Banks & Micro Finance

8/7/2019 Banks & Micro Finance

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BANKS AND MICRO FINANCE

1

A

Report on

BANKS AND MICROFINANCE

A DISSERTATION SUBMITTED IN PARTIAL FULFILLMENT

OF

THE REQUIREMENTS FOR THE AWARD OF MBA DEGREE OF

BANGALORE UNIVERSITY.

Submitted By

K.PAVITRA

Reg.No-03XQCM6069

UNDER THE GUIDANCE OF

Dr.T.V.Narasimha Rao

INTERNAL GUIDE

M.P.BIRLA INSTITUTE OF MANAGEMENT

ASSOCIATE BHARTIYA VIDYA BHAVAN

43, RACE COURSE ROAD,

BANGALORE-560001


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2003-2005


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DECLARATION

I hereby declare that the research work embodied in this

dissertation entitled BANKS AND MICROFINANCE , has been

carried out by me under the guidance and supervision of

Dr.T.V.Narasimha.Rao, M.P.Birla Institute of Management,

Bangalore (Internal Guide).

I also declare that this dissertation has not been

submitted to any other University/Institution for the award ofany Degree/Diploma.

Place: Bangalore K.PAVITRA

Date: 17th

June 2005 Reg

No.03XQCM6069


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PRINCIPALS CERTIFICATE

I hereby certify that this dissertation is an offshoot of the

research work undertaken and completed by Ms.K.PAVITRA.

under the guidance of Dr.T.V.NarasmihaRao, MPBIM,

Bangalore.

Place: Bangalore (Dr. N.S.

Malavalli)

Date: 17th

June 2005.

Principal


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ACKNOWLEDGEMENT

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

gratitude to my internal guide Prof. T.V.Narsmiha Rao for his

enormous guidance and assistance. He has been my mentor and

guide, his continuous encouragement and valuable suggestions

helped me at every stage of this project.

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

Principal M.P.Birla Institute of Management Bangalore.

I would like to express my thanks to Mr.A.S.Srikanth, (I.A.S),

M.D, Karnataka Land Army Corporation Ltd., for his guidance.

Finally, I would like to thank my family and friends for their

overwhelming

support and encouragement

K.PAVITRA


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Table of contents

Abstract...01

Chapter 1: Introduction

Background.05

Problem Statement..07

Research objectives.07

Chapter 2: Theoretical Framework..08

Chapter 3: Review of Literature

Methodology and findings..42

Chapter 4: Research Methodology

Methodology....44

Type of Research.44

Collection of Data44

Research Limitations45

Chapter 5: Analysis and DiscussionInterpretation46

Chapter 6: Conclusion

Conclusions.53

References54


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LIST OF TABLES

Table

no.

Name Page

no.

1 Rating of SHG 19

2 SHGs linked by Commercial banks in

Karnataka

45

3 SHGs linked by RRB in Karnataka 46

4 SHGs linked by Co-operative banks in

Karnataka

47

5 District wise break up of SHGs in Karnataka

(03-04)

48

6 Performance of public sector and private sectorbanks

49

7 New SHGs formed and loan disbursed by

banks in India

51


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ABSTRACT

Post nationalization in India, commercial banks have been participating

actively

in implementation of poverty alleviation programmes of the Government

like the

Integrated Rural Development Programme (IRDP), Small Farmers

Development Agency

(SFDA) for the marginal farmers and agricultural laborers and the

Drought Prone Area

Programme (DPAP). Experimenting with subsidized credit for the poor

through these

programmes has resulted in one unpleasant and tangible outcome

increased Non

Performing Assets . Group based micro finance was introduced in the

country in the early 1970s, but has not picked up momentum until

recent times. Banks, over time have begun adopting models that havebeen tried and tested by Non Government Organizations (NGOs) and

Micro Finance Institutions (MFI). These institutions had the clear vision

to disprove the intuition of the formal bankers that banking with the

poor was a risky affair. They have proved beyond doubt that banking

with the poor is most certainly a profitable business. They have also

popularized the concept of group lending through the formation and

grooming of Self Help Groups (SHGs).

The objective of this research is to study the growth of microfinance sector in Karnataka.

The analysis has been based on the secondary data obtained from

NABARD and other published articles.


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.

INTRODUCTION

The important finding of last three decades in the finance field is poor can save, can

borrow and and certainly repay loans. This is world of microfinance.

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

small-scale financial services for both credits and deposits that are provided to people

who farm or fish or herd; operate small or micro enterprises where goods are produced,

recycled, repaired, or traded; provide services; work for wages or commissions; gain

income from renting out small amounts of land, vehicles, draft animals, or machinery and

tools; and to other individuals and local groups in developing countries, in both ruraland urban areas.

In the Indian context terms like "small and marginal farmers", rural

artisans"

And "economically weaker sections" have been used to broadly define

micro-finance

customers. The recent Task Force on Micro Finance has defined it as

"provision of thrift,

credit and other financial services and products of very small amounts to

the poor in

rural, semi urban or urban areas, for enabling them to raise their income

levels and


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improve living standards".

Microfinance services are provided by formal institutions such as rural

banks and

Cooperatives; semiformal institutions such as non-government

organizations; and

Informal sources such as moneylenders and shopkeepers. Institutional

microfinance is

defined to include microfinance services provided by both formal and

semiformal

institutions. Microfinance institutions are defined as institutions whose

major business is

the provision of microfinance services. At present, a large part of micro

finance activity is

confined to credit only. Women constitute a vast majority of users of

micro-credit and

savings services.

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

socioeconomic

characteristics, residing in the locality. The SHG concept is most

appropriate

and can succeed in our country only if and when a holistic approach is

imbibed in the

Promotion of SHGs as self-sustaining local organizations. However bank

linkages for


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

SHG has an average size of about 15 people from a homogenous class.

They come together for addressing their common problems. They are

encouraged to make voluntary thrift on a regular basis. They use this

pooled resources to make small interest bearing loans to their members.

The process helps them imbibe the essentials of financial intermediation

including prioritization of needs, setting terms and conditions, and

accounts keeping.

MICROFINANCE INSTITUTIONS IN INDIA

A range of institutions in public sector as well as private sector offers

micro

finance services in India. They can be broadly categorized into two

categories namely,

1. Formal institutions

2. Informal institutions.

The former category comprises Apex Development Financial Institutions,

Commercial Banks, Regional Rural Banks, and Cooperative Banks that

provide micro finance services in addition to their general banking

activities and are referred to as micro finance service providers.

On the other hand, the informal institutions that undertake micro

finance services as their main activity are generally referred to as micro

Finance Institutions (MFIs). While both private and public ownership are

found in the case of formal financial institutions offering microfinance

services, the MFIs are mainly in the private sector.

The micro finance service providers include apex institutions like

National Bank for Agriculture and Rural Development (NABARD), Small


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

Kosh (RMK).

The micro finance initiative in private sector can be traced to the

initiative undertaken by Ms.Ela Bhatt for providing banking services to

the poor women employed in the unorganized sector in Ahmedabad City

of Gujarat State.

NABARD during the early eighties conducted a series of research studies

in association with MYRADA (a leading NGO from South India) and also

independently which showed that despite having a wide network of rural

bank branches that implemented specific poverty alleviation programmes

and self-employment opportunities through bank credit for almost two

decades, a very large number of the poorest of the poor continued to

remain outside the fold of the formal banking system. NABARD, however,

also took a conscious decision to experiment with other successful

strategies such as replicating Grameen, wholesaling funds through NGO-

MFIs.

The dominant model of microfinance the group lending model

pioneered by the Grameen Bank in Bangladesh socializes the costs of

lending to poor women by providing them access to credit on the basis ofsocial collateral obtained through membership in borrower groups.

Here social capital helps correct for imperfect information about

borrowers lacking in formal credit and employment histories and

substitutes for collateral by ensuring against default through social

sanction and peer enforcement.


