DISSERTATION REPORT

ON

MICROFINANCE IN INDIA

By:

Shanky GuptaA0101908611

MBA Class of 2010

Under the supervision of Prof. Akhil Swami

ProfessorDepartment of Finance

In partial fulfillment of Award of Master of Business Administration

AMITY BUSINESS SCHOOLAMITY UNIVERSITY UTTAR PRADESH

SECTOR 125, NOIDA - 201303, UTTAR PRADESH, INDIA2010

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AMITY UNIVERSITY UTTAR PRADESH

AMITY BUSINESS SCHOOL

DECLARATION

I, Shanky Gupta student of Masters of Business Administration from Amity Business

School, Amity University Uttar Pradesh hereby declare that I have completed

Dissertation on

“MICROFINANCE IN INDIA”

as part of the course requirement .

I further declare that the information presented in this project is true and original to the

best of my knowledge.

Date: 15/03/10 Name: Shanky Gupta

Place: Noida Enroll. No: A0101908611

Program: MBA (G)

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AMITY UNIVERSITY UTTAR PRADESH

AMITY BUSINESS SCHOOL

CERTIFICATE

I, Prof. Akhil Swami, hereby certify that Shanky Gupta, student of Masters of

Business Administration at Amity Business School, Amity University Uttar Pradesh has

completed dissertation on “MICROFINANCE IN INDIA”, under my guidance.

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ACKNOWLEDGEMENT

.

I would also take this opportunity to thank Prof. Akhil Swami, Faculty, Amity Business

School, Noida for facilitating my understanding of concepts of Commercial banking and

Microfinance and giving me an opportunity to gather practical knowledge of banking

operations. I thank him for his support and guidance.

Shanky Gupta

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ABSTRACT

Microfinance currently plays a modest role in India with significant variations among

MFIs across various states. Southern states account for a larger percentage of funds from

microfinance. It is estimated that Indian MFIs as a whole has one million borrowers.

According to an ICICI report, in 2003 it was estimated that the demand for credit in India

ranges from US$3 - $9 billion annually, the organized sector is able to provide only

US$200 million to US$300 million. The Small Industries Development Bank of India

(SIDBI) has been the largest lender to MFIs, while Friends of Women’s World Banking

India and the National Women’s fund have also played a significant role. It is worth

noting that only one MFI, Bharatiya Samruddhi Finance Ltd., has been successful in

raising capital from mainstream markets.

This has been the story of microfinance in the Indian economy so far, wherein 72.22% of

the total population is rural and dependent on agriculture and its allied activities for their

livelihood, and wherein the rural economy still accounts for 40% of India’s GDP. The

rural market share of consumer durables and non-durable products exceeds 40 – 50% for

most items and is growing every year.

Indian banks have become aware of the potential of microfinance and have started to

compete with MFIs, particularly in the case of lending to SHGs, which have experienced

significant growth since 1999.

Recently, new private sector banks such as ICICI Bank, UTI Bank and HDFC Bank have

begun to actively seek exposure in the microfinance sector. Key innovations include a

pilot scheme by ICICI Bank that uses MFIs or NGOs, traders or local brokers as

intermediaries for loans to groups of small farmers. Another approach is the Integrated

Agricultural Service Provider. ICICI Bank’s pilot, the ICICI Bank Farmer Service

Center, has had success reaching small farmers.

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TABLE OF CONTENTS

DECLARATION

CERTIFICATE

ACKNOWLEDGEMENT

ABSTRACT

CHAPTER 1 INTRODUCTION 8WHAT IS MICROFINANCESERVICES INCLUDED UNDER MICRO FINANCEDOES MICRO FINANCE MAKE BUSINESS SENSECHAPTER 2 MODELS DEVELOPED FOR PROVISION OF MICRO FINANCE 17GRAMMEN BANKINGSELF HELP GROUPMICRO FINANCE INSTITUTIONIT INNOVATION FOR MICROFINANCECHAPTER 3 RATIONALE AND OBJECTIVE 25CHAPTER 4 RESEARCH METHDOLOGY 27CHAPTER 5 MICRO FINANCE IN INDIA 28INCLUSIVE GROWTH MEANING & CHALLENGESFINANCIAL INCLUSIONOBJECTIVE OF FINANCIAL INCLUSIONNEED FOR MICRO FINANCE IN INDIABACKGROUND FOR MICROFINANCE IN INDIACHAPTER 6 44MICRO FINANCE INSTITUTION IN INDIACHAPTER 7 52OTHER MICROFINANCE INSTITUTIONCHAPTER 8 58SUCCESS FACTORS OF MICRO FIANANCE IN INDIACHAPTER 9 62ISSUES IN MICROFINACECHAPTER 10 70ANALYSIS & INTERPRETATIONCHAPTER 11 77KEY FINDINGSCHAPTER 12 78RECOMMENDATIONS AND SUGGESTIONS

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CHAPTER 13 80LIMITATIONCHAPTER 14 81CONCLUSIONS

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CHAPTER 1

INTRODUCTION

WHAT IS MICRO FINANCE?

The broadest definition of Microfinance is the provision of financial services to poor or

low-income clients. The term has most often been confused with just lending to the poor.

However, calling it that would undermine the power that microfinance holds for the

economic development of an economy. Micro finance involves all those services that can

be provided so as to include people with lower incomes into the banking net. Services

include credit, insurance, facility for savings, fund transfers, transactions etc. Apart from

these, micro finance also involves providing sound financial advice to low income

individuals. This ensures not only the provision of financial resources but also the correct

use of those resources to promote long term development.

Microfinance services are provided by three types of sources:

Formal institutions, such as rural banks and cooperatives;

Semiformal institutions, such as non - government organizations; and

Informal sources such as money lenders and shopkeepers

BENEFITS PROVIDED BY MF

i. Poverty Alleviation: Microfinance can be a critical element of an effective

poverty reduction strategy. Improved access and efficient provision of savings,

credit, and insurance facilities in particular can enable the poor to smoothen their

consumption, manage their risks better, build their assets gradually, develop their

micro enterprises, enhance their income earning capacity, contribute to the

improvement of resource allocation, promotion of markets, and adoption of better

technology

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ii. Microfinance can provide an effective way to assist and empower poor women,

who make up a significant proportion of the poor and suffer disproportionately

from poverty.

iii. Trade Facilitation

iv. Education

v. Enables taking advantage of profitable investment opportunities

vi. Reduction of Social exclusion based on income

SERVICES INCLUDED UNDER MICROFINANCE

Apart from basic banking services such as remittance payment, fund transfers,

transaction services, micro finance includes three broad services.

MICRO – CREDIT

Microcredit is the extension of small loans to entrepreneurs too poor to qualify for

traditional bank loans. General characteristics of micro – credit are:

Size - loans are micro, or very small in size

Target users – Micro entrepreneurs and low-income households

Utilization - the use of funds - for income generation, and enterprise

development, but also for community use (health/education) etc.

Terms and conditions - most terms and conditions for microcredit loans are

flexible and easy to understand, and suited to the local conditions of the

community

Collateral – Loans are usually not based on any collateral but on ‘trust’

MICRO SAVINGS

Micro savings services are deposit services that allow one to save small amount of money

for future use. Savings are vital for the economic condition to improve. Micro savings

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accounts, often with no minimum balance requirement, allow households to save in order

to meet unexpected expenses and plan for future investments. A study carried out by

Shahidur R. Khandker in 1998 revealed that micro credit not only increases involuntary

savings, but also induces voluntary savings.

MICRO INSURANCE

Micro-insurance is a term increasingly used to refer to insurance characterized by low

premium and low caps or low coverage limits, sold as part of a typical risk-pooling and

marketing arrangements, and designed to service low-income people and businesses not

served by typical social or commercial insurance schemes.

THE RATIONALE BEHIND MICROFINANCE:

The rationale is based on the available evidence and experience about the role of

microfinance in poverty alleviation and the continued large scale failure of both state and

market to meet the savings, credit and insurance needs of the poor.

At the core of microfinance is the idea of addressing the problem of poverty and

deprivation by enabling the poor to access financial capital hitherto denied to them. With

the help of loan, savings and insurance obtained from microfinance institutions (MFIs),

the poor are expected to take up on their own economic activities which would generate

incremental income and employment to cross the poverty line. Access to microfinance is

also expected to provide stability to the poor in times of shocks and fluctuations. Thus,

microfinance is expected to play both the promotional and protective role in poverty

alleviation.

There is fairly good evidence which suggests that microfinance interventions have not

only contributed significantly towards direct poverty alleviation of the participating

members but have even contributed indirectly in reducing overall poverty of villages or

areas in which they have been implemented (Hossain 1988, and Khandker 1998). It is

evident that contribution of microfinance to poverty alleviation takes place mainly

through improvements in the asset base, employment and income levels, reduced

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dependence on moneylenders and even diversification of occupation. As a result of these

changes, the participants have experienced improvements in their living standards, which

is reflected in increased consumption levels, better housing, clothing and education, and

many other qualitative changes (ibid).

There is also the empowerment role of microfinance. Besides leading to reduction of

poverty in ways mentioned above, the increased access and control over financial

resources by women can itself become an empowering instrument. The available

evidence indicates that women are able to experience many positive changes as a result of

their participation in microfinance programmes. A major study about the impact of

microcredit programmes in Bangladesh concluded that, “Women have clearly benefited

from microcredit programmes. Programme participation has enhanced women’s

productive means by increasing their access to cash income generation from market-

oriented activities and by increasing their ownership of non-land assets. These

improvements should enhance women’s empowerment within the households,

influencing their own and their children’s consumption and other measures of welfare”

(Khandker 1998: 150). It is based on such evidence that an increased emphasis is being

given to expand the role of microfinance in order to achieve the twin goals of poverty

alleviation and empowerment.

