faster: weekly
group meetings are likely to be unpopular. The groups might resort to ‘collection points’ 3 in which the clients
accumulate the repayment amount in one member’s house and abstain from the weekly meetings.
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Even the MFIs do not mind this as it makes their work faster and easier. However, this can cause a problem at
a later stage when delinquencies begin, and the clients refuse to take up group liability as there has not been a
strong bonding between the clients (as they hardly meet). To ease this, MFIs can make smaller groups of
people who live close by and can attend meetings easily without any problems. And for clients who have good
income flow but cannot abide by the standard way of MFI repayment (weekly, monthly), individual loans are
a good option. The risk appetite of the MFIs will determine if they give individual loans to fresh clients or
observe clients’ behaviour in groups for a while before giving individual loans. But a thorough cash flow
analysis will be a must before this. Also the repayment frequency can be different from the more conventional
weekly or monthly (like fortnightly). With care, Mumbai promises to be a very lucrative market for
microfinance.
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