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BACKGROUND

The NABARD led Pilot Project commenced with the support of the Central

Bank of the country, i.e., Reserve Bank of India, from 1992 onwards

aimed at promoting and financing 500 SHGs across the entire country,

the SHG- bank linkage strategy has come a long way. However, NGOs

and MFIs acted as a catalyst for change and helped in bringing about

such paradigm shift. They were very successful in combining social and

economic agenda with synergistic effect. They also recognized

sustainability as the core factor in development

The statistics in this field are mind-boggling. During the period April

2003 to March 2004 - 361,731 new SHGs were financed by banks to a

tune of Rs 18.55 billion (US $ 412 million) by way of loans. Cumulatively,banks have lent Rs 39.04 billion (US $ 867 million) to 1,079,091 SHGs.

NABARD has extended a refinance of Rs 7.06 billion (US $ 156 million) to

banks during 2003-04 bring the cumulative refinance amount to Rs

21.24 billion (US $ 472 million).

These successes have been achieved only due to strict monitoring and

functioning of the NGOs and MFIs. For example, the Non Governmental

Organizations (NGOs) and Microfinance institutions promoting SHGs

must abide by the international best practices for microfinance, which

suggests that good financial analysis is the basis for successful and

sustainable microfinance operations leading to the success of the SHG

concept. With this understanding of the world of MF, this research was


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carried out in accordance with the famous phrase If you want to

evaluate the forest, look at the trees.Thus it is important to evaluate an

institutions performance with regard to different areas of its operation

i.e. product, service, delivery, etc. Microfinance as a developmental and economic

tool has caught the imagination of banks and other financial institutions, and NGOs in

India.

NGOs newly involved in microfinance tend to point to high repayment

rates as an indicator of their success. If there is one universal micro-

credit doctrine, it is that repayment rates of close to 100 percent are

within reach if the microfinance institutions conduct their operations

along "best practice" lines. "Best practice" explanations for good

repayment rates include high frequency collection schedules, tight

controls, a good management information system, loan officer incentives,

good follow up, and a quick jump on delinquency. On the borrowers'

side, the effects of peer pressure in group based schemes, and the

attractiveness of products with relatively low transaction costs also

explain good repayment rates.


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Research Objectives

Objectives of the study:

1. To study the microfinance by banks in Karnataka.

2. To compare the performance of private sector banks with that of public sector banks in

terms of microfinance provided.

3. To examine the role by banks in the development of SHGs in the realm of

microfinance.

RESEARCH PROBLEM

India is the largest emerging market for microfinance. Over the past decade, the

microfinance sector has been growing in India at a fairly steady pace. Though no

microfinance institution (MFI) in India has yet reached anywhere near the scale of the

well-known Bangladeshi MFIs. The sector in India is characterized by a wide diversity of

methodologies and legal forms. However, very few Indian MFIs have achieved

sustainability yet.

This research attempts to study the growth of microfinance in Karnataka and

different state and evaluation of private and public sector banks in this field.


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THEORETICAL FRAMEWORK

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

the world. Indian microfinance has lapped up the Grameen blueprint; it has replicated

some aspects of the Indonesian and the Bolivian model. In addition to the imported

artifacts of microfinance, we also have the home-grown model of self-help

groups(SHGs).

This study aims to understand the economic attractiveness of microfinance both to NGOs

and to commercial banks; the relative merits of various delivery channels; the issue

of growth; and finally, what lies beyond micro credit.

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

products, should be provided for the poor, as quickly as possible. The most important

reason is that all these services are needed by the poor, especially by poor women who

predominate among the clients of microfinance. They need savings facilities for

safekeeping and to tide them over food deficits and other periodic emergencies, as well as

to accumulate larger amounts of funds for the marriage of their daughters and the

purchase of productive assets. Micro-credit is needed for investment in income-

generating activities, activities, so as to break out of the vicious cycle of poverty.


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Life and large livestock insurance are needed so as not to burden survivors with debt, and

to be able to cope with the death of a large farm animal purchased with loan funds.

As far as savings facilities and micro-credit are concerned, the usually strong demand

from poor women is sufficient evidence.

A second important reason for NGO-MFIs to provide clients with an integrated set of

microfinance services is that they promote the early attainment of institutional financial

break-even and sustainability, without which NGO-MFIs will not be able to serve the

poor for long. Not only do loan client savings provide an obvious cushion for timely

repayment; but even more important, client

savings provide the basis for financial intermediation that makes possible the efficient

supply of micro-credit to its clients. Normally, savings are an alternative and relatively

cheap source of funds for NGO-MFIs, because the interest rates usually are less than

those that have to be paid for debt. Therefore, by maximizing its savings mobilization, an

NGO-MFI should be able to minimize its average cost of funds. This in turn should

maximized its margin at any given interest rate to its clients, and thereby hasten the

attainment of break-even and profitability. Insurance products also promote the

attainment.

What is micro-credit?

Micro credit can be defined as the extension of small loans to population, too poor to

qualify for traditional bank loans. These schemes are characterized by relatively small

loans, a few hundred dollars at most. The repayment period is relatively short, about a

year or so. Women are the major beneficiaries of these schemes, and the destination of

the funds primarily includes agriculture, distribution and trading, small craft, processing


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industries and consumption credits too. The administrative structure is generally light and

the entire process is participatory in nature.

The core issue for poor was the access to credit, rather than cost of credit. In fact one of

the contributions of microfinance can possibly be the end of interest rate debate.

Microfinance has proved time and again that it is access and not interest rates that are a

constraint for the poor.

Another discovery followed, that the poor can and will save, and can indeed use a wide

range of financial services such as remittances facilities and insurance products. The most

well known and cited international example of a micro credit institution is the Grameen

Bank in Bangladesh.

PLAYERS IN MICROFINANCE SECTOR

The different actors on the basis of the roles they play in building of the rural financial

structures depending on their needs & goals.

i) The Rural poor

Perceive thrift as their strength as also as the bonding factor among themselves

Realise that timely and adequate credit was preferable and productive than

subsidies and doles.

They need hassle-free delivery mechanisms.

ii) NGOs

Act as catalysts of change

Combine social and economic agenda with synergistic effect


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Recognise sustainability as the core factor in development

iii) Banking system

Accept SHG-bank linkage as a cost effective means of reaching the poor Accept peer pressure as collateral substitute for excellent recovery of loans

iv) Government

Formulate supportive policy framework

Encourage routing of social programmes through SHGs

v) Reserve Bank of India

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

Liberalise interest rates and deregulated interest rate structure for micro credit,

leading to flexibility in lending rates.

vi) NABARD

Provides inputs in capacity building for banks and partner agencies

Promotes the idea of organising thrift and credit groups among the NGOs as an

add-on activity and encouraged linking them with banks.

MODEL WISE LINKAGE PROGRAMME

Three different models of credit linkage have been evolved and the model-wise

status of credit linkage as on 31 March 2004 is as follows:

Model I: SHGs formed and financed by banks

In this model, banks themselves take up the work of forming and nurturing the

groups , opening their savings accounts and providing them bank loans. Up to

march 2004, 20% of the total number of SHGs financed wee from this. This


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

increased role of banks in promoting and nurturing SHGs.

Model II: SHGs formed by formal agencies other than banks, NGOs and others,

but directly financed by banks.

This model continues to have the major share, with 72% of the total number of

SHGs financed up to march 204, here NGOs and formal agencies in the field of

microfinance act only a s facilitators, they facilitate organizing, forming and

nurturing of groups and train 5them in thrift and credit management. Banks give

loan directly to these SHGs.

Model III: SHGs financed by banks through NGO s and other agencies as

financial intermediaries

This is the model where in the NGOs take on the additional role of financial

intermediation. In areas where the formal banking system faces constraints the

NGOs are encouraged to approach a suitable bank for bulk loan assistance. This,

in jkturn , is used by the NGO for on lending to the SHGs. In areas where a very

large number of SHGs have been financed by bank branches, intermediate

agencies like federations of SHGs are coming up as link between bank branch and

member SHGs.These federations are financed by banks, who, in turn, finance

their member SHGs. Other agencies like NBFCs are also coming up to take up

this role. The share of cumulative number of SHGs linked under this model upto

march 2004 continued to be small at 8%.