At the level of developmental paradigm, microfinance has emerged as a response to the

failure of market and state to ensure for the poor a sustained access to capital. Market

failure occurs when formal agencies and programmes operating in the market fail to meet

the capital needs of the poor to take up productive investments. As a result of such

failure, not only the poor are unable to make investments for income and employment

generation but are also forced to depend upon informal sources of finance, which are

either exploitative or not fully reliable. The formal institutions like commercial banks and

cooperatives have failed to serve the poor for reasons like their focus on collateral based

lending, information asymmetry, small sized loans or savings leading to high cost of

transactions and attitudinal bias against the poor and women. There is another dimension

to this issue of market failure. As the formal financial institutions become inaccessible

the poor either try to avoid them or look towards alternative sources of credit, savings and

insurance. These alternatives are mostly informal agencies like private moneylenders,

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traders, and commission agents who, using their monopolistic position, tend to exploit the

poor by charging exorbitant rates of interest or force the clients to take part in inter-linked

transactions for credit, labour and commodities in the pretext of giving collateral-less

loans. This is the case of typical market failure for the poor.

There is also the angle of failure of state in the rationale for microfinance. A

developmental state has a clear onus for poverty alleviation. The state under such a

situation has to ensure that capital needs of the poor are also adequately met. The failure

of state can occur when the state is either not able to make formal agencies respond to the

needs of the poor or unable to create any alternate mechanisms for the poor to access

savings, credit and insurance on a sustainable basis. The state in India has come out with

many policies including imposing certain obligations on formal agencies to devote part of

their resources to meet the credit needs of the weaker sections like small and marginal

farmers, agricultural labourers and rural artisans. Some of the initiatives of the state for

the poor include credit based self-employment programmes like Integrated Rural

Development Programme (IRDP) and Swarna Jayanthi Swarozgar Yojana (SGSY),

Differential Interest Rate (DRI) scheme, and creation of separate institutions like

Regional Rural Banks (RRBs).

The assessments of the initiatives taken by the state have revealed that despite these

programmes, the poor have not been able to avail regular services from the formal

agencies. Despite the good intention of the state in initiating these schemes, the outcomes

have not been favourable to the poor. Some of the major problems identified with these

programmes are:

• Target based approach focusing on achieving quantitative results in reaching the poor;

• linkage to subsidies resulting in large-scale leakage of the benefits to non-poor;

• high rate of failure of self-employment schemes due to poor project formulation and

implementation;

• high loan repayment problems both due to failure of projects and creation of wide

spread impression among the scheme participants about loan as non-returnable grant.

As a result the schemes have come to be perceived by the banks in general as risky,

making them reluctant to increase their lending to the poor. Overall, the state led

initiatives have not succeeded fully in creating sustainable financial services for the poor.

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These failures get corroborated by some of the studies conducted to estimate debt and

investment position of rural households. As per the All-India Debt and Investment

Survey of 1991, only 15.6% of the rural households had borrowed from various formal

sources (NABARD, 2000). For the poor, this proportion was even lower. Further, though

the institutional agencies accounted for about 64% of the debt of all the households in

1991, for the households in the three lower asset value groups (less than Rs. 5,000, Rs.

5,000 to Rs. 10,000 and Rs. 10,000 to Rs. 20,000) it was the non-institutional agencies

which accounted for bulk (58%, 53% and 56% respectively) of their debt.

Even the recent situation also remains largely the same. This is corroborated by the recent

Rural Finance Access Survey (RFAS) of NCAER and World Bank in two major states of

India, Andhra Pradesh and Uttar Pradesh (Basu and Verma, 2003). The survey revealed

that while only about 21% of the rural households accessed formal loan, the proportion

was only 13% for the poor households who are landless or owning less than one acre of

land. In other words about 87% of poor were without any formal loan. However, about

48.2% of the poor households borrowed from informal sources as against about 44% for

all the households. This indicates the continued dependence of the poor on informal

sources for meeting their credit needs. Even with regard to savings and insurance, the

RFAS survey revealed that the access by the poor is still very limited. As per the survey

while about 58.8% of all the rural households had no deposit accounts, in the poor

category 70.4% of the households did not have any deposit account. Overall, only about

15% of the rural households had subscribed to insurance schemes.

The formal agencies thus, despite their growth, have not been able to meet the needs of

the poor adequately. It is because of this failure of the formal agencies, that the role of

microfinance interventions has assumed significance. The response of various

microfinance initiatives, especially in the Indian context, has been broadly on the

following two lines.

•Creation of alternative delivery mechanism for the poor: In many ways microfinance

can be considered as an attempt to create newer institutions or mechanisms for the poor

as an alternative to both the formal and informal agencies which have failed them. The

main aim of microfinance interventions in this regard is to help the poor to reduce the

difficulties they face with the banks or moneylenders by creating separate institutions

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which can fully understand and appreciate their needs. The idea is to create pro-poor

agencies or institutions which can deliver financial services to the poor. Much of the

microfinance activities so far have been on these lines.

• Reforming the formal agencies: Looking at the success of NGO-led initiatives in

delivering savings and credit to the poor, the state and formal agencies are trying to make

amendments in their systems so that they are also able to reach out to the poor. The

reforms include adapting methods and innovations tried out by NGOs and other

microfinance agencies. The fast growing SHG-Bank Linkage Programme in India is one

such example of the response from the formal agencies in reforming their earlier systems.

DOES MICRO-FINANCE MAKE BUSINESS SENSE?

It is widely believed that micro finance is more of a CSR initiative rather than a viable

business alternative. Perhaps this is the reason for the low adoption rate by major

commercial banks across the globe, and especially in India. However, micro finance

serves as a profitable opportunity for banks and financial institutions. From a long term

point of view, customers of micro finance now, translate to regular customers in the

future. This gives ample opportunities to banks to provide a range of financial services as

the customers move up the income ladder. The chart below shows that globally

Microfinance follows the profitability model rather than only CSR and India ranks among

the Global Profitability rankings.

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The interest charged by the non-institutional channels (money lenders etc.), on informal

loans, ranges from 24 per cent to 60 per cent. In some regions, it is reported to be as

high as 120 per cent per annum. In comparison, the interest charged by the institutional

channels (banks and MFIs) varies between 15 to 28 per cent. There is, as such, hardly

any competition between the two, and this clubbed with the high underserved customers

possesses a huge business opportunity for the commercial banks and microfinance

institutions. Despite this, the non-institutional channels continue to have a sway over

micro-credit in India. In a way, this is primarily due to the limited outreach of the

institutional sector in rural and remote areas.

Though the profitability of SHG lending is not yet fully established, indications are that

banks are able to do this business without losses even when interest rates are capped at

12.5 per cent. Indeed recently, the State Bank of India has announced its intention to

lend at lower rates. This is spurred by the fact that due to cut in deposit rates, the cost of

funds for banks is going down and at least so far the level defaults in SHG portfolio is

small. About transaction costs, banks have the view that they any way have a rural

branch network with all the fixed costs and there are little incremental costs for SHG

lending.

A few studies have examined lending to self-help groups by some commercial banks and

regional rural banks and found it to be profitable. For instance, Bank of Baroda, one of

the largest public banks most involved in lending to self-help groups, had a regular

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repayment rate of nearly 100 per cent and reasonable transaction costs, so the total cost of

this lending was not higher than for large loans. Oriental Bank of Commerce, a small

public bank, has also developed profitable lending to self-help groups.

Bank of Madura, an old private commercial bank, has found the self-help program so

satisfactory that it has made it part of its strategy for achieving viability in its 104 rural

branches. Bank of Madura, now part of the large private ICICI Bank, highlights the

importance of finding innovative solutions to cut the costs associated with the program

and confirms the privileged role played by the private sector in innovating. Bank of

Madura expects its self-help group lending to become profitable even without using

NABARD refinancing.

These success stories could be circulated to encourage commercial banks to include self-

help group lending in their business strategies, and innovative strategies to cut the cost of

the program could be shared with other practitioners.

Moreover in India the regulations require a quota fulfilment of Priority sector lending.

Loans to Indian MFIs not only fulfil the priority sector lending requirements; but they

also fulfil the need for returns.

The MFIs in India have only grown bigger and bigger. Leading MFIs offer slim, but

positive margins, whereas according to a latest study, Indian local MFIs also lead the

global rankings on efficiency and profitability, with most of them being 33% less costlier

than the global average. This provides Indian MFIs the room to squeeze out some extra

margins.

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CHAPTER 2

MODELS DEVELOPED FOR PROVISION OF MICRO

FINANCE

The inherent nature of this field is that it can be flexible in its conception and

implementation. There are a number of distinctive models of microfinance, reflecting the

fact that microfinance has evolved differently in different environments. Most formats are

tailor made according to the culture and social infrastructure of the country. Some

countries tend to rely on one particular model or method, while others exhibit

considerable diversity in the range of models used.

Leading models of microfinance :

Grameen banking, perhaps the most widespread, with characteristic forms of

small group organization and strict procedures

Self-help groups (SHGs), with larger and more autonomous groups and a mixture

of social and financial intermediation

Regulated financial institutions, usually small and operating in favourable

regulatory environments

Credit cooperatives, some of which, as in Sri Lanka, have made an effort to

include the poor.

GRAMEEN BANKING

This model, developed in Bangladesh, has thrived in a variety of physical, cultural, and

institutional settings and has a number of distinctive features. These include careful

targeting of the poor through a means test; the use of self-selected groups of borrowers,

generally consisting of five members, who guarantee each other’s loans; compulsory

savings mobilization, with generally little or no emphasis on voluntary savings; intensive

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motivation and supervision of borrowers (including the use of weekly meetings); and

decentralized Operations.

