ABSTRACT

After India's independence in 1947, the Indian economy was identified by

exclusive regulation, recession, public ownership, rampant corruption,
hyperinflation, and protectionism. The Microfinance revolution in India started
in early 1980 with the effort of the Yezdi Hirji Malegam committee by forming
informal self-help groups(SHGs) to provide access to the needy borrowers and
the small entrepreneurs who have great vision and aspiration but have
limited capital. Before the economic reforms, it rose at a slow pace but after
economic reforms i,e globalization, liberalization, and privatization had
supported in the development and growth of the microfinance sectors in India
at wider extent. This study reveals a better understanding of the enigmatic
microfinance sector after tracing its information from various sources. The
present study attempts to analyse the impact of microfinance for the
upliftment of the weaker sections of society and is an effective tool for
generating substantial revenue.

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INTRODUCTION
The United Nations (UN) is an international organization of all the countries
around the world who declared the year 2005 as “The UN Year of
Microcredit”. In 2006, Grameen Bank and its founder Prof Mohd Yunus in
Bangladesh was awarded the Nobel Peace Prize “for their efforts to create
economic and social development from the below”. Prof Mohd Yunus believes
that microfinance is a tool of development which is used to get rid of
poverty.
Microfinance is the provision of financial services to the
underprivileged clients or solidarity lending groups including
consumers and self-employers, who lack convenient access to banking
and its related services without having the support of collateral
securities.
Microfinance which serves as an umbrella encompasses the provision of
banking services by microfinance institutions, which plays a significant role
in the alleviation of poverty especially in rural and poor sectors of the
country. This is a tool that deeply understands the grievances of the weaker
section and assists them by providing collateral-free loans with enough
relaxation period of loan repayment. It also renders other banking facilities
that were ignored by the formal financial service providers. Microfinance is a
boon for the weaker section of the society. It pays special attention to the
poor and miserable women so that they can earn a good living.
India is a developing country, the population of both the lower and middle-
income groups are relatively more than the high-income groups. The poor
are struggling even for necessities like food, clothes, and shelter.
Microfinance has come up with an innovative idea of providing financial
services that are trying to enable the economically weaker people to leverage
their initiative and thus boasting the process of generating incomes, assets,
and improvement in various socio-economics aspects. The reason for the
emergence of microfinance is that the esteemed financial institutions,
scheduled banks, etc avoid catering to the needs of low-income groups and
miserable women-headed households. They only provide loans or other
financial services to those who have good credit-worthiness and the support
of collateral security. They prefer doing transactions with large loans in small
numbers to reduce administrative expenses.
Keeping in mind the credit control policy norms prescribed by the RBI or
the income tax provision under Income-tax Act 1961, bankers are afraid of
bad debts as well as high operating cost while providing loans to the low-
income groups, as they believe that these people will not be able to repay
installments and interests on the due date. Though the point of rejecting the
loans to the priority is logical, the poor have loan requirements too, which is

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not a very huge sum. Therefore, poor people depend on moneylenders who
belong to the unorganized sectors. They pay huge interest to them. The
fundamental problem is not an ineffective team of credit but a lack of access
credit (Kim 1995). The government is just a supporter, not a direct financial
service provider. Microfinance emerged as a solution to the lack of capital for
those living in poverty in developing economies, yet it has spread to
developed economies where the entrepreneurs also find microloans difficult
to secure [ CITATION Fre00 \l 16393 ].
Banks prefer to provide loans to high-income groups because they pay the
principal and interest amount easily and timely, but this is not possible
always, as many high-income groups are unable to repay the loan and this
leads to the problem of Non-Performing Asset (NPA) which badly affects the
financial sector and economy of the country. Gross domestic product is
rising but at a very slow speed compared to the densely populated country
i.e. India.
Microfinance plays a significant role in the mobilization of ideal small savings
to those borrowers who want to operate and expand their existing business
or want to start a new venture in micro, small, medium enterprises. It
provides self-employment as well as lending amenities to the weaker sectors
and is more focused on women to be employed in some economic activities.
It has opened many fields in employment for priority sectors like sericulture,
animal husbandry, beehive, poultry farming, agrarian sectors, mushroom
farming, dairy business, stitching centres, weaving sectors, cottage industry,
handicraft, export housing, handloom work, micro small medium
enterprises, growth of gig economy and many other commercial activities.
Microfinance has been a panacea for poverty reduction in India and provides
an efficient and effective financial system throughout the country’s
economy. It helps in reducing the income discrimination problem within the
country and creating more job opportunities. Moreover, effective financial
tools help in increasing economic activities in a country and thus add value
to economic growth. Microfinance consists of a wide range of facilities for the
economically weaker section of the society such as insurance and saving
microcredit (Chakravarty & Shahriar, 2015). It provides small loans to
those low-income groups who are rejected from a facility of the formal loan
[ CITATION Mor99 \l 16393 ].