In any model the most important element of microfinance sector is the SHG-Slef

help group. the self help group indicates:

S-Savings H-Honesty G-Growth

E-Earnings/Employment E-Economy R-Resources

L-Learning L-Leadership O-Opportunities

F-Friendship P-Productivity U-Unity

P-Progress


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Assessing a self help group is a vital component.

ASSESSING A SELF HELP GROUP

The norms for SHGs in a particular place may have to be developed keeping in view the

local conditions. The above pattern is only a model and indicative one and could be used

as the basis for developing suitable norms for financing SHGs is it banks or any other

financing institution. A few proactive commercial banks, Regional Rural Banks and

Cooperative Banks have already introduced their own norms and the same is being

followed by the financing units.].

[This note may be read with NABARD circular letter dated February 2000, which also

shares different formats for appraising a SHG for finance].

For any financing institution, appraisal is very important for ensuring the utility of the

loan and repayment of the loan. Bankers generally appraise the project and the borrower.

In case of SHG financing, most of the project appraisal norms like assessing the cost

benefit and profits will not be workable due to the peculiarities of SHG financing. For

considering a loan application for financing the Financer has to evaluate the capacity and

character of the prospective borrower. SHGs also being customers have to be appraised

before extending credit facilities. But then assessment of creditworthiness of a SHG is

very different from that of an individual. SHGs are not to be assessed in terms of their

ability to provide collateral or guarantees of net worth. The SHGs have to be assessed in

terms of Group dynamics like cohesion, vibrancy, goal-oriented action, participation of

members, democratic decision and collective leadership. The appraiser has to see whether


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the group is functioning, actually as a group, why the members have come together,

whether it is for obtaining loan from bank or the group sees other purposes, what is the

group discipline and whether it is sustainable.

The basic principles on which the SHGs function are:

i. The members of the groups should be residents of the same area and must have an

affinity. Homogeneity of relationship could be in terms of caste/occupation/gender or

economic status (which is critical).

ii. Savings first, credit thereafter

iii. SHGs should hold regular meetings

iv. SHGs should maintain record of financial and other transactions

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

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

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

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

ix. Group liability and peer pressure to act as substitutes for traditional collateral.


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For assessing a Self Help Group the important aspects that a financer should look into

include;

1. Norms for functioning : The SHG should have developed some kind of norms

for its functioning the norms should be covering major areas of its functioning as well as

the decision making processes, leadership etc., Norms generally relate to

a. Membership

b. Meetings - time, periodicity

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

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

charged, repayment

period etc.

e. Fines - in case of default in attending meetings, savings and credit repayment. group

may also levy any fines for any deviant behavior etc.

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

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

to be done etc.


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The above norms may be written or oral. They may be decided in the initial meetings or

they may evolve over a period of time depending upon the need of the group. The

important aspect to be looked into are :

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

Whether the members are aware of the norms (even if they are oral) and

understand them,

Whether the norms are implemented.

2. Meetings

The group decides the periodicity of the meetings i.e., weekly, fortnightly or monthly.

They also decide on the time of the meeting. Decision on time and periodicity helps in

regular conduct of meetings. The regularity in the holding of the meeting and the

attendance during meeting gives an indication bout groups functioning. Therefore a

Financer should see whether.

The meetings have been held regularly

The attendance in the meetings The members are punctual and stay till the end of the meeting

Are there any sanctions for the delinquent members ?

The Financier can use his observations during the meetings and the meeting register to

get data on this appraisal aspect.

3. Maintenance of Books

Whether group is maintaining the basic books that will give details of its functioning and

accounts of the group is an important criterion to be judged. The books should give the

details of number of meetings held, decisions taken in the meetings, amount of savings of

the members and credit availed, the total savings of the group and repayments. Who

maintains these books is another important criterion for judging the group. Do members


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maintain it, if not are they making efforts to achieve basic numeracy or literacy so that

they can start doing it themselves.

Financer has to verify :

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

Whether member-wise record of saving and credit are maintained.

Whether the records are upto date.

Whether all members are kept informed of their savings and credit balances from

time to time.

In case of illiterate groups whether what is the system followed, does the group

verify the books maintained by NGO/outsider.

Whether systems have been developed to ensure safe custody of cash.

4. Leadership

Two or three group members are elected as leaders*/ book-writers. Initially the opinion

leaders may be the leaders and over a period of time they are expected to be take turns.

The group leaders are expected to a) regularly convene and conduct the meetings, b) help

the group members in taking decisions, c) resolve conflicts, d) maintain books of account

and e) approach bank branch for operation of accounts.

The aspects that are to be seen are :


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Whether the leaders have been elected and rotated

Whether they help in democratic functioning of the group

Whether there is a conscious attempt to groom other members to take up

leadership

Are they marginalizing the benefits (especially loans)

5. Participation and Awareness of Group Members

Are the Members aware of the purpose of group formation, the operations and activities

of the group viz. The savings and the credit of the group as well as the individual

members savings and credit details.

Do they participate in group discussions and decision making

Do they help solve the problem that are raised in the meetings

Do they work cohesively and have transparent dealings

The democratic character of the group may be judged by attending one or two meetings

and talking to individual members. The awareness level of members helps in healthy

functioning of the group and resolution of conflicts within the group.

6. Savings :

The group decides on the amount of savings as also its periodicity. It has to be seen

whether the saving, as decided upon, is regularly made, how the defaults are dealt with

and whether the system is modified as per the requirements of the members.

7. Credit :

The following aspects to be looked into while assessing the credit function of the group:


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The decision making process of selecting loanees.

The system followed in assessing credit requirement of individual members and

the amount to be sanctioned.

The system of monitoring the credit. The repayment performance of members and incidence of defaults besides the

effectiveness to deal with such defaults; whether the concept of ` peer pressure is

working.

8. Self Reliance of the Group

Can the group function on its own without the support of the NGO is an important

criterion for assessment? The level of dependency on the NGO/promoter of the group andimpact of withdrawal of NGO/promoter on the group is to be assessed.

TABLE-1

RATING OF SELF HELP GROUPS

SL.NO CATEGORY CRITERIA MARK KEY

1 COMPOSITION a. Membership is

homogeneous

b. No homogeneityin membership

10

5

The rating is based on the

judgment of assessingofficial

2 AGE OF THE

GROUP

c. One year and

above

d. Six months and

above but less than a

year

10

5

There is no need to

evaluate an SHG if it is

less than six month old

(ignore marginal shortfallsup to 1 month)

3 WEEKLY

GROUPMEETINGS

e. Four meetings per

month

f. 2-3 meetings permonth

g. 1 meeting permonth

10

8

5

The total number of

meetings conducted duringthe last 3 months may be

divided by 3 to arrive at

average no. Of groupmeetings.


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4 ATTENDANCE h. More than 90%

i. Between 70%and 90%

j. Less than 70%

10

5

3

See explanation 1 at the

end.

5 MINUTES BOOK k. Written in detail

l. Maintained, but

not in detail

10

5

Peruse of minutes bookpertaining to meetings held

during the last 3 months.

6 PARTICIPATION

IN GROUPDISCUSSION

m. Participation by

only a few members

n. Participation bymajority of members

5

10

Peruse minutes book (if

rating is 10 for item 5)

Observe during a couple ofgroup meeting

Interact with members7 SAVINGS

(FREQUENCY)o. 4 times a month (by majority members)

p. 4 times a month(but not by majority)

q. 2-3 times a month(by majority members)

r. 2-3 times a month

(but not by majority)

s. 1 time a month

day (by majority

members)

t. 1 time a month

(but not by majority)

10

8

8

5

3

1

Step 1 : Take the averageno. Of members making

saving during last 3

months.

Step 2 : Compare this with

the total no. Of members

Step 3 : Majority mean >

60%

Step 4 : For average no.

Of meeting, follow ratinggiven for item 3 above.