SELF HELP GROUPS

These are larger (around 20 members) and much more autonomous than borrower groups

in the Grameen model. SHGs are based primarily on the principle of lending their

members’ savings but they also seek external funding to augment these resources. A

number of non government organizations (NGOs) specialize in promoting and motivating

SHGs, with an important distinction between NGOs which operate as financial

intermediaries and those which confine themselves to social intermediation. Variants of

these approaches also exist in a number of other countries, including Indonesia, Nepal,

Pakistan, and Sri Lanka.

Some of the principles underlying the model and the guidelines that were issued to the

implementing groups are listed below:

The SHGs are to use part of their funds (almost 60%) for lending to their

members and the rest for depositing in a bank to serve as the basis for refinancing

from the bank.

Savings are to come first: no credit will be granted by the SHG without savings

by the individual members of the SHG. These savings are to serve as partial

collateral for their loans.

The joint and several liabilities of the members are to serve as a substitute for

physical collateral for that part of loans to members in excess of their savings

deposits.

Credit decisions on lending to members are to be taken by the group collectively.

All the intermediaries (the Central Bank, banks, NGOs and SHGs) will charge an

interest margin to cover their costs.

Interest rates on savings and credit for members are to be market rates to be

determined locally by the participating institutions.

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Instead of penalties for arrears, the banks may impose an extra incentive charge to

be refunded in the case of timely repayments.

The ratio of credit to savings will be contingent upon the creditworthiness of the

group and the viability of the projects to be implemented, and is to increase over

time with repayment performance.

SHGs may levy an extra charge on the interest rate for internal fund generation

(which would be self-imposed forced savings).

The chart on the following page shows the general model of micro lending.

Fig 2.1 Source: Building Sustainable Micro Finance System: A Growth Catalyst for the PoorLOGOTRI Research Study

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MICRO FINANCE INSTITUTIONS

Fig 2.2

Indian MFIs range from Grameen-replicator NGOs to for-profit entrepreneurial ventures

to developmental NGOs which moved from SHG promotion to direct financial

intermediation. Based on asset sizes, MFIs can be divided into three categories:

Category 1: 5-6 institutions which have attracted commercial capital and scaled up

dramatically over last five years. These MFIs; which include SKS, SHARE and

Spandana; were initiated in the 1990s as NGOs promoting SHGs or Grameen-style

programs but after 2000, converted into for-profit, regulated entities, mostly Non-

Banking Finance Companies (NBFCs).

Category 2: Around 10-15 institutions with high growth rates, including both NGOs and

recently formed for-profit MFIs (mostly NBFCs). Many NGOs have transformed into

regulated, for-profit structures recently or are in process now, and seek commercial

equity investments. Examples include Grameen Koota, Bandhan and ESAF.

Category 3: The bulk of India's 1000 MFIs are NGOs struggling to achieve significant

growth. Most continue to offer multiple developmental activities in addition to

microfinance and have difficulty accessing growth funds.

MFI MAINSTREAMING AND COMMERCIALIZATION

While SHGs tend to have a multi-sectoral development approach and are challenged by

sustainability, Most MFIs focus on scaling up microcredit operations while creating a

sustainable legal structure and business model. The MFI approach is generally more

attractive to commercial capital and mainstream market players.

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AMENABLE FINANCING ENVIRONMENT

Access to finance has played a critical role in helping Indian MFIs achieve such growth.

Donors including Cordaid and Ford Foundation have extended grants and quasi-equity to

support institutional capacity building and cover early-stage losses. Organizations such as

Grameen Foundation have extended guarantees to leverage additional loan funds. Apex

institutions like Small Industries Development Bank of India (SIDBI), Friends of

Women’s World Banking (FWWB) and Rashtriya Mahila Kosh (RMK) provided early

stage on lending capital.

Leveraging these resources, many MFIs accessed market-rate lending capital from

commercial banks such as ICICI Bank, ABN Amro Bank and HDFC Bank. Since 2006

commercial equity investments have entered the market, mostly into Category 1 MFI

capital structures. Between 2004 and 2007, the microfinance sector received an equity

infusion of almost USD43 million, USD38 million of which flowed in during the first

four months of 2007 (See Box 3).

This high growth period was also marked by new and innovative delivery channels. The

ICICI Bank Partnership Model allows MFIs to grow their client base and enjoy large

financial leveraging. SHARE and BASIX are selling their portfolios to mainstream banks

to fuel growth.

FROM CREDIT-ONLY TO DIVERSIFIED SERVICES

Though many MFIs formally mobilized client savings as NGOs, deposit mobilization is

prohibited once MFIs transform into for-profit legal entities. Proposed policy reforms on

the horizon, are expected to allow non-profit MFIs to function as business correspondents

for commercial banks and offer savings services to clients, but this is not an avenue open

to most of the scaled-up, for-profit MFIs.

NGO-MFIs are also partnering with mainstream insurance providers to offer insurance

services. Remittances are another emerging area of interest for Indian MFIs as well. For

example, Spandana has partnered with Western Union to provide remittance services to

its clients.

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INCREASING OUTREACH

Many Indian MFIs are increasingly becoming national players. As of 2008, at least 12

MFIs operate in more than one state. There is an increased focus on urban market and a

new generation of MFIs, such as Ujjivan and Swadhaar, operate solely in urban areas.

METHODOLOGY FOLLOWED BY SKS MICROFINANCE

Before entering a village, SKS staff members conduct a comprehensive survey to

evaluate the local conditions and potential for operations. Some of the key factors

include total population, poverty level, road accessibility, political stability and

safety. After a village has been selected, SKS conducts a Projection Meeting with

the entire village to introduce SKS, its mission, methodology and services. After

the projection meeting, SKS holds a Mini-Projection Meeting to further explain

SKS to interested parties and appeal directly to those who may not have attended

the meeting because of religious, class, caste or gender barriers.

After SKS has selected a village and conducted informational sessions with its

residents, interested women form self-selected five member groups to serve as

guarantors for each other. This process is called Group Formation. Experience has

shown that a five-member group is small enough to effectively enforce group peer

pressure and, if necessary, large enough to cover repayments in case a member

needs assistance. Group members must be between the ages of 18 and 59, cannot

be related and must live close to one another.

Once a group is formed and meets the minimum requirements, it begins

Compulsory Group Training (CGT). CGT is a five day program consisting of

hour-long sessions designed to educate clients on the processes and procedures of

SKS and build a culture of credit discipline. Using innovative, visual and

participatory teaching methods, SKS staff introduces clients to SKS’ financial

products and delivery methods. In addition, CGT teaches clients the importance

of collective responsibility, how to elect group leaders, the SKS pledge and how

22

to sign their name. During the training period, SKS staff also collects quantitative

data on each client to make sure they qualify for the program and record base-line

information for future analysis. On the fifth day, clients take the Group

Recognition Test and are officially accepted as a SKS’ client after successfully

completing the test.

As additional groups are formed within a single village, a Sangam (Center)

emerges. During Sangam Formation, groups are combined to form a center of 4 to

12 groups or 20 to 60 clients. The Sangam is responsible for the repayment of all

groups, creating a dual joint liability system. If one group defaults the rest of the

Sangam must repay.

After the formation of a Sangam, a leader and deputy leader are appointed to help

facilitate meetings and ensure compliance with SKS procedures. Sangam

meetings are held on a weekly basis by SKS’ Field Assistants and all financial

transactions (also see Products & Services) are conducted during the meeting.

Meetings begin early in the morning so not to interfere with the daily activities of

the clients. In addition to financial transactions, clients use the weekly meetings to

discuss new loan applications, loan utilization and community issues. Sangam

meetings are conducted with rigid discipline in order to sustain an environment of

credit discipline created during CGT.

IT INNOVATIONS FOR MICROFINANCE

Microfinance’ primary objective is to increase the outreach to bottom of pyramid and

facilitate a creation of responsive two way channel.

Therefore Information technology is the basic tool to enable banks and Microfinance

institutions’ to reach end customer. Traditional microfinance models had an inherited lag

due to unavailability of technology and infrastructure in rural areas. The MFIs used to

get the payments pooled from the Customers (self help groups) and transfer it to the

banks typically by month’s end, but banking regulations in most of the countries asks the

banks and MFIs ( in many countries) to record the transaction as and when it is enabled,

therefore need of technology to record the transactions.

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Further technology like Smart cards and ATMs are needed to authenticate the customers

and provide them additional facilities. The key challenges faced in such implementation

are the scale and awareness.

Microfinance has started reaching millions of customers around the globe therefore IT

systems are needed to be put in place to reach such large number of customers, and

further the customers and the staff have to be imparted with the knowledge of use of such

technology and equipments.

Following are some innovations done in Microfinance to streamline the flow of

information to rural sector

Pc kiosks in villages (India)

Operator is a secondary school graduate who pays ~US$ 1,300 to start up

Connectivity provided through wireless in local loop (WLL) technology

Services: e-governance, agriculture info, video message and health diagnosis

Banking and insurance services can be delivered through the operator

Pension “Trucks” (S. Africa)

300 vehicles with biometrics, smart cards, cash dispensers (1.7m clients)

Deliver US$ 150 million in pension and grant payments each month

Banking and insurance services can be delivered through the vehicles

Mobile Phones (Nigeria, Kenya, S. Africa, Zambia, etc.)

Anytime, anywhere using SMS – 38m mobile users in Africa by end-20031

Mid-to-large banks across Africa installing mobile banking applications

Balance inquiries, transactions, alerts, account service, promotions

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CHAPTER 3

RATIONALE AND OBJECTIVE

RATIONALE OF THE STUDY:

There is a vast unmet gap in the provision of financial services to the poor. A very little

segment of the poor people is being served by the formal financial system for micro-

credit. Majority of the Indian population depends upon the informal financial system for

their credit needs. And it is this informal financial system, comprising of the money

lenders, big farmers, commission agents and friends/relatives who exploit the rural poor

and extract huge sums of money from them by charging exorbitantly high interest rates.