Microfinance has a wide coverage of financial products and services like

livestock insurance, life insurance, credit purchase, to assist the poor people
in expanding existing or establishing business enterprises, saving products,
on-life insurance products, money transfer, advisory services related to
finance, micro leasing, payment services, remittance products, insurance
products. The purpose is to provide financial products or services to the
poor people to increase their income and improve their standard of living. It

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has three characteristics to be enlisted as successful i.e. Impact, outreach,
sustainability[ CITATION Hol97 \l 16393 ].
The main features of microfinance are as follows:
1. Microfinance plays a significant role in developing and balancing the
parity of the economy in rural and urban sectors;
2. It provides micro-credit loans free from collateral security to the
weaker sector of the society at a nominal interest rate;
3. It is a short duration loan with a frequency in repayment of the loan;
4. It is non-profit-oriented, but service or welfare-oriented;
5. It creates opportunities for self-employment and helps the weaker
sectors to generate income;
6. It develops the spirit of entrepreneur’s courage among the priority
sectors;
7. It is an effective tool of development used for alleviation of poverty and
helps in contributing greatly to the country's economic growth;
8. It provides a single-window of multi-function facilities at less
operating costs;
9. The two main techniques for the delivery of financial services to the
clients (belonging to priority sectors):
(a) Relationship-based banking for small businesses and individual
entrepreneurs;
(b) Group-based models, where a large number of entrepreneurs of
common interests come together to apply for the same type of
loans and other services.

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INSTITUTIONAL FRAMEWORK FOR MICRO CREDIT
In India, there are two channels through which microcredit is provided to
the borrower. The first is the “Bank-Self-Help Group (SHG) Linkage
Programme” by which the National Bank for Agriculture and Rural
Development (NABARD) and commercial banks promote the formation of
SHGs and the second one is the MFI (Microfinance Institutions) model.
NABARD which is considered as the ‘Micro Credit Innovations Department’
has continued its role as the facilitator and mentor of microfinance
initiatives in the country.

Self-Help Group Model:

The Self-Help Group methodology was developed in Karnataka in 1992. It
serves as a link between the informal groups of people to the mainstream
banking system. According to NABARD ‘s report of FY (2016-2017), more
than 100 Scheduled Banks, 349 DCCBBs, 27 State Rural Livelihood
Missions program and over 5000 NGOs are engaged in promoting Self Help
Groups. It considers a holistic development microfinance model. The criteria
would broadly be adopted by NABARD for selecting SHGs:
(i) Membership of the group could be between 10 to 20 persons;
(ii) The group should be in existence for at least six months;
(iii) The group actively promotes saving habit;
(iv) Groups could be registered or unregistered.

SHGs-Bank Linkage:
The NABARD launched the pilot project i.e. SHG-Bank Linkage Programme
in February 1992 to promote rural credit operations by commercial banks
to SHGs (micro-entrepreneur, landless people, small artisans, peasants,
women, etc.). The poor people were encouraged to come together to save a
small amount regularly and extend microloan among them (Mukundan .N
& Saundari Hiliaria. M, 2008). It helps in minimizing the bank’s
transaction cost. The central objective of the SHGs-Bank linkage program is
to remove the dependence of rural women on unreliable
sources/moneylenders who charge an exorbitant interest rate on loans.

MICROFINANCE MODEL:
Microfinance institutions(MFIs) are those which provide thrift, credit and
other financial services and products of a very small amount mainly to the
villagers, micro-entrepreneurs, improvised women and poor families for
helping them to generate their income and improve their standard of living.
It is like a small bank with the same challenges, liabilities, and a need for
capital for incurring recurring expenses and for expansion of small ventures,

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along with the social responsibility to serve economically marginalized
populations. MFIs can be classified into the following three categories, based
on the legal framework. According to the sources “Adapted from the
Report of the task force on Supportive Policy and Regulatory
Framework (NABARD 2012)” they have emerged into three broad
categories:

S.I.NO. Types of MFIs Number Legal

Registration
Profit motives 1.Non -Banking 45 Indian
MFIs Financial Companies Act,
Companies Reserve Bank of
(NBFCs) India Act 1934

Non-Profit MFIs 1.NGOs, 400-500 Society

2.Public Trusts Registration Act,
Registered, Indian Trust Act
3.Non Profit 20 Indian
Companies Companies Act
Mutual Benefits 1.Mutual Benefit 200-250 Mutually Aided
MFIs MFI-Mutually Co-operative
Aided Societies Act
Cooperative Enacted by State
Societies(MACS) Governments
,
2.State Credit
Cooperatives,
3.National Credit
Cooperatives.