Note : Please seeexplanation 2 at the end.

8 SAVINGS &LOAN

RECOVERY

(MODE OF

COLLECTION)

u. Collected ingroup meetings

v. House - to housecollection

10

5

Ascertain form groupleaders and members in

this regard also, peruse

minutes book.

9 STYLE OF

FUNCTIONING

w. Democratic and

Transparent

10 Peruse minutes book,

Interact with members,


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AND GROUP

DECISIONS

Transparent

x. Decisions takenby few dominant

member / members /

group leaders

0 Observe in few group

meetings, Ascertain

whether periodicalelections are conducted for

the leadership and whether

all decisions are in groupmeetings and ondemocratic lines.

10 SANCTION AND

DISBURSEMENT

OF LOANS

y. Selection of

borrowers in group

meetings

z. Sanction and

disbursement of loans ingroup meetings

aa. Loan terms andconditions discussed in

group meetings and

recorded in minutes

bb. Utilisation of loans

reviewed regularly ingroup meetings

cc. Recovery of loansreviewed regularly in-

group meetings.

2

2

2

2

2

Ascertain the position from

group leaders/ members

Peruse minutes book

(Each item will get marks

shown against it, if theconditions are satisfied)

11 INTEREST ON

SHG LOANS

Uniform rate

irrespective of source of

funds

Different ratesdepending on source of

funds

Interest rates varyaccording to the purpose

of loan

Uniform interest rate for

all purposes

5

3

5

3

Peruse loan register.

Ascertain from group

leaders / members

12 UTILISATION

OF SAVING FOR

a. Above 80% 10 Compare savings

outstanding on a given date


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LOANING b. Above 50% and

upto 80%

5 with loans outstanding on

the same date to obtain the

percentage. Nil mark forutilisation of savings below

50%

13 RECOVERY OFLOANS c. Dues notrecovered in respect of

10% or less of totalno.of loan accounts

d. Dues notrecovered between 10%

and 30% of total no.of

loan accounts.

10

5

Even one instalmentunpaid without

authorisation by the groupis treated as dues not

recovered. Count such

accounts and compare

them with total no. Of loana/c. Also, peruse minutes

book for authorisation for

non-payment

14 BOOKS OF

ACCOUNTS

e. Attendance cum

minutes book

f. Savings Register

g. Loan Ledger

h. Bank Passbook

3

3

3

1

Each record / register, if

maintained properly andupto date, will get marks

shown against each.

15 BYLAWS /

GROUP RULES

i. Known to all

members

j. Known to most of

the members

k. Not known to

many members

10

5

0

Ascertain from the member

through interaction

TOTAL MARKS 150

SELECTION CRITERIA OF SHG FOR LINKAGE TO BANK LOAN


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1. SHG scoring more than 120 marks out of maximum of 150 marks could be chosen

for credit linkage

2. SHG scoring less than 120 marks will have to be further developed before linkage.

The areas for taken up after 3 months.

NABARD & microfinance

mF - NABARDs Vision and Mission

Vision

To facilitate sustained access to financial services for the unreached poor in rural areas

through various microFinance innovations in a cost effective and sustainable manner.

Mission Accomplished

Provision of financial access to 16.7 million poor families through formation and credit

linkage of 1,079,091 self help groups as on 31 March 2004.

Mission-Ahead

Formation and credit linkage of 585,000 new self help groups by the year 2007 with

60% of them coming from 13 priority underdeveloped states of the country.

Facilitate mature SHGs to graduate from microFinance for consumption or production

credit to microEnterprises.


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microFinance- NABARD' s Strategy

Overall Strategy

Forming and nurturing small, homogeneous and participatory self-help groups

(SHGs) of the poor has today emerged as a potent tool for human development.

This process enables the poor, especially the women from the poor households, to

collectively identify and analyse the problems they face in the perspective of their

social and economic environment. It helps them to pool their meagre resources,

human and financial, and prioritise their use for solving their own problems.

The emphasis on regular thrift collection and its use to solve immediate problems

of consumption and production not only helps to meet their most urgent needs,

but also trains them to handle larger financial resources more skillfully, prudently

and with a more lasting impact.

Encourage SHGs to become a forum for many social sector interventions.

SHG-Bank Linkage Programme

Facilitating SHGs to access credit from formal banking channels. SHG-Bank

Linkage Programme has proved to be the major supplementary credit delivery

system with wide acceptance by banks, NGOs and various government

departments.


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Region-specific Initiatives

NABARD has intensified its efforts for roping in new partners for promotion and

linkage of groups in regions where the growth of groups has not been

commensurate with potential.

Priority has been assigned to awareness- building and for identification of NGOs

and other partners in 13 priority states, which account for 70% of rural poor in

the country.

Capacity Building Initiatives

NABARD has supports/ sponsors capacity building programmes for various

partners in the field of microFinance to sensitise and equip them with concept &

nuances of SHG bank linkage programme. Upto the end of March 2004 about

687,000 persons have been trained by us through our regional offices, training

establishments, resource NGOs and partner agencies.

NABARD provides training inputs on SHG financing to training establishments

of participating banks, to help them to internalise the training requirements at

their level.

NABARD gives technical support to banks to evolve suitable intermediate

structures like Farmers' Clubs (Vikas Volunteer Vahini Programme of the

National Bank) to increase the outreach of their branches in promotion and

linking SHGs

NABARD supports and helps banking institutions (especially RRBs &

cooperative banks) to take on the role of Self Help Promoting Institutions

(SHPIs)


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Support to Governments

Necessary assistance is provided to the governments by NABARD for

dovetailing mF practices with the poverty alleviation programmes

NABARD also encourages the association of Panchayati Raj Institutions ( PRIs )

in adopting group processes for maximization of empowerment.

NABARD , in association with Lal Bahadur Shastry National Academy of

Administration, Mussoorie conducts tailor made exposure programme on self

help group and microFinance for senior and middle level officers of Indian

Administrative Services (IAS) who are posted as district collectors/ Chief

Executive Offices of local administrative set ups (Zilla Parishad)

Support to NGO Partners

Several steps have been taken by NABARD for capacity building of NGOs

which partner in promotion and nurturing of SHGs. The emphasis is on involving

a large number of NGOs. Special focus is on those NGOs participating in

watershed development, health, literacy and women development, to encouragethem to take up promotion, nurturing and linkage of SHGs as an ' add-on' activit

NABARD has a scheme of part-financing the cost of promotion of groups by

NGOs.

NABARD has developed specialized programmes for use by CEOs of NGOs for

appropriately envisioning this as an add-on concept. Separate programmes have

also been designed for NGO field staff to appreciate the nuances of SHG

functioning.

Alternate mF practices

The NGOs and other local bodies at village, block and district levels in the North

Eastern States are encouraged to take up alternative micro-credit delivery


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mechanisms through direct funding.

Formation and operation of SHG Federations is supported and encouraged by

NABARD. Similarly, networking of NGOs is also encouraged.

Coordinating mF Efforts in India

NABARD coordinates the mF activities in India at international/

national/state/district levels. These include organizing international/national

Workshops, Seminars, etc for experience sharing, Organizing National and State level

Meets of Bankers and NGOs etc.

Dissemination of best practices in SHG / microFinance.

Monitoring and Review

Block/district/state level review meetings are organised and/or organised by

NABARD. The relative documentation and database is also carried out by NABARD.

In addition, periodical Monitoring studies are conducted through NABARD/Bank

Officers. Internal Impact Studies and are conducted by NABARD periodically.

mF- Regulation and Supervisory Aspects

This Section looks at the emerging requirement for regulation and supervision of

microFinance Institutions in India and introduces the issues and policies related to it.

A. Emerging microFinance Institutions (mFIs)


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Banks provide mF service as one of the many services provided by them, along

with their other conventional business. Therefore, banks can be classified as "mF

service providers".

There are other agencies and institutions which provide mF service for the poor,

as a predominant activity. These institutions are called microFinance Institutions (

mFIs).