Hence, it is here that the organized financial sector sees immense potential for growth by

the provision of their financial services to the unbanked at easily affordable rates. These

services allow participants to smooth consumption across time and help them tide over

the impact of adverse shocks during their life cycle. Thus, microfinance has brought a

paradigm shift in the Indian economy and has grown to become not just philanthropy, but

also a long-term growth strategy for various financial institutions.

25

OBJECTIVE OF THE STUDY:

Detailed study of the evolution of microfinance concept in India.

To analyze the current market scenario of microfinance in India and a brief

introduction to it from the world perspective

To study the few players serving in this sector in India.

The future challenges prospects of microfinance in India

Conduct a research in order to know the awareness about the concept of

microfinance among the masses.

26

CHAPTER 4

RESEARCH METHODOLOGY

Method of the data collection

Two methods of data collection have been used i.e. Primary data and Secondary data.

Primary data

The study is conducted through questionnaires and interviews. The questionnaires and

interviews are the main data collection tools due to their nature of giving accurate results

to a problem from the selected sample frame. The questionnaire is easily customizable

and the manner of its construction is easy to follow which is only very practical in the

nature of the research. The questionnaires record the degree to which the employees are

satisfied

Secondary data

This was primarily done through secondary data collected from the internet, journals and

magazines. Henceforth, the focus shifted to the efforts which various banks have put in,

and the models and technological innovations which they have developed for the

provision of this service.

27

CHAPTER 5

MICRO FINANCE IN INDIA

This section examines the role of micro finance in the empowerment of people and the

realisation of financial inclusion in India. With increasing demand for rural finance, and

the inadequacies of formal sources, the MF has immense opportunities in the new avatar

of micro credit in India. However, in the light of recent experiences, and the need for

qualitative growth, it is of utmost importance that MF be managed with better scrutiny in

terms of finance and technology as well as social responsibility. Also, NGOs have played

a commendable role in promoting Self Help Groups by linking them with banks.

INTRODUCTION

Credit is one of the critical inputs for economic development. Its timely availability in the

right quantity and at an affordable cost goes a long way in contributing to the well-being

of the people especially in the lower rungs of society. It is one of the three main

challenges to input management in agriculture, the other two being physical and human

(Hans, 2006).

Thus access to finance, especially by the poor and vulnerable groups is a prerequisite for

employment, economic growth, poverty reduction and social cohesion. Further, access to

finance will empower the vulnerable groups by giving them an opportunity to have a

bank account, to save and invest, to insure their homes or to partake of credit, thereby

facilitating them to break the chain of poverty. But India is lagging behind in this respect

so it has become the matter of concern.

In India, moneylenders and other informal lenders meet more than 60 per cent of rural

credit needs. The share of banks in particular in rural areas hovers around about 30%. It

has been assessed that only 27 per cent of the total farm households are indebted to

formal sources; in other words 70 per cent of the farmhouses do not have access to formal

credit sources (Rangarajan, 2007).

28

Banking data reveals that credit exclusion is severe in 139 districts of the country. In

these districts, only 10 per cent or less out of 100 persons have access to credit from the

fact that the exclusion is large, there is also a wide variation across regions, social groups

and asset holdings. The poorer the group, the greater is the exclusion (Rangarajan, 2007).

Over the years there has been an increase in the percent of credit facilities extended by

the banks to rural areas but this increase is only marginal and not a significant one.

In spite of the large network of institutional credit system, it has not been able to

adequately penetrate the informal rural financial markets and the non-institutional sources

continue to play a dominant role in purveying the credit needs of the people residing in

rural areas.

Thus, an important challenge facing the banking sector is to extend financial services to

all sections of society. Like others, the poor need a range of financial services that are

convenient, flexible, and affordable and not just loans. Micro-finance can work as a

powerful tool to fight poverty in an effective manner and thus forms an indispensable part

of financial inclusion. With the new philosophy and policies pertaining to micro credit,

micro finance institutions (MFIs) such as Self Help Groups (SHGs) have emerged and

they now have a strong footing in India.

INCLUSIVE GROWTH- MEANING & CHALLENGES

The banking industry has shown tremendous growth in volume and complexity during

the last few decades. Despite making significant improvements in all the areas relating to

financial viability, profitability and competitiveness, there are concerns that banks have

not been able to include vast segment of the population, especially the underprivileged

sections of the society, into the fold of basic banking services (Thorat, 2007a). This lead

to the emergence of Financial Inclusion as a strategy to bring so called excluded people

into the mainstream.

29

FINANCIAL INCLUSION

It is the delivery of banking services at an affordable cost to the vast sections of

disadvantaged and low-income groups. As banking services are in the nature of public

good, it is essential that availability of banking and payment services to the entire

population without discrimination is the prime objective of the public policy. Although

credit is the most important component, financial inclusion covers various financial

services such as savings insurance, payments and remittance facilities by the formal

financial system to those who tend to be excluded (Mahendra S, 2006).

Approaches of Financial Inclusion: Based on the studies published by various experts

in this field we can safely say that there are six approaches in the system of Financial

Inclusion which are relevant in the Indian context. They are as follows:

1. Credit to the farmer households: Ensuring availability of credit to the marginal

and sub marginal farmers as well as other small borrowers is the need of the hour.

2. Advisory Role: Rural branches must go beyond providing credit and extend a

helping hand in terms of advice on a wide variety of matters relating to

agriculture.

3. Greater Accessibility: In district where population per branch is much higher than

the national average commercial banks should encouraged to open branches.

4. Easy Loans: There is need for the simplification of the procedures in relation to

granting of loans to small borrowers.

5. Strengthening SHG’s: The further strengthening the SHG-Bank Linkage

Programme (BLP) is required as it has proved to be an effective way of providing

credit to very small borrowers.

6. Effective Implementation: The business facilitator and correspondent model needs

to be effectively implemented.

30

INDIAN PERSPECTIVE

In India, the drive for financial inclusion, initiated by the Reserve Bank of India, has thus

far involved ensuring access to at least one zero minimum-balance ‘no frills’ savings

bank account to every household. In this context, at least one district in each state has

been brought under the purview of this drive with public sector banks in the region taking

the lead to open at least one bank account per family in the district.

OBJECTIVES OF FINANCIAL INCLUSION

The broad objective of Financial Inclusion (FI) is to widen the span of activities of the

organized financial system to include within its ambit people with low incomes. Through

graduated credit, the attempt is to lift the poor from one level to another so that they come

out of poverty. Inclusive growth encompasses ideas related to basic needs and equity. It

focuses on broad – based growth so that all strata of society benefits out of it. It seeks to

bridge the divide that fragments the society into the classes of rich and poor. Reduction in

poverty and equality of income such that everyone enjoys a basic minimum standard of

living are the objective of inclusive growth. Thus, access to finance by the poor and

vulnerable groups has been recognized as a pre requisite for poverty reduction and social

cohesion. In fact, providing access to finance is a form of empowerment of the weaker

sections.

SOLVING THE PROBLEM OF LIMITED ACCESS TO CREDIT

Limited access to affordable financial services such as savings, loan, remittance and

insurance services by the vast majority of the population in the rural areas and

unorganized sector is believed to be acting as a constraint to the growth impetus in these

sectors.

Access to affordable financial services - especially credit and insurance - enlarges

livelihood opportunities and empowers the poor to take charge of their lives. Such

31

empowerment aids social and political stability. Apart from these benefits, FI imparts

formal identity, provides access to the payments system and to savings safety net like

deposit insurance. Hence FI is considered to be critical for achieving inclusive growth;

which itself is required for ensuring overall sustainable overall growth in the country. The

financially excluded sections largely comprise marginal farmers, landless labourers, oral

lessees, self employed and unorganized sector enterprises, urban slum dwellers, migrants,

ethnic minorities and socially excluded groups, senior citizens and women (Thorat,

2007b).

NEED FOR MICRO-FINANCE IN INDIA

Micro-Finance allows broader access to financial services and can lead to faster and more

equitable growth. It is the delivery of banking services at an affordable cost to the vast

sections of disadvantaged and low-income groups. Such a system of money for the poor

allows poor households to save and manage their money securely, decreases their

vulnerability to economic shocks and allows them to contribute more actively to their

development. Increasingly, with the proliferation of micro finance initiatives, there is

evidence that such initiatives can empower poor households socially as well.

In the context of India becoming one of the largest micro finance markets in the world

especially in the growth of women’s savings and credit groups such as Self Help Groups

(SHGs) and the sustaining success of such institutions which has been demonstrated by

the success of SEWA bank in Gujarat, low cost banking is not necessarily an unviable

intention.

However the situation still remains grim for most of the households in the rural sector.

For instance, out of 203 million households in the country, 147 million are in rural areas,

89 million are farmer households. 51.4 per cent of farm households have no access to

formal or informal sources of credit while 73 per cent have no access to formal sources of

credit (Jayasheela, 2008)

32

BACKGROUND TO THE GROWTH OF MICRO-FINANCE IN

INDIA

The financial sector developed in India by the late 1980s and was criticized as being

target and supply driven. High default rates, corruption and high degree of suspicion

among bankers about the credit worthiness of poor people were the major pitfalls.

The situation was bleak with the formal financial sector remaining unsuccessful to

recognize the divergence between the hierarchies of credit needs and credit availability.

This led to an adverse use of credit available. Till date majority of the rural houses fund

their needs for credit through informal sources at high cost. Another major flaw was that

usually credit was available for setting up new enterprises and not for meeting personal

requirements like marriage expenses, medical treatment of family etc.

FINANCIAL COSTS TO BANKS AND SHGS

Under the Bank-SHG linkage the banks make funds available to SHGs at around their

prime lending rate (PLR) that may range between 11-12 per cent. The SHGs on-lend the

funds to their members at rates ranging from 12% to 60%. However, generally, the rate

charged by SHGs to members is around 24%.