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 MICROFINANCE

FORMAL INFORMAL
SECTORS SECTORS

MONEY LENDERS
SHROFFS
LAND OWNERS
SELF-HELP GROUP MICROFINANCE
CONVENTIONAL
BANK LINKAGE INSTITUTIONS
WEAKER SECTION
C
LENDING BY MODEL (MFIs)
BANKS
MICROFINANCE
SERVICE
PROVIDERS
(i) COOPERATIVE BANKING
INSTITUTIONS; RURAL
URBAN; PROMINENT SEWA
BANKS
(ii)REGIONAL RURAL BANKS NABARD Apex MF NGOs APEX
SHG
(iii)COMMERCIAL BANKS Service FEDERATIONS MFIs
SIDBI LEGAL FORMS
PRIORITY SECTOR LENDING Provider
- NOT FOR PROFIT MIFs
BANKS
- MUTUAL BENEFIT MFIs
MULTILATERAL, BILATERAL, - FOR- PROFIT MFIs
NATIONAL AND INTERNATIONAL
FUNDING AGENCIES CREDIT-LENDING MODELS
- INDIVIDUALS
- SELF-HELP GROUPS
- INDIVIDUALS ORGANISED IN
JOINT LIABILITY GROUPS
- SHG FEDERATIONS

MODAL I MODAL II MODEL III

NABARD-BANK NABARD- BANK NABARD – BANK
SHG (WITHOUT SHG (WITH NGO) NGO- SHG (WITH
NGO AS A NGO AS
INTERVENTION) FACILITATING FINANCIAL
AGENCY INTERMEDIARY)
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REVIEWSOURCE:
OF LITERATURE
INDIAN FINANCIAL SYSTEM[ CITATION PAT19 \l 16393 ]
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It has been discovered from many empirical
PUBLISHER: PEARSON literature, that microfinance has
a significant impact on the weaker section of the society. It has also shown a
decrease in the socio-economic problems through effective parameters i.e,
through employment generation, education, improvement in health and
empower the small scale entrepreneurs and women to become self-reliant
and self-confident.

(NABARD All India Rural Financial Inclusion Survey, 2016-2017) NABARD

introduced a comprehensive survey titled ‘NABARD ALL INDIA FINANCIAL
INCLUSION SURVEY’ (NAFIS) in 2016-2017’. This survey assumes the
significance of financial inclusion on the livelihood of rural sectors both in
qualitative and quantitative terms. Besides this, the survey has covered
many economic indicators such as debt, savings, expenditure, income and
investment, composition and paradigms of consumptions, parameters like
financial literacy/ awareness, borrowing behaviour, Kisan Credit Card(KCC),
distress events (such as crop failure, death of earning people) insurance
facilities coverage for crop insurance life and accident insurance, pension,
etc. NABARD had constituted an advisory committee for guidance and
directions. NAFIS had covered a sample of 1.88 lakh persons from 40327
agricultural & non- agricultural rural households across 29 states of the
count.

(Arifujjaman Mohammed, & Anisur Rahaman Mohammad, 2007)

investigates the impact of microfinance on the poor people of the society
with the main focus on Bangladesh. The objectives of this study has showed
microfinance works, by using group lending methods for alleviation of
poverty and its effects on the standard of living (includes incomes, saving,
and consumption) of the poor people in Bangladesh. Microfinance plays a
significant role to improve health, education, sanitation, legal rights which
are relevant for the concerns of the poor. This study provides opportunities
for self-employment. Their main focus is on women to make them self-
reliant, self-confident.

(Ledgerwood Joanna, 2000) identifies the following objectives provided by

microfinance institutions in developing countries. It includes :
1.Eradicate extreme poverty and hunger;
2.Promotion of gender equality and women empowerment;
3.Achievement of universal primary education;
4. Improvement in maternal health;
5. Creation of employment opportunities;
6. Building Assets;
7. Stabilization of consumption;

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8. Encouragement of new business formation and developing spirit of
entrepreneurship;
9.With longer-term vision and aspiration, they develop a strategy to build
global financial systems that meet the needs of the poorest people;
10.Protection against uncertain risk.
In this research, they had concluded after considering various case studies
that the above objectives can be achieved through (i) microcredit; (ii) micro
saving; (iii) microinsurance; (iv) money transfer for the poor .

[CITATION App12 \l 16393 ] The paper titled “An analysis of microfinance

investigated the relationship between microfinance and poverty reduction in
Bayelsa State of Nigeria” had investigated the relationship between
microfinance and poverty reduction in Bayelsa State of Nigeria. The
questionnaire has been used as an instrument to obtained primary source
of data.The Chi square, ANOVA and discriptive statistics were used to
analyse the data.The analysis of the data revealed that there is a significant
relationship between microfinance and poverty reduction.