NGOs have, over the past two decades, started financial intermediation as an add-

on activity, to enhance acceptability of their social welfare programmes. Over the

years they have emerged as the major microFinance Institutions, although most of

them continue with their social sector interventions.

Three broad categories of mFIs are:

1. Not for Profit mFI, comprising NGOs, Trusts and Not-for-Profit Companies;

2. Mutual Benefit mFIs, mostly State and National Level Cooperatives; and

3. For-Profit mFIs, which are classified as Non Banking Financial Companies.

It is estimated that more than 500 NGOs are providing mF services to the

poor at present

Similarly, 2155 NGOs have participated in SHG-credit linkage

programme till March 2002.

ATask Forcewas set up by NABARD to look into the entire gamut of mF and mFIs to

catalyse their growth.

B. Transformation of Donorship into Ownership of mFIs

Recognition of NGO-mFIs

Although not legally recognised as such, the role of NGOs as providers of

financial services has been accepted by Government of India and RBI.

There are however, certain inherent restrictions in the financial activities of the

NGO-mFIs as regards

mobilisation of savings

lack of equity concept for leveraging bank loan

uncertain status as regards taxation on interest earned


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inability to transfer resources to form a new company

With a view to professionalising mF, certain NGOs have promoted exclusive

Non-Banking Financial Companies for mF.

Entry of Foreign Capital into mF

1. At present, certain restrictions are imposed on entry of foreign equity into rural

credit and microFinance.

2. The minimum capital requirement even for an mF-NBFC is Rs. 20 million, the

same as for any other company.

Areas for transformation of mFIs

Development of systems for Resource Mobilisation by the mFIs in a sustainable

manner.

Building managerial competence and creating qualified manpower

Managing transition from a subsidy-dependent culture to a commerical culture

Provision of sufficient protection in the laws for non-profit organisations.

C. Organisation and Economics of Supervision

Banks as mF service providers are supervised by RBI and NABARD as part of

their overall banking business

The mF activities of the NGO mFIs are unregulated and unsupervised

Only mFIs registered as Cooperatives and NBFCs are presently regulated. Need

for regulation

Savers with mFIs are legally not "members" of the mFIs, but only "clients".

Protection of the savings of the poor is needed

Infusion of financial discipline into the credit activities of mFIs is necessary. Task

Force on mF considers formation of "Self Regulatory Organisations" ( SROs) to

be the best suited for regulation of mFIs. Such SROs willhave to emerge from


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suitable associations of mFIs. Functions of Self Regulatory Organisations The

following functions have been envisaged for the proposed SROs:

Registering of mFIs

Setting of minimum performance standards

Evolving accounting systems for mFIs

Conducting audit and inspection of mFIs

Representing mFIs in different fora

Innovative Pilot Projects

The phenomenal growth rate of microFinance sector, especially the SHG bank linkage

programme has posed number of issues and challenges which need immediate attention.

In response to this NABARD has initiated a number of innovations basically as an

investment for posterity. At the core of these innovations is a desire to improve the

outreach and sustainablility of the programme. Some of the pilot projects designed and

initiated recently are summarised here.

Introduction of Smart Cards- Application of IT in SHG Bank Linkage Programme

There are now many branches of Commercial Banks and Regional Rural Banks that

service more than 200 SHG accounts which were hitherto considered impossible.

Howsoever welcome the trend may be, the burgeoning numbers have also brought to the


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fore a host of issues relating to tracking, monitoring and adequately servicing SHG

accounts. It was felt that the best way to deal with the huge numbers would be to take

recourse to new technologies available.

Also in general, the branch manager in the rural areas is hard pressed for time and as a

result does little for developing the business of the branch or for scouting for new

business opportunities for the branch. It was felt that use of Information Technology in

the form of processor/memory cards for SHGs and other clients coupled with automation

in a branch would serve to solve these vexed issues and leave adequate time for business

development work.

NABARD has therefore decided to experiment with about five branches per RRB in

different regions of the country. Introducing Processor/Memory Cards for active

clients and SHGs & automation of book keeping in SHGs is expected to reduce paper

work, save time and thus improve the efficiency of the field worker. This is also expected

to reduce the scope of manipulation, reduce unintended leakages and also maintain up to

date books at SHG level.

The first pilot project on smart cards has been launched with Sri Visakha Grameena Bank

in Andhra Pradesh, which has been one of the front-runner banks in financing SHGs. It isexpected that with enhanced use of rural-oriented technology, the bank would be able to

provide value addition to services being offered to the rural clients and further expand its

outreach in a sustainable manner.

The users of processor/memory cards would include SHGs and other good customers of

the bank who are its regular customers. About 500 such customers, who would perform

all banking transactions on a fast track, would be selected in each bank branch, Time

taken for banking by these regular good clients is likely to be reduced considerably. Use

of processor/memory cards by SHG customers also adds another set of advantages like

effective book keeping, tracking and monitoring of SHGs, reducing the hassles of

illiterate SHG members seeking the assistance of the NGO / promoter/ local book writer

to perform these functions. In addition to prompt upkeep of books by SHGs, auditing of


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books of accounts, computing interest, could also be ensured with this system. The

transaction data of each SHG collected from the field could be consolidated at branch

office to generate MIS reports, which the branch staff could effectively use to track the

functioning of SHGs, ensure prompt credit linkages and recovery. This, coupled with

automation of back office operations of the branch would ease the branch manager of a

lot of time spent on routine matters and they could use the spare time to build new

customers and enhance business relations.

Pilot Project for linking SHGs with Post Offices

With more than one and a half lakh outlets, more or less evenly spread all across the

country, the outreach of the post offices is unmatched. Add the "neighborhood friend"

image that the ubiquitous postmen enjoy-especially in the rural areas, and you have a

near perfect "doorstep" credit delivery channel-waiting to be tapped.

On the other hand, there are many bank branches /PACS, which are either ill equipped in

terms of their financial soundness/ infrastructure or unwilling to take up the linkage

banking programme. Another internationally acclaimed channel of providing micro

finance i.e. MFIs, is yet to prove that in our country they are capable of attaining the

outreach of the formal institutions in a medium term or even long term time frame.

This has prompted NABARD to take up a pilot project on linking SHGs through post

offices. A Revolving Fund Assistance (RFA) of Rs.34 lakh has been sanctioned to select

post offices in Kancheepuram and Pudukottai districts in Tamil Nadu for providing loans

to 200 SHGs promoted by NGOs. Grant assistance has also been sanctioned under the

project for meeting initial expenditure on publicity & awareness creation. The rate of

interest, which would be shared between NABARD and the post office in the ratio of 2:1,

would be 9 %. The project would run up to March 2007.

The project would test the efficacy of the Department of Posts in providing micro finance

services to rural clientele and help NABARD in deciding the future strategy for

expansion of the linkage programme.


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Joint Liability Groups

The pilot project on financing Joint Liability Groups aims at developing effective credit

products for mid segment clients, which reduce risk and transaction costs for the banker

and also introduce a greater degree of flexibility for the credit user to determine his/her

needs and priorities. This middle segment, which predominantly performs agriculture

related activities, often requires quantum' s of credit larger than micro-credit, it also

requires credit for longer durations it is also at times linked to seasons, repayments are

normally met at the end of harvest seasons only. In essence, it is about hassle-free credit

for agriculture and other rural enterprises".

A Joint Liability Group (JLG), proposed to be established under the pilot project, is an

assembly of 5-10 member clients (new or existing) for a bank, informally recognised by

the bank as a group. The JLG members offer an undertaking to the bank that enables

them to jointly receive such amounts as deemed eligible by the bank for pursuing any

individual or joint activities- as found suitable by the group. The main purpose of JLG is

to facilitate mutual loan guaranteeing and execution of joint liability agreement making

them severally and jointly liable for payment of interest and repayment of loan obtained

from the bank. The management of the JLG is to be kept simple with little or no financial

administration within the group. There could be different functional models of JLGs that

could be formed based on the need of the clients as also the comfort level and

understanding of the bank about its success. Thus the JLG approach could be either

credit-led or saving-led.