A few studies have examined lending to self-help groups by some commercial banks and

regional rural banks and found it to be profitable. For instance, Bank of Baroda, one of

the largest public banks most involved in lending to self-help groups, had a regular

repayment rate of nearly 100 per cent and reasonable transaction costs, so the total cost of

this lending was not higher than for large loans. Oriental Bank of Commerce, a small

public bank, has also developed profitable lending to self-help groups

Bank of Madura, an old private commercial bank, has found the self-help program so

satisfactory that it has made it part of its strategy for achieving viability in its 104 rural

branches. Bank of Madura, now part of the large private ICICI Bank, highlights the

33

importance of finding innovative solutions to cut the costs associated with the program

and confirms the privileged role played by the private sector in innovating. Bank of

Madura expects its self-help group lending to become profitable even without using

NABARD refinancing.

These success stories could be circulated to encourage commercial banks to include self-

help group lending in their business strategies, and innovative strategies to cut the cost of

the program could be shared with other practitioners

OPERATING COSTS OF MICRO-CREDIT

The operating cost of servicing micro-finance/micro-credit is higher than normal (bank)

finance, however. This holds good for commercial banks (including RRBs), MFIs and

credit co-operatives. Salaries to staff, travelling expenses, commissions not classified

under financial costs, expenses on promotion of groups, staff welfare expenses;

amortization and depreciation, rent on hired buildings and other overheads-all constitute

the operating cost. These costs are critical to the operations of the formal banking sector.

Taking cognizance of these costs, results in a far higher calculation than taking the

(above) view that the overhead costs need not be allocated to the SHG-bank linkage

programme since it is being incurred by the bank anyway.

The data shows that the entire bank branches, irrespective of SHG promotion

mechanisms, are making substantial losses in lending to SHGs due to pricing of SHG

loans below cost. These loans carry the lowest interest rates of all products in all the

sample banks (12.5-13 per cent per annum), and this does not allow the banks to earn a

spread even with the most efficient operating system. The five RRBs studied in the

sample showed that the cost of SHG lending varied from 22-30 per cent (even if one

excluded an RRB where it cost over 48 per cent, as an outlier). Thus, unless banks

increase their interest rates on SHG lending to the range of 24 per cent, it is unlikely that

they will make any profits. However, efficiency improvement in operations of RRBs as

34

also economies of scale with more SHG lending may also reduce the breakeven pricing to

perhaps 21 per cent’

The net effect of ignoring overhead costs is to lower the apparent cost of banks lending to

SHGs but it means that such lending can then take place at each branch individually only

to the point where the existing “slack” in the overhead is fully taken up. Lending to

SHGs beyond this point will require the bank to incur further overhead costs and, at this

point, the full cost of lending to SHGs would have to be taken into account. In this

context, it is worth noting that the above study found that even in the case of individual

RRBs in south India (where the SHG-bank linkage is very much in vogue) the SHG

portfolio did not exceed 11% of advances in the best of branches. Overall, the

outstanding of the entire banking sector to SHGs does not exceed 0.5% of their total

advances.

COSTS TO MFIS

The costs incurred by any financial institution in making loans is made up of three main

components (i) Financial Costs (or costs of raising money for making loans), (ii)

Operating Expenses (or staff, travel and other administrative costs of servicing the loans)

and Risk Costs (or costs of covering for the risk of losing capital on account of the

inability of the institution to recover loans whether or not default is wilful).

Financial Cost

The other credit lending institutions like the credit co-operatives and the MFIs may not

have sufficient deposits, as the commercial banks (& LABs) to undertake credit activity

on their own. They are, therefore, dependent either on refinancing facility from

agencies, such as, the NABARD, the SIDBI, the Rashtriya Mahila Kosh or borrowings

from the commercial banks (including the RRBs). The respective financial cost involved

under each category may be seen from Table 2 below:

35

Table 3.2: Financial Cost to MFI

(On a one year loan)

Institution Rate of Interest

(on declining balance)

I NABARD 8-9

SIDBI 8-9

RMK 8

II Commercial Banks

a. Public Sector 12

b. Private Sector 14

Funding may be made available to MFIs by the development agencies

(SIDBI/NABARD) also by way of subordinated debts, as promoter’s/member’s capital

(or equity/quasi equity) as well as grants from donors. In view of the high set up cost, the

development institutions may charge a lower rate of interest to the MFIs in the initial

years, which may be raised subsequently once the MFI has matured. Equity other than

‘grants’ is, obviously, the cheapest of all funds as there is no interest liability and

payment of dividend is to be made only when profits have been earned. The financial

cost to the MFI will, thus, be the weighted average of all the different kinds of funds.

Operating Cost

Salaries, moreover, account for the major cost of these institutions. The sustainability of

micro-finance at low interest charges thus depends greatly on staff efficiency. In simple

terms, efficiency depends on how many clients a staff member is able to deal with. By

and large, MFIs in India are able to service some 150-250 clients per staff member. The

larger institutions are able to service more borrowers per staff member as some

economies of scale take effect. The leading ten MFIs in India service some 239 clients

36

per staff member. This amounts to the operating expense ratio (OER) of these

institutions declining as the size of portfolio increases.

The table/figure below gives some idea of start up costs – the first three years and a

portfolio size of Rs1 crore are crucial. Beyond this level operating expenses decline to

20% and after about Rs.2.5 crore to 14-15% of outstanding portfolio. The really large

MFIs are able to achieve 10-12% OERs.

Table 3.3 Operating expenses and portfolio yield by age of MFI

Age (years) OER

Yield

<3 46.0% 19.0%

3-5 19.0% 17.0%

5-7 14.0% 20%

>7 15.0% 19.0%

M-CRIL India18.5% 19.1%

Top 10 12.3% 24.8%

MBB 20.2% 38.1%

THE IMPACT OF MICRO FINANCE

MFIs have been playing an important role in substituting moneylenders and reducing the

burden on the formal financial institutions. It is a proven method of financial inclusion,

37

46%

19%

19.0% 17.0% 15%14%

20.0% 19.0%

0%

10%

20%

30%

40%

50%

<3 3-5 5-7 >7

Years of Experience

OER Yield

providing un-banked rural clientele with access to formal financial services from the

existing banking infrastructure. To study the impact of these initiatives we begin by

analysing the number of SHG’s that have been linked with the banks.

Increasing Number of SHG’s: During the year 6, 86,408 new SHGs were credit linked

with banks as against 6, 20,109 during 2005-06, taking the cumulative number of credit

linked SHGs to 29, 24,973. Considering that many groups now operate to promote the

idea of MF it is important to have a peek into the number of households that have

benefited from such groups.

Households Served: The phenomenal outreach of the programme has enabled an

estimated 409.5 lakh poor households to gain access to MF from the formal banking

system as on 31 March 2007, registering a growth of 24.2 per cent over the previous year

(NABARD, 2007). These initiatives, which were started as an outreach programme, not

only aimed to promote thrift and credit but made immense contribution towards

empowerment of rural women.

Huge Potential For Growth: Micro finance still plays a modest role in India. At the All

India Level less than 5 per cent of poor rural households have access to micro finance (as

compared to 65 per cent in Bangladesh) with significant variation exists across the states

(Basu and Srivastava, 2005).

Balanced Regional Development: There is skewed growth of SHGs across the regions.

The year 2006-07 witnessed the spread of the MF programme in resource-poor regions of

the country indicating a marked shift from its initial concentration in the southern region.

The cumulative share of non southern regions rose from 29 per cent as on March 2001 to

48 per cent as on March 2007. This is mainly because of presence of large number of

NGOs operating in South Region

Promoting Overall Development: While estimating the impact of micro finance on

savings and borrowings it has been found that micro credit not only increases involuntary

savings, but also induces voluntary savings (Khandker, 1998). Apart from financial

services Micro finance Institutions (MFIs) provide training and impart knowledge to the

target groups. Thus micro finance today is being treated as a developmental tool and not

just a financial service (Ledgerwood Jonna, 2000).

38

Empowering Women: The formation of SHGs in rural areas through NGOs has kindled

new hope of change and development in the status and role of women folk who were

otherwise considered as powerless and marginalized members of the society.

Increasingly, they have been able to grow economically and socially because now

members have also accepted the changed role of their women folk and most of the time

they are supportive to the efforts they make (Patil, 2006).

CURRENT STATUS OF MICROFINANCE IN INDIA

An attempt is made in this section to highlight the current status of the microfinance

sector in India in terms of potential demand for microfinance services, current level

outreach and supply in relation to the potential, and extent of involvement of various

types of institutions.

There are no clear and systematic estimates available regarding the actual as well as

potential demand and supply of microfinance in the country. Regarding the estimation of

target groups for MF services, one can base it on the official estimation of the number of

poor in the country as indicative of the total potential, given the fact that microfinance is

meant for the poor. The estimated size of the below poverty line (BPL) population gives

some idea about the potential client base of the sector.

Taking the official estimation of BPL population of 260 million during 1990-2000

(Government of India, 2002) and the average household size, we find that there are about

52.04 million households who are in the BPL category. The number of BPL households

in rural areas comes to 38.6 million; the same in urban areas comes to about 13.4 million.

There are, however, arguments whether the entire BPL households should be considered

for the purpose of providing microfinance. But given the fact that even very poor

households need service like savings and insurance, if not credit always, one can safely

consider almost all the households below BPL as potential client base of microfinance.

Adjusting for changes like population growth and households crossing poverty line

during the interval, one can say about 50 million households in the country presently

constitute the basic target group of the MF sector.

39

As regards the demand, based on the available estimates in the Task Force of NABARD

on microfinance it was indicated that the potential annual credit requirement could be in

the range of Rs. 150 billion to Rs. 500 billion per year (NABARD, 2000). A recent

unofficial estimate puts the total credit demand by the poor households in the order of

Rs.150 billion to Rs. 450 billion (Mahajan and Ramola, 2003). These estimates are based

on the actual credit usage as reported by various studies and not the potential demand.