(Chakravarty Sugato & Shahriar Zafar Abu, 2010) emphasized on

bank-borrower relationships in the application and approval stages of
microcredit. The primary data has been compiled from the field of 34
randomly selected villages in Bangladesh. The statistical tool which is used
in the research is regression analysis. This study focuses on informal
communication between the lender and the borrower which is collectively
defined as a relationship. This study serves as evidence that is regarding the
potential borrowers who have maintained a long membership with the
microcredit provider.
[ CITATION Zah15 \l 16393 ]The authors had emphasised the impact of
microfinance on poverty alleviation keeping in mind the factors affect the
poverty including to fulfilment of basic needs, living standard and self-
employment. The survey was conducted by structured questionnaire that
comprising various aspects of microfinance & poverty alleviation. A
convenience sampling was used to collect data. The number of respondent
were 263 as sample. Correlation and three linear regressions model is used
to determine the relationship between microfinance and basic needs,
relationship between microfinance and living standard; and relationship
between microfinance and self-employment to examine the impact of
microfinance on poverty alleviation. The study revealed that there is positive
impact of microfinance on poverty alleviation. In other terms there is
significant relationship between independent variable which is microfinance
on dependent variable which is poverty alleviation through fulfilment of
basic needs, living standard & self-employment.
Besides this, there are many famous case studies on microfinance which
indicate that the innovation of microfinance plays a significant role in the
upliftment of weaker sections and great efforts in the prosperity of the

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country’s economy. Such case studies are the Ethan Wagner case study,
Anna Purna Mahila Mandal by Medha Purao, Grameen Bank by Prof. Mohd
Yunus, and many more.

OBJECTIVES:
The objectives of the study are as follows:
1. To identify the factors which influence the effectiveness of microfinance
services.
2.To study the impact of microfinance for the upliftment of weaker sections
of the society.
HYPOTHESIS
H0 - There is no significant difference between the impact of microfinance for
the upliftment of weaker sections of the society.

RESEARCH METHODOLOGY
RESEARCH DESIGN
Research design is a plan, structure, and strategy of investigation to obtain
information that helps in navigating the present research journey.
Exploratory and descriptive research design is considered to accomplished
the purpose of the present study. It seeks to assess the positive effect of
microfinance for the upliftment of weaker section of the society. It involves
both qualitative and quantitative research The study was conducted in the
state of Uttrakhand.

DATA COLLECTION
The research work is based on primary and secondary data.

PRIMARY DATA
Primary data is collected through personal interviews, observations,
telephone surveys with the borrowers who belong to weaker sections of the
society.

SECONDARY DATA
Secondary data is collected through journals, RBI and NABARD reports,
published books, annual reports, magazines, newspapers, websites, etc .

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RECOMMENDATION

1. The loan amount should be increased to meet the requirements of the

borrowers, but this should be done in a very prudent and diligent
manner, depending on the ability of the client to repay on the maturity
date and reasonable interest should be charged on that loans. This is
important because the entrepreneurs can start new ventures and
other small businessmen can expand their existing businesses. This
will create employment opportunities and help in the reduction of
poverty.
2. The microfinance should enlarge their territories to reach more poor
people (especially in hilly and interior area). MFIs and self-help groups
have a better understanding of the problems and grievances of the
poor sectors so that they can render better and flexible services to
increase the satisfaction levels of the poor borrowers.
3. Microfinance institutions should provide training skills and knowledge
in time to equip their clients in advance. Customer-oriented training
to staff members must be conducted to teach properly, how to deal
with the clients. Members in the self-help groups should not belong to
any political background and have no personal motive. They should
possess the quality of leadership and have a vision for the betterment
of the poor people.
4. Besides expansion of microfinance, there are new fancy alternatives
which helps in seeding entrepreneurship among priority groups like
crowdfunding and peer-to-peer innovation. Crowdfunding means a
practice of funding a project or venture by raising money from a large
group of people who contribute a relatively small amount individually.
Peer-to-peer lending in a form of crowdfunding used to raise loan for
people who need to borrow, from people who want to invest. In this
online platform is used where borrowers and lenders registered
themselves.

5. There should be compliance with scientific management principles

within the system of microfinance organizations. Apart from this, for
the upliftment of weaker sections in the society, there should be
proper utilization of the mudra loans and other facilities provided by
the government.
6. Promotion of women entrepreneurship (particularly in micro and
small sectors) which will not only provide support to economy, but
also play an important role within the organisation to bring more
innovation and engagements. It will reduce gender discrimination evils
and will help in eradicating the problem of poverty.
It is also important to remove some socio and economic barriers which
affecting in the prosperity of microfinance and development of weaker

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section with suitable policy interventions. One thing which is important is to
improve gender diversity to become more creative.
.

Chakravarty Sugato & Shahriar Zafar Abu 2010

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