The project could be piloted in five/ ten banks located in diverse agro-climatic belts/

states. It will be implemented through five branches of each participating RRB or

cooperative bank. An average of 20 accounts of JLGs will be implemented per branch

and experimented to cover about 500 borrowers/bank (or about 100 members per branch)

as the first stage testing of this product and also refining its design and operational

details.


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The guidelines have been kept flexible giving the partner banks enough freedom to

implement the pilot, keeping the ground realities and context in perspective. National

Bank will provide, as grant assistance, Rs. 3.00 lakh for operational cost, during

implementation of the project. As an arrangement for the pilot project a special line of

credit limit by way of refinance will be made available to the participant banks.

Project on "Computer Munshi" - a self-sustaining mechanism to manage SHG

account and MIS

Quality and regularity of book keeping is the aspect of linkage banking, which is most

affected because of the widespread illiteracy amongst the poor SHG women. If ignored

for a long time, this has the potential to endanger the sustainability of the Groups.

Another related issue of almost equal importance is the MIS, which means passing on the

relevant information about the functioning of the SHGs to the concerned stakeholders

like SHPIs and banks.

PRADAN, an NGO, which has promoted more than 4000 SHGs, very strongly felt that

sustaining the groups would be a major problem if a proper accounting system and an

stronger MIS and were not put in place urgently. They, therefore came up with the idea of

Computer Munshies. The idea involves identification of skilled rural youth for the taskof higher order accounting by providing training as Computer Munshies (CM). The

trained individuals would be equipped with a computer and software to serve 100 to 300

SHGs. The SHG level meeting transaction statement will be send to the CM after every

meeting, which will be keyed in by the trained individual using the software which would

generate outputs like trial balance, member savings and loan balances. The SHG

promoter and the banker could also access data about SHGs from the CM on payment of

a fee.

The software (McFinancier) for the project has been developed by PRADAN with the

help of a Delhi based agency. It captures all the essential data- financial and non-

financial. The software also generates number of useful reports including 19 different

ratio analysis. The data could be aggregated at the cluster or block level to make


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assessment of the functioning of the groups in a specific geo-span. It also facilitates

financial analysis, drawing a trial balance, balance sheet, portfolio analysis, member level

impact - by capturing the base line data etc. The outputs generated could be useful to all

related stakeholders including bankers, social intermediaries and the SHG themselves.

To test the idea, NABARD has sanctioned a grant assistance of Rs.6.10 lakh to PRADAN

for establishment of 10 Computer Munshi Units in the states of Jharkhand and Orissa.

PRADAN would measure the effectiveness of the idea and the commercial viability of

the project, based on which the future strategy will be decided.

If the experiment works out well NABARD could consider financing establishment of

mF call centres with computers, which could be financed by banks. This experiment

could also be able to give us a lead as to whether this could serve as a fundable revenue

model. Alternatively the individual being trained for the purpose (SHG accounting) could

use the services of the local Internet caf or computer unit for completing the task and

generating print outs of the account sheets.

Grain Banks and SHGs

The tribal population in some parts of the country is known to use the concept of Grain

Banks (Grain Golas) for saving the grains during the harvesting seasons and using them

to meet their consumption requirements during the lean / dry periods. They also use the

arrangement for borrowing the grains for seed purposes at the time of sowing. in the past

also, some of the state and central government interventions in these backward regions

had attempted to create the infrastructure of Grain Banks. Currently, the need for

evolving a participatory food security system for backward tribal regions is being actively

debated. .


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The strong emphasis on group savings in kind and borrowing in kind under the Grain

Bank approach has significant similarities with the SHG Bank Linkage Programme; the

difference being that the savings and loans are in kind. The issue, therefore, is how to

facilitate monetization of the savings and loans in kind and integrate the traditional

approaches into the monetized microFinance system. Such an integration would enable

the poor tribal population to access need based financial services and also address the

issues of food and seed securities. These considerations have led to the launch of the

pilot project on Grain Banks

The Pilot Project, sanctioned to Antoday -an experienced NGO, is proposed to be

implemented in 17 villages in Thaumul Rampur Block of Kalahandi district in KBK

region of Orissa state. It involves promotion of 25 SHGs and formation of 3 GrainBanks. There would be one Grain bank for every 100 households. Apart from the

savings in cash, monetization of the savings-in-kind, as also loans to SHGs against their

stock of grains, would be considered by the Bank. Members would save and draw loans

both in cash and / or kind, depending upon their convenience. The Kalahandi Anchalik

Gramin Bank would extend loans to the SHGs against the stock of Grain banks and cash

savings of the Groups. The SHGs wouild utilize the bank loan to procure grains when the

price is low and for repayment of loan taken from Grain Bank.In due course the Grain

Banks could be linked with PDS and other Govt. Programs.

The project is likely to enable the poor to save in kind, raise resources against such

savings, provide access to self managed, participate in food security systems and also

provide access to seeds for sowing purpose in the times of distress.

SHG-Bank linkage programme in Karnataka

Karnataka, a pioneer in SHG-Bank linkage programme continues to manintain its

leading status in promotion and credit linkages of SHGs. While the NGOs and Women

and Child Development Department (WCDD, GoK) have been actively involved in


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promotion of majority of the SHGs in the state, all the banks have taken the responsibility

of linking these groups with the formal banking system. Over a period of time, some of

the Regional Rural Banks and Cooperative Banks in the state have deveopled the skill in

promoting SHGs on their own and assumed the mantle of Self Help Promoting

Institutions (SHPIs).The SHG-Bank linkage programme registered its progress in the

state of Karnataka by leaps and bounds during the year 2003-04.

Role of Government of Karnataka

The state government through its women and child development department (WCDD) as

its implementing agency, continued its mission of empowering rura poor woen in the

state through its stree shakthi programme. With the active involvement of the anganwadi

Workers in the state, the government realized its goal of promotion of a cuuative ONE

LAKH SHGs during the year. The state through capacity building of the SHGs in co-

ordination with NABARD and other reputed NGOs in the state.

The Swashakthi programme ,which is implemented in select districts of the state

through Karnataka State Women Development Corporation (KSWDC), played

its role in strengthening the women groups promoted under the programme. As on

31st amrch 2004, 2,120 Shgs have been promoted and 1599 SHGs have been

credit linked under the programme.

Role of micro-finance in alleviating poverty

Hunger is complex in its causes and solutions. It cuts across religious lines, language,

borders and gender. Through self-employment opportunities to people - both men and


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women, hunger can be reduced. But the two are not always related, meaning the poor are

not necessarily unemployed and all unemployed are not poor. The relationship depends

on the level of productivity and earnings that employment carries.

The relationship between gender specific employment and poverty is further complicated

by the fact that while employment is a phenomenon related to an individual, poverty is a

household phenomenon. It was found that the creation of women self-employment

opportunities through micro-finance has impacted on the poverty and related

characteristics of the household than the employment of the men. It was also found that

women tend to utilize their earnings more on basic needs of the household and

particularly, on improving the well being of their children. This however assumes that

women have greater control over their earnings and its utilization. The most promisingaspects of micro-finance programs especially with small savings and credit groups

of women, has been a demystification of the age old image of poor as non-

creditworthy' and a confirmation of the power of collective action[Mosely 2000].

Since early 90s, micro-finance has emerged as a major plank of donor poverty

alleviation strategies. It is also increasingly getting feminize as more and more

people argue for female targeting and an emphasis on facilitating women' s access to

financial services.

Micro-finance is moving from just a subsidy dependent activity to a serious business

proposition. The challenge ahead is to build and strengthen the limited institutional

capability of the retailers.

MICRO-FINANCE AND POVERTY REDUCTION

Given below is the demand for micro-finance and structure and characteristics

The sources of demand, products and services and characteristics of demand for

microfinance are explained below.