Due to variations in the average household credit use as estimated by different studies,

there is a wide gap in the total estimated range of credit demand.

Again, there are no clear estimates about savings and insurance demand by the poor. The

same unofficial study (ibid), based on the assumption that the poor can save up to five to

10% of their annual income and can pay insurance premium equivalent to three to five

percent of their income, puts the annual demand for savings products in the range of Rs.

50 billion to Rs. 100 billion, and demand for insurance premium in the range of Rs. 30

billion to Rs. 50 billion. Taking together the estimated demand for credit, savings and

insurance, the annual total demand for microfinance by the poor households has been put

in the range of Rs. 230 billion to Rs. 600 billion in the country.

Given such a demand potential, the actual coverage of the target group and the extent of

supply of microcredit by various agencies indicate that there is a big gap in the demand

and supply of microfinance in the country. Since there are no clear figures available on

the actual supply of microfinance, here we look at the level of lending and outreach of the

target group attained by the major apex level microfinance institutions in the country. The

following table gives some macro level details about the lending and outreach

performance of the major apex level microfinance institutions or schemes in the country

based on 2003 and 2004 data. It is possible that there may be some overlaps in the

coverage of these agencies as some of the MFIs and NGOs may be simultaneously

getting assistance from more than one agency. There may be also some MFIs,

40

NGOs or government-sponsored microfinance programmes like SGSY which may not be

fully covered under these apex level programmes. Hence, one needs to take the figures in

Table 1 only as indicative of the total actual outreach and supply.

In terms of the actual number of agencies or institutions involved at the grass root or

retail level, from Table 1 one can make out that about 1,752 institutions of different types

were involved in delivering microfinance during 2003-2004. Under the SHG-Bank

Linkage Programme of NABARD, about 560 financial institutions, cooperatives, RRBs

and Commercial Banks have participated across the country. Under the SHG-Bank

Linkage Programme, the financial institutions have financed about 1,080,000 SHGs

which are promoted either directly by them or by the NGOs. NABARD provides

refinance to these financial institutions for on-lending to SHGs. Besides these financial

institutions, a large number of NGOs and microfinance institutions are also involved in

delivering microfinance.

41

About 1,192 NGO/MFIs had received loan assistance from various apex institutions like

SFMC, RMK, FWWB and NABARD for their on-lending programme. These 1,192

NGOs/MFIs have approached the apex agencies for getting various types of loan

assistance for on-lending to their groups or members. Cumulatively, these NGOs/MFIs

have reached out to over 1.56 million households and have received about Rs. 2,942

million loan assistance from apex agencies for on-lending. In addition to these 1,192

NGO/MFIs, it is estimated that another about 500 NGOs with an outreach of 0.32 million

households are also involved in delivering microfinance in the country. These are mostly

smaller NGOs which are managing their microfinance programmes either using donor

funds or with savings mobilised by their SHGs. Taking even these NGOs into account,

one can say that as of 2003-2004, about 1,700 NGOs/ MFIs are involved in delivering

microfinance in the country, apart from the 560 mainstream financial institutions

involved under the SHG-Bank Linkage Programme.

Taken together, the microfinance agencies in the country have reached about 17.87

million households, which accounts for little over one-third of the estimated number of

poor households in the country. The MF agencies hence still have a long way to go in

reaching the ultimate potential. If we look at the credit needs being met, the gap in the

demand and supply is even more glaring. Cumulatively, from 1989 till 2004 the major

microfinance agencies have disbursed about Rs. 41.98 billion loans. Even this cumulative

loan figure of 15 years accounts for only about 28% of an estimated annual credit

demand on the lower side (Rs. 150 billion) or only about 9.3% of the estimated credit

demand on the higher side (Rs. 450 billion).

Instead of cumulative loan disbursement, if one were to take the actual annual loan

disbursement of these agencies, then the gap would be even bigger. The gap probably

could be even bigger if we were to take the total potential demand and not one based on

the actual credit use. As regards savings and insurance, again there are no clear macro

level statistics available. But going by the fact that the microfinance agencies in the

country so far have focused their attention mainly on credit, and also that many local

microfinance institutions are not able to mobilise savings in a full fledged way due to

legal restrictions, the extent of gap in the demand and supply for these services would be

42

definitely much higher than the credit. Thus, given the need and their current level of

achievements, the MFIs and other agencies have still a long way to go in meeting the

needs of the poor.

43

Chapter -6

Microfinance institutions in India

SIDBI

Mission

SIDBI Foundation for Micro Credit (SFMC) was launched by the Bank in January 1999

for channelising funds to the poor in line with the success of pilot phase of Micro Credit

Scheme. SFMC’s mission is to create a national network of strong, viable and sustainable

Micro Finance Institutions (MFIs) from the informal and formal financial sector to

provide micro finance services to the poor, especially women.

Approach

SFMC is the apex wholesaler for micro finance in India providing a complete range of

financial and non-financial services such as loan funds, grant support, equity and

institution building support to the retailing Micro Finance Institutions (MFIs) so as to

facilitate their development into financially sustainable entities, besides developing a

network of service providers for the sector. SFMC is also playing significant role in

advocating appropriate policies and regulations and to act as a platform for exchange of

information across the sector. The launch of SFMC by SIDBI has been with a clear focus

and strategy to make it as the main purveyor of micro finance in the country. Operations

of SFMC in the next few years, is not only expected to contribute significantly towards

development of a more formal, extensive and effective micro finance sector serving the

poor in India but also ensure sustainability at all levels viz. at the apex level (SFMC), at

the MFI level and at the client level to ensure continuance of such arrangement. Most

importantly, SFMC has strived to create a mechanism in which there should be no

44

barriers to growth. Under the dispensation, there is a focus on innovation and action

research.

On lending

In keeping with its mission, SIDBI Foundation identifies, nurtures and develops select

potential MFIs as long term partners and provides credit support for their micro credit

initiatives. The eligible partner institutions of SIDBI Foundation, therefore, comprise

large and medium scale MFIs having minimum fund requirement of Rs. 10 lakh per

annum. In all, around 100-125 MFIs are planned to be developed as long term partners

over the next 4 years. Large and medium scale MFIs having considerable experience in

managing micro credit programmes, high growth potential, good track record,

professional expertise and committed to viability are provided financial assistance for on-

lending. Under the present dispensation, annual need based assistance is provided to

enable MFIs to expand their scale of operations and achieve self sufficiency at the

earliest. Lending is based strictly on an intensive in-house appraisal supplemented with

the capacity assessment rating by an independent professional agency. Relaxed security

norms have also been adopted to reduce procedural bottlenecks as well as to facilitate

easy disbursements.

STATE BANK OF INDIA

SHG MOVEMENT – A MISSION:

SBI has taken up SHG movement as a mission. A noble mission to reach those families

who were hitherto having no access to the credit by any formal financial institution and,

therefore, were depending on informal sources and moneylenders.

 MICRO FINANCE – DEEP ROOTS IN SBI:

Micro finance is not new to State Bank of India. Bank’s association with non-government

organizations (NGOs) or voluntary agencies in extending financial help can be traced as

45

far back as 1976 well before NABARD introduced SHG-Bank Credit Linkage

Programme as a pilot project in 1992.

 STEADY GROWTH IN SHG-BANK CREDIT LINKAGE PROGRAMME:

SBI has actively participated in SHG-Bank Credit Linkage programme since its inception

in 1992 as a pilot project of NABARD. Since then the Bank has made a steady progress

in financing SHGs. As on March 2006, SBI’s branches spread throughout the length and

breadth of the country have opened 6,30,067 Savings Bank account of SHGs out of

which more than 5.41 lacs SHGs have been provided with credit facilities thus benefiting

more than 75 lacs poor people. Majority of these SHGs are women SHGs . The year-wise

cumulative position of SHGs-Bank Linkage programme for the last 4 years is as under:

 Year March ‘03 March ‘04 March ‘05 March ‘06

SHGs linked (financed) 1,07,553 1,74,666 3,43,691 5,40,481

No. of beneficiaries 12,33,660 21,50,752 48,11,674 75,68,842

Amount disbursed 324.84 cr. 614.87 cr. 1311.45 cr. 2262.95 cr.

Amount outstanding 269.43 cr. 462.77 cr. 872.08 cr. 1459.89 cr.

No. of SHGs maintaining

Savings a/c in the Bank

2,79,466 3,69,568 5,08,396 6,36,067

Amount in Savings a/c

(Amt. in Rs.)

261.36 cr. 348.31 cr. 411.82 cr. 434.07 cr.

SBI – LEADER IN SHG-BANK CREDIT LINKAGE:

SBI is maintaining its position as a leader among Commercial Banks in credit linking of

SHGs and is a prime driver for the movement. As at the end of March 2006, SBI with a

share of approximately 47% of total SHGs financed by Commercial Banks is far ahead of

others.

46

 INNOVATIONS & INITIATIVES:

Bank has successfully initiated various measures toward widening its SHG network. To

list a few examples:

o Sensitization of staff: Bank’s aim is to sensitize the entire staff from

Manager to Messenger working in rural and semi-urban branches towards

the programme.

o Special training programmes in SHGs are being conducted at 54

training centres of the Bank in the country apart from State Bank Institute

of Rural Development, Hyderabad.

o Close liaison with NGOs: Operating functionaries at branch level and

region level are in close contact with NGOs in their area to take the

movement ahead. For the purpose, regular meetings are arranged with the

NGOs and their support is solicited.

o SHG cells: Special SHG cells have been opened at major branches.

o Lending to NGOs / Federations of SHGs: Lending to credible NGOs/

Federations of SHGs on selective basis for on lending to SHGs is being

encouraged.

o Sahayog Niwas: SBI has launched its Housing Loan product ‘SAHAYOG

NIWAS’ meant for SHG members. Under the scheme formulated keeping

the socio economic conditions of villages insight, housing loans are given

to the SHG members without any mortgage of house / land. Response to

this product is very encouraging.

o SBI Life- Shakti: SBI Life, our insurance subsidiary, is the first to

introduce a life insurance scheme, especially designed for SHG members.

Special feature of the scheme is that entire premium amount paid by the

member is refunded after maturity, i.e., 10 years.

47

o Rural training institutes: To help the rural youth to stand on their feet,

two RUDSETI type training institutes have been established at Gulbarga

and Gadag in Karnataka State, to impart training in self employment to

youth free of cost.

o SBI staff as SHPI: The main role of formation and nurturing of SHGs

have been played by NGOs who, apart from their fundamental role of

social service, also aim to make the poor economically self sufficient. But

in SBI, our committed work force is not lagging behind and a number of

committed staff members have worked hard to form and nurture SHGs on

their own.

o Appreciation by Government: A number of our branches / Circles have

also received commendation and appreciation from various State

Governments for doing excellent job in SHG-Bank Credit Linkage

programme.

ICICI

OVERVIEW

ICICI Bank, India's second largest bank, is finding innovative and profitable ways to

extend financial services to the rural poor. Prompted in part by regulation that requires all

banks to serve the rural market, ICICI Bank is developing multiple channels to deliver

microfinance. It proposes to finance a network of village internet kiosks, partner with

microfinance institutions (MFIs) who will act as loan service agents, and collaborate with

social entrepreneurs to establish Greenfield MFIs. If it succeeds, ICICI Bank will have

built a US$ 10 billion plus microfinance loan portfolio by 2010 and created a network

that could eventually distribute a range of financial services throughout rural India. Its

insurance subsidiaries have already begun selling life, personal accident and weather

insurance (index-based rainfall insurance) policies through MFIs in rural areas.  

48

ICICI Bank is India's second-largest bank with total assets of over Rs.100, 000 crore

(about US$ 20 billion) and a network of 450 branches and offices and over 1,700 ATMs.

The bank has an approximate 30 percent market share in the retail segment, and was one

of the first commercial banks in India to realize the potential of the microfinance sector.

The Reserve Bank of India (RBI) requires all private sector banks in India to allocate at

least 18 percent of their net bank credit to the agricultural sector, although agri-lending

can also fulfil banks’ this requirement, the officials contacted at ICICI bank revealed that

bank takes rural finance as a full fledged profitable business model. ICICI Bank is

aggressively focusing on microfinance to expand its portfolio size. In agriculture, during

the last three years ICICI Bank has built a portfolio of over Rs. 2,000 crore (about US$

400 million) with a presence in the following states: Punjab, Maharashtra, Tamil Nadu,

Andhra Pradesh and Uttar Pradesh. The Bank hopes to significantly increase its

involvement in the agricultural sector with the asset base growing over time to over Rs.

10,000 crore (about US$ 2 billion). ICICI Bank's challenge is to reach this target without

the benefit of a wide branch network or brand presence in rural India. (By comparison,

the public sector State Bank of India has over 6,600 rural and semi-urban branches). Its

strategy is multi-pronged:

1. Enter into strategic partnerships with NGOs/MFIs that serve the rural poor.

2. Build rural outreach through low-cost technology networks

3. Create a franchise for social entrepreneurs to start up MFIs. 

ICICI Bank and Microfinance

ICICI Bank entered the micro-finance market in 2002. Among the reasons for entering

the market is its goal to lead in every field of Indian banking. Other includes:

The reverse merger meant that ICICI Limited’s portfolio was aggregated with

that of ICICI Bank for the purposes of calculating the Bank’s priority sector

lending quota. This created urgent need for additional qualifying assets, since the

returns on compensating ‘penalty loans’ to institutions such as NABARD and

SIDBI were likely to be lower than ICICI Bank’s average cost of funds.

49

ICICI Bank had purchased the privately owned Bank of Madura, in Southern

India, in the year 2001. The Bank of Madura had a substantial portfolio of loans

to 600 SHGs, and ICICI Bank had somehow to integrate these accounts into its

business model.

The Bank of Madura’s experience showed that micro-finance loans were of

high quality, and that the market would pay relatively high interest rates for good

quality service. ICICI Bank’s management believe that their model of offering

services through specialized intermediaries, such as car loans through vehicle

dealers, housing finance through builders, or micro-credit through micro-finance

institutions, can offer better quality service than banks can through their multi-

purpose branch networks.

ICICI Bank’s management believe that their micro finance clients will migrate

into mainstream banking, and micro finance is a form of customer development.

The Bank is highly visible, and has a obvious branch presence in the richer parts

of Mumbai, Delhi and micro-finance offers a way to demonstrate the Bank’s

commitment to social as well as economic and financial goals. ICICI Bank started

its micro-finance activities under its Social Initiatives Group (SIG). This Group is

half-way between the corporate responsibility area and the for-profit business.

The SIG is responsible for strategic sector-wide developments, and it success has

already led to competition from other banks, learning from the pioneering work of

SIG. The bulk of the micro-finance activity has now been transferred to

mainstream business. The five-member micro-finance team is located in the rural

and micro-banking and agri-business group, within the wholesale banking

division. They have also set up a specialised centre for practical action-directed

research in micro-finance, which is located in Chennai, in an existing staff

training centre of the Bank. As a private sector bank, ICICI Bank feels that it

should focus on improving individuals’ capacity to access formal financial

services, rather than working at the community level. The Bank therefore

endeavours to deal direct with individuals or with their SHGs when they are

organized in this way. They sometimes work through community SHG

50

federations or similar bodies, but the emphasis is on developing individual

customer relationships whenever possible.

By early 2005 ICICI had a portfolio of about $66 million through 27 partner MFIs, and

loans through a further 11 institutions were under negotiation. Indian micro-finance has

grown rapidly but inequitably; Bihar and Uttar Pradesh, which are home to 37 percent of

India’s poorest people, only have 9 percent of the over one million SHGs. ICICI Bank is

attempting to reverse this trend, and a number of its partner MFIs, including Cashpor, one

of the largest, are located in the poorer Northern States.

The Bank aims to increase its micro-finance portfolio to $4 billion dollars, working

through 200 MFIs. There are some 1600 MFIs in India, but only about a dozen of these

are presently of sufficient size or strength to be suitable partners for ICICI Bank. The

Bank is trying to develop their capacity, through practical training, and also through a

programme of mentoring whereby senior staff of the Bank, not from the micro-finance

team, make regular visits to assist MFIs to improve their systems and to adopt some

elements of a banking culture. This programme is thought to be of great benefit not only

to the MFIs but also to the mentors, who may previously have had little or no exposure to

the realities of poverty in their own country. The Bank is also collaborating with the

CARE CASHE project to develop second-tier MFIs (see section 6). ICICI Bank is

packaging and selling on its micro-finance loans, to for instance UTI Bank, one of the

larger private banks. In this way ICICI can enhance the quality and price of these assets.

It may eventually be possible to create an international secondary market in microfinance

debt, such as already exists for many other securitised assets, but the priority sector

eligibility of the Bank’s loans to MFIs means that they are presently more attractive to

Indian banks.

51

CHAPTER 7

SOME OTHER MICRO-FINANCE INSTITUTIONS

BANDHAN

(Ranked 2nd by Forbes Magazine in December 2007)

Bandhan is working towards the twin objective of poverty alleviation and women

empowerment. It started as a Capacity Building Institution (CBI) in November 2000

under the leadership of Mr. Chandra Shekhar Ghosh. During such time, it was giving

capacity building support to local microfinance institutions working in West Bengal.

Bandhan opened its first microfinance branch at Bagnan in Howrah district of West

Bengal in July 2002. Bandhan started with 2 branches in the year 2002-03 only in the

state of West Bengal and today it has grown as strong as 412 branches across 6 states of

the country! The organization had recorded a growth rate of 500% in the year 2003-04

and 611% in the year 2004-05. Till date, it has disbursed a total of Rs. 587 crores among

almost 7 lakh poor women. Loan outstanding stands at Rs. 221 crores. The repayment

rate is recorded at 99.99%. Bandhan has staff strength of more than 2130 employees.

As on July 2008

No. of states : 8

52

No. of branches

No. of members

No. of staff

Cumulative loan disbursed

Loan outstanding

: 528

: 1,182,741

: 3,191

: Rs.1,249 crores

: Rs. 417 crores

Operational Methodology

Bandhan follows a group formation, individual lending approach. A group of 10-25

members are formed. The clients have to attend the group meetings for 2 successive

weeks. 2 weeks hence, they are entitled to receive loans. The loans are disbursed

individually and directly to the members.

Economic and Social Background of Clients

Landless and asset less women

Family of 5 members with monthly income less than Rs. 2,500 in rural

and Rs. 3,500 in urban

Those who do not own more than 50 decimal (1/2acre) of land or capital

of its equivalent value

Loan Size

The first loan is between Rs. 1,000 – Rs. 7,000 for the rural areas and between Rs. 1,000

– Rs. 10,000 for the urban areas. After the repayment, they are entitled to receive a

subsequent loan which is Rs 1,000 - 5,000 more than the previous loan.

Service Charge

Bandhan charges a service charge of 12.50% flat on loan amount. Bandhan initially

charged 17.50%. However from 1st July 2005, it has slashed down its lending rate to

15.00%. Then it was further reduced to 12.50% in May 2006. The reason is obvious. As

53

overall productivity increased, operational costs decreased. Bandhan, being a non profit

organization wanted the benefit of low costs to ultimately trickle down to the poor.

Monitoring System

The various features of the monitoring system are:

A 3 tier monitoring system – Region, Division and Head Office

Easy reporting system with a prescribed checklist format

Accountability at all levels post monitoring phase

Cross- checking at all the levels

The management team of Bandhan spends 90.00% of time at the field

Liability structure for Loans

When a member wants to join Bandhan, she at first has to get inducted into a group. After

she gets inducted into the group, the entire group proposes her name for a loan in the

Resolution Book. Two members of the group along with the member’s husband have to

sign as guarantors in her loan application form. If she fails to pay her weekly installment,

the group inserts peer pressure on her. The sole purpose of the above structure is simply

to create peer pressure.