1. Source of demand - Households poorest [Rural and Urban]

Products and Services and characteristics of demand- Convenient access to safe and


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liquid deposit services, Passbook savings with unlimited withdrawal facility, Strong

demand for consumption and emergency loans with no collateral, Small size loans for

livelihood activities, Occasional loans for finance lumpy expenditures such as schools

fees, Service outlet and close proximity, Simple procedures, Low transaction costs

2. Source of demand -Poor [Rural and Urban]

Products and Services and characteristics of demand - Convenient access to safe, liquid

deposit facilities, Return on savings, Passbook savings with easy withdrawal facilities,

Term deposits with small denominations and regular interest payments, Money transfer

services, payment services, Insurance services for livestock, Consumption and emergency

loans, Small loans for livelihood activities, Loans to finance lumpy expenditures, Low

transaction costs

3. Source- Enterprises Micro-farms [Rural]

Products and Services and characteristics of demand - small loans for working capital

(fertilizer, seeds), small loans for fixed capital (purchase Products and Services and

characteristics of demand of simple tools, land improvements etc), below informal

market interest rates, easy access and minimal transaction costs, seasonal demand,

deposit facilities (safe, liquid, convenient), return on deposits

4. Soucre- Fisheries, Livestock and Poultry [Mainly Rural]

Products and Services and characteristics of demand - working capital loans for feed,

fixed capital loans (tools, purchase of chicks), small loan size, substantial demand from


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livestock sector, deposit services (safe, liquid and convenient), insurance services

5. source- Non-farm [Rural and Urban]

Products and Services and characteristics of demand - deposit services (safe, liquid and

convenient), money transfer, payment services, insurance and leasing services, a wide

range of enterprises, demand for loan is not seasonal, demand is large for working capital

loans, relatively large loans within the confines of micro-credit, minimal transaction costs

and easy access

Source: Asian Development Bank

What is Unique about the SHGs and Linkage Programme?

Decision

Members make decisions collectively. SHG concept offers opportunity for

participative decision making on conduct of meetings, thrift and credit decisions. The

participative process makes the group a responsible borrower

Financial services

SHGs provide the needed financial services to the members at their doorstep. The

rural poor needs different types of financial services, viz. Savings, consumption


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credit, production credit, insurance, remittance facilities etc. The platform of SHG

provides the possibility to converge these services.

Supplementary to formal banking

SHG linkage does not supplant the existing banking system, but it supplements it thus

taking full advantage of the resources and other advantages of the banking system.

Cutting costs

SHG linkage cuts costs for both banks and borrowers. In a study sponsored by FDC,

Australia, it was observed that the reduction in costs for the bankers is around 40 %

as compared to IRDP loans. The poor have a net advantage of 85 % as compared toindividual borrowing. Similar finding was also observed in a NABARD study.

NPA Savvy

The Linkage mechanism has proved that the repayments are as high as 95% - 100 %

Peer pressure as collateral

The SHG linkage emphasises peer pressure within the group as collateral substitute.

Quality clients

The SHGs are turning out to be quality clients in view of better credit management,

mobilisation of thrift, low transaction costs and near full repayments.

Client preparation

The members of the SHGs could over a period of time, very selectively graduate to

the stage of micro entrepreneurship and have been prepared with requisite credit

discipline.

Social agenda


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Available statistics indicate dependency of 35%-40% of rural households on non-

institutional sources for credit needs. SHG Linkage offers a better way of dealing

with the magnitude of social agenda. Many NGOs/ Governments have recognised the

SHG as a vehicle for carrying and deepening of their developmental agenda/ delivery

of services.

Exclusive poor focus

SHGs have exclusive focus on absolute have-nots, who have been bypassed by the

banking system. Social banking does not have any meaning if the lowest strata and

the unreached are not focused.

No-subsidy- dependence syndrome

The programme does not envisage any subsidy support from the government in the

matter of credit. The issue is to build capabilities and enterprise of the individual

members, blending with group cohesion and solidarity through training provided by a

SHPI to set the ball rolling for the SHG.

REVIEW OF LITERATURE

Literature review discusses the work of previous scholars that support, offer a counter

position, and provide a context for my study.

Methodology:

Reviewing the articles on this topic in the internet (WWW).

1. Microfinance An Introduction


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by- R.Srinivasan and M.S.Sreeeram

This round table focusses on issues relating to microfinance in India. The Indian

microfinance sector is a museum of several approaches found across the world. Indian

microfinance has lapped up the Grameen blueprint; it has replicated some aspects of the

Indonesian and the Bolivian model. In addition to the imported artifacts of microfinance,

we also have the home-grown model of self-help groups.

The round table discussion thereafter looks at four major issues the economic

attractiveness of microfinance both to NGOs and to commercial banks; the relative merits

of various delivery channels; the issueof growth; and finally, what lies beyond

microcredit.

2. Microfinance: Analysis of monthly cash flows of Self HelpGroups

byMs S Usha Nandhini, Dr P David Jawaharand

Mr M Shivachandran

The objective of this research has been to study the repayment patterns

of the SHGs. The analysis has been based on samples taken from Self

Help Groups operating in urban limits. Questionnaires and Direct

Interview have been used for data collection. The repayment pattern was

presumed to be the determinant of the success of a group. However the

analysis has brought to light several other factors which are

instrumental in determining the success and failure of Self Help Groups.

This survey also provided insights in studying the changes that have

taken place in the lives of the

poor and the variables that have contributed to these changes.

3.Microfinance in India-The Role Of Banks

January 17, 2005

By R.Anand

This project talks about various aspects in


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Access to rural financeSHG-bank linkage programme What is it? Outreach Viability

ImpactOther approachesGoing forwardThese articles have enabled me to understand the concept of microfinance and helped me

in the process of my research and provided a base for documentation.

REARCHMETHODOLOGY

Type of research

This study is a descriptive study which aims to compare the growth of microfinance

sector and contribution of banks in this field in Karnataka. This is based on the secondary

data published by NABARD.


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Scope of the study

The study aims at providing an in depth knowledge of microfinance, its operations

and benefits.

Sampling techniqueThe technique is convenient sampling. The sample taken is the commercial banks,

regional rural banks, cooperative banks and private banks.

Research tools

Secondary data collection (literature survey)

Sources: Publications of NABARD

Library

E-library

Data analysis

Averages, ratios Tables.

Analysis

Micro finance in Karnataka

Commercial Banks (CBs)

The SHG-Bank Linkage Programme became part and parcel of


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business for the 22 public sector banks and 03 private sector banks.

Canara Bank had credit-linked the highest number of SHGs (5,054) during 2003-04,

followed by Vijaya Bank (4,678), Syndicate Bank (1,397) and State Bank of India (

1,290). During the year, a number of CBs registered impressive growth in SHG-bank

linkage. Among the private sector banks, Karnataka Bank has significantly credit linked

SHGs.

TABLE-2

SHGs LINKED BY COMMERCIAL BANKS IN KARNATAKA

Year No of SHGs BankLoan% increase in the

SHGs over

previous year

%increase in theloan disbursed over

the previous year

(as on 31 (Rs. Lakh)

March)1997 1,425 206.00 137.8143 144.0559

1998 2,008 297.27 140.9123 144.3058

1999 2,974 473.61 148.1076 159.3198

2000 4,829 1017.60 162.3739 214.8603

2001 6,395 1452.00 132.4291 142.6887

2002 14,425 2426.24 225.5668 167.0964

2003 20,987 4539.58 145.4905 187.1035

2004 35,912 10227.38 171.1155 225.2935

The commercial banks have shown 225% growth in the disbursement of loan in the

previous year which depicts the reach of the commercial banks in Karnataka

Regional Rural Banks (RRBs)

The Regional Rural Banks financed SHGs significantly during 200304 in the State. All

the 13 RRBs in the State participated in the SHGBank Linkage Programme. The

achievement of RRBs as a percentage to the total registered an impressive


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increase in terms of SHGs linked, bank loan disbursed and refinance availed

from NABARD. The highest number of SHGs has been linked by Malaprabha GB

(2,981) in the State, followed by Cauvery GB (2,087). The other RRBs showing

significant increase were Tungabhadra GB, Krishna GB and Kalpataru GB.

TABLE-3SHGs LINKED BY RRBs IN KARNATAKA

Year No of SHGs BankLoan

% increase in the

SHGs over

previous year

%increase in theloan disbursedover the previousyear

(as on 31 (Rs. lakh)

March)1997 1,022 186.65 155.3191 205.0423

1998 1,528 314.57 149.5108 168.5347

1999 2,417 513.34 158.1806 163.1878

2000 4,735 1000.20 195.904 194.8416

2001 8,334 1647.70 176.0084 164.7371

2002 13,279 3021.70 159.3353 183.389

2003 23,473 6048.29 176.7678 200.1618

2004 38,631 10947.28 164.5763 180.9979

The regional rural banks have shown considerable increase in the promotion of self help

groups.

Cooperatives

All the 21 DCCBs in the State have involved themselves prominently in the SHG-Bank

Linkage Programme upto March 2004. The major contributors were Hassan, Bidar, South

Canara, Tumkur and Mandya DCCBs in that order.


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TABLE-4SHGs LINKED BY CO-OPERATIVE BANKS IN KARNATAKA

Year No of SHGs Bank Loan

% increase in the

SHGs over

previous year

%increase in theloan disbursedover the previousyear

(as on 31 (Rs. lakh)

March)

1997 5 0.50 ---- ----

1998 54 13.50 1080 2700

1999 201 68.25 372.2222 505.5556

2000 1,046 212.30 520.398 311.0623

2001 3,890 576.80 371.8929 271.691

2002 9,328 1951.70 239.7943 338.36692003 17,718 3973.05 189.9443 203.5687

2004 29,323 7346.63 165.4984 184.9116

The contribution by commercial in this sector has been appreciable. The pioneer in the

commercial banks are SBI and ICICI. There has been a growth of above 150% in the

formation of new SHGs by commercial banks and increase of 180% in disbursement of

laons.

TABLE-5

District wise break up of SHGs formed in year 2003-04 and bank loan

disbursed in the year.

District No of SHGs formed in

year 2003-04

Bank loan disbursed in

2003-04


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Bagalkot 576 19.79

Bangalore(R) 1,152 41.12

Bangalore(U) 304 16.87

Belgaum 1,480 61.99

Bellary 1,774 61.99

Bidar 1,577 81.61

Bijapur 518 17.33

Chamarajanagar 877 37.70Chikmagalur 664 20.74

Chitradurga 1.842 59.40

Dakshin Kannada 6,925 217.71

Davangere 577 11.50

Dharwad 795 20.89Gadag 527 11.69

Gulbarga 1,993 46.76Hassan 2,941 87.59

Haveri 618 19.44Kodagu 682 18.98Kolar 1,553 40.24

Koppal 605 6.38

Mandya 1,891 52.45

Mysore 2,601 85.61Raichur 831 18.42

Shimoga 1,033 82.18

Tumkur 2,943 79.74

Udupi 3,427 134.57

Uttara Kannada 982 43.36Total 41,688 1,396.04

On an average every district has 1544 new SHGs in the year 2003-04 and disbursed a

loan of 51.7 Million.

Comparison of Performance of private sector and public sector banks

TABLE-6


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The performance of public sector and private sector banks.

bank Cumulative

SHGs till

31mar 2003

New SHGs

provided loan

in 03-04

Cumulative

bank loan

disbursed upto

march 2003

Bank loan

disbursed in 03-

04 (Rs in

million)

Public sector 348368 168329 10545.10 9650.35

Private sector 12693 9032 949.99 1402.85

Public sectors banks have grown tremendously in this field in year as in this field in the

year 2003-04 the loan disbursed are as much as 84.84% of total disbursements till 2003.

Public sector has been an active player and has a share of 94.9% of new SHGs formed in

2003-04.

Chart showing the share of public and private sector banks in New SHGs formed in2003-04.


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pub

priv

SBI the largest player in the public sector with a share of 23.9% has disbursed loans

which forms 26% of total loan disbursed in 2003-2004.

Private sector banks have shown a considerable increase as loan granted by them in 2003-

2004 is 147.6% on cumulative loan given in previous years till 2003.

In the private sector ICICI has been the major player with a disbursement of 84% in

year 2003-04and with maximum 4741 SHGs promoted in this year.

Development of SHGs in the realm of microfinance.


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Banks have played a significant role in this field by ensuring accessibility to poor. The

efforts of banks can be appreciated on the reach to the common man. There has been a

tremendous increase in the number of SHGs promoted by banks for the past few years.

In 2001 149050 SHGs were formed, where as in 2002 there were 197653 new SHGs

promoted which shows there has been a growth of132% and .

In 2003 new SHGs prromted were 255882 which shows a growth of 129% from the

previous year.

In 2004 new SHGs promoted by banks were 361731 which depicts growth of 141%

against previous years.

The quantum of bankloan to SHGs has been constantly increasing which shows the

efforts of banks in this field.

TABLE-7

SHGs formed and bank loan disbursed from yr 2001-2004 in India.

year New SHGs formed growth rate against

previous year in SHGs

Bank loan (Rs

in million)

Growth rate in

bank loan

2001 149050 ----- 263825 -------

2002 197653 132% 461478 174%

2003 255882 129% 717360 155.4%

2004 361731 141% 1079091 150%

There has been a considerable increase in the reach to the poor and amount of

disbursements by banks.


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. RESEARCH LIMITATIONS

The study had limitations due to the lack of time for the project.

The study is limited to the secondary data.

Analysis and Discussion

Microfinance has been growing in India but needs to grow a lot. The study shows that

the public sector banks are playing a very good role. The thought of past that the the

poor are less reliable and cant repay the credit has been proved wrong as there is 95-

100% recovery of microfinance loans. It is one of the reason that the banks are willing to

expand the horizon of operations and working towards achieving growth. The private

sector banks are now beginning to enter the microfinance sector , the lead being taken by

ICICI bank.

The banks in all the sectors-public, private, commercial, regional rural banks and district

cooperative banks have been taking initiatives in enlarging the scope of microfinance .

The apex authority NABARD has been issuing guide lines for effective implementation

of the various programs in the realm of microfinance.

Various steps taken such as introduction of smart cards, linking of SHGs with post

offices, creation of joint liability groups, project on computer munshi to make SHG self

sustainable have all yielded fruitful results which can be seen in the form of improved

status of the poor.

Government is playing the role of a catalyst by proving support to various programs of

NABARD and providing incentives to banks which excel in this field. the government of

Karnataka has taken initiatives in this field through its women and child development

department , stree shakthi programme and is continuously making efforts to make poor

more self reliant and in empowering women.


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Conclusions and recommendations

Conclusions

Microfinance has a huge potential to grow. Microfinance is moving from just a subsidy

dependent activity to a serious business proposition. The challenge ahead is to build and

strengthen the limited institutional capability of retailers.

Microfinance has been growing enormously in the past few years and will continue to

grow as now the potential has been well understood by the government , institutions of

finance and the biased thought of inability of poor to repay has broken. The well formed

chain of SHG, NGOs and the banks have been a great success.

Recommendations:

Though microfinance sector has been growing, there still exists huge untapped

potential. Banks with the help of NGOs and SHGs need to grow in terms of

geographic reach.

Private Banks need to grow and reach the poor.

Delivery of additional financial services eg life insurance to SHG members

through banking channels will give more security to the poor.

Further surveys/studies needed to understand better impact.


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REFERENCES

1. Srinivasan R and Sriram M S, Round Table - Microfinance in India:

Discussion,

IIMB Management Review, Volume 15, No. 2, June 2003.

2. Robinson, Marguerite S, Microfinance: the Paradigm Shift From credit

Delivery

to Sustainable Financial Intermediation, in Mwangi S Kimenyi, Robert C

Wieland and J D Von Pischke (eds), 1998, Strategic Issues in

Microfinance,

Ashgate Publishing: Aldershot.

3. Finance for the poor: M

Banks & Micro Finance

Documents

Transcript of Banks & Micro Finance