GRAMEEN BANK

The Grameen Model which was pioneered by Prof Muhammed Yunus of Grameen Bank

is perhaps the most well known, admired and practised model in the world. The model

involves the following elements.

! Homogeneous affinity group of five

! Eight groups form a Centre

! Centre meets every week

! Regular savings by all members

! Loan proposals approved at Centre meeting

! Loan disbursed directly to individuals

54

! All loans repaid in 50 instalments

The Grameen model follows a fairly regimented routine. It is very cost intensive as it

involves building capacity of the groups and the customers passing a test before the

lending could start. The group members tend to be selected or at least strongly vetted by

the bank. One of the reasons for the high cost is that staff members can conduct only two

meetings a day and thus are occupied for only a few hours, usually early morning or late

in the evening. They were used additionally for accounting work, but that can now be

done more cost effectively using computers. The model is also rather meeting intensive

which is fine as long as the members have no alternative use for their time but can be a

problem as members go up the income ladder.

The greatness of the Grameen model is in the simplicity of design of products and

delivery. The process of delivery is scalable and the model could be replicated widely.

The focus on the poorest, which is a value attribute of Grameen, has also made the model

a favourite among the donor community.

However, the Grameen model works only under certain assumptions. As all the loans are

only for enterprise promotion, it assumes that all the poor want to be self-employed. The

repayment of loans starts the week after the loan is disbursed – the inherent assumption

being that the borrowers can service their loan from the ex-ante income.

SKS MICROFINANCE (CEO-VIKRAM AKULA)

Many companies say they protect the interests of their customers. Very few actually sit in

dirt with them, using stones, flowers, sticks, and chalk powder to figure out if they will be

able to repay a $20 loan at $1 a month. With this approach, this company has created its

own loyal gang of over 2 million customers.

Its borrowers include agricultural labourers, mom-and-pop entrepreneurs, street vendors,

home based artisans, and small scale producers, each living on less than $2 a day. It

55

works on a model that would allow micro-finance institutions to scale up quickly so that

they would never have to turn poor person away.

Its model is based on 3 principles-

1. Adopt a profit-oriented approach in order to access commercial capital-

Starting with the pitch that there is a high entrepreneurial spirit amongst the poor

to raise the funds, SKS converted itself to for-profit status as soon as it got break

even and got philanthropist Ravi Reddy to be a founding investor. Then it secured

money from parties such as Unitus, a Seattle based NGO that helps promote

micro-finance; SIDBI; and technology entrepreneur Vinod Khosla. Later, it was

able to attract multimillion dollar lines of credit from Citibank, ABN Amro, and

others.

2. Standardize products, training, and other processes in order to boost

capacity- They collect standard repayments in round numbers of 25 or 30 rupees.

Internally, they have factory style training models. They enroll about 500 loan

officers every month. They participate in theory classes on Saturdays and practice

what they have learned in the field during the week. They have shortened the

training time for a loan officer to 2 months though the average time taken by other

industry players is 4-6 months.

3. Use Technology to reduce costs and limit errors- It could not find the software

that suited its requirements, so it they built their own simple and user friendly

applications that a computer-illiterate loan officer with a 12th grade education can

easily understand. The system is also internet enabled. Given that electricity is

unreliable in many areas they have installed car batteries or gas powered

generators as back-ups in many areas.

Scaling up Customer Loyalty

Instead of asking illiterate villagers to describe their seasonal pattern of cash flows,

they encourage them to use colored chalk powder and flowers to map out the village

on the ground and tell where the poorest people lived, what kind of financial products

56

they needed, which areas were lorded over by which loan sharks, etc. They set

people’s tiny weekly repayments as low as $1 per week and health and whole life

insurance premiums to be $10 a year and 25 cents per week respectively. They also

offer interest free emergency loans. The salaries of loan officers are not tied to

repayment rates and they journey on mopeds to borrowers’ villages and schedule loan

meetings as early as 7.00 A.M. Deep customer loyalty ultimately results in a

repayment rate of 99.5%.

Leveraging the SKS brand

Its payoff comes from high volumes. They are growing at 200% annually, adding 50

branches and 1,60,000 new customers a month. They are also using their deep

distribution channels for selling soap, clothes, consumer electronics and other

packaged goods.

57

CHAPTER 8

SUCCESS FACTORS OF MICRO-FINANCE IN INDIA

Over the last ten years, successful experiences in providing finance to small entrepreneur

and producers demonstrate that poor people, when given access to responsive and timely

financial services at market rates, repay their loans and use the proceeds to increase their

income and assets. This is not surprising since the only realistic alternative for them is to

borrow from informal market at an interest much higher than market rates. Community

banks, NGOs and grass root savings and credit groups around the world have shown that

these micro enterprise loans can be profitable for borrowers and for the lenders, making

microfinance one of the most effective poverty reducing strategies.

FOR NGOS

1. The field of development itself expands and shifts emphasis with the pull of ideas,

and NGOs perhaps more readily adopt new ideas, especially if the resources

required are small, entry and exit are easy, tasks are (perceived to be) simple and

people’s acceptance is high – all characteristics (real or presumed) of

microfinance.

2. Canvassing by various actors, including the National Bank for Agriculture and

Rural Development (NABARD), Small Industries Development Bank of India

(SIDBI), Friends of Women’s World Banking (FWWB), Rashtriya Mahila Kosh

(RMK), Council for Advancement of People’s Action and Rural Technologies

(CAPART), Rashtriya Gramin Vikas Nidhi (RGVN), various donor funded

58

programmes especially by the International Fund for Agricultural Development

(IFAD), United Nations Development Programme (UNDP), World Bank and

Department for International Development, UK (DFID)], and lately commercial

banks, has greatly added to the idea pull. Induced by the worldwide focus on

microfinance, donor NGOs too have been funding microfinance projects. One

might call it the supply push.

3. All kinds of things from khadi spinning to Nadep compost to balwadis do not

produce such concrete results and sustained interest among beneficiaries as

microfinance. Most NGO-led microfinance is with poor women, for whom access

to small loans to meet dire emergencies is a valued outcome. Thus, quick and high

‘customer satisfaction’ is the USP that has attracted NGOs to this trade.

4. The idea appears simple to implement. The most common route followed by

NGOs is promotion of SHGs. It is implicitly assumed that no ‘technical skill’ is

involved. Besides, external resources are not needed as SHGs begin with their

own savings. Those NGOs that have access to revolving funds from donors do not

have to worry about financial performance any way. The chickens will eventually

come home to roost but in the first flush, it seems all so easy.

5. For many NGOs the idea of ‘organising’ – forming a samuha – has inherent

appeal. Groups connote empowerment and organising women is a double bonus.

6. Finally, to many NGOs, microfinance is a way to financial sustainability.

Especially for the medium-to-large NGOs that are able to access bulk funds for

on-lending, for example from SIDBI, the interest rate spread could be an

attractive source of revenue than an uncertain, highly competitive and

increasingly difficult-to-raise donor funding.

59

FOR FINANCIAL INSTITUTIONS AND BANKS

Microfinance has been attractive to the lending agencies because of demonstrated

sustainability and of low costs of operation. Institutions like SIDBI and NABARD are

hard nosed bankers and would not work with the idea if they did not see a long term

engagement – which only comes out of sustainability (that is economic attractiveness).

On the supply side, it is also true that it has all the trappings of a business enterprise, its

output is tangible and it is easily understood by the mainstream. This also seems to sound

nice to the government, which in the post liberalisation era is trying to explain the logic

of every rupee spent. That is the reason why microfinance has attracted mainstream

institutions like no other developmental project.

Perhaps the most important factor that got banks involved is what one might call the

policy push.

Given that most of our banks are in the public sector, public policy does have some

influence on what they will or will not do. In this case, policy was followed by diligent, if

meandering, promotional work by NABARD. The policy change about a decade ago by

RBI to allow banks to lend to SHGs was initially followed by a seven-page memo by

NABARD to all bank chairmen, and later by sensitisation and training programmes for

bank staff across the country. Several hundred such programmes were conducted by

NGOs alone, each involving 15 to 20 bank staff, all paid for by NABARD. The policy

push was sweetened by the NABARD refinance scheme that offers much more

favourable terms (100% refinance, wider spread) than for other rural lending by banks.

NABARD also did some system setting work and banks lately have been given targets.

The canvassing, training, refinance and close follow up by NABARD has resulted in

widespread bank involvement.

Moreover, for banks the operating cost of microfinance is perhaps much less than for

pure MFIs. The banks already have a vast network of branches. To the extent that an

NGO has already promoted SHGs and the SHG portfolio is performing better than the

60

rest of the rural (if not the entire) portfolio, microfinance via SHGs in the worst case

would represent marginal addition to cost and would often reduce marginal cost through

better capacity utilisation. In the process the bank also earns brownie points with policy

makers and meets its priority sector targets.

It does not take much analysis to figure out that the market for financial services for the

50-60 million poor households of India, coupled with about the same number who are

technically above the poverty line but are severely under-served by the financial sector, is

a very large one. Moreover, as in any emerging market, though the perceived risks are

higher, the spreads are much greater. The traditional commercial markets of corporate,

business, trade, and now even housing and consumer finance are being sought by all the

banks, leading to price competition and wafer thin spreads.

Further, bank-groups are motivated by a number of cross-selling opportunities in the

market, for deposits, insurance, remittances and eventually mutual funds. Since the larger

banks are offering all these services now through their group companies, it becomes

imperative for them to expand their distribution channels as far and deep as possible, in

the hope of capturing the entire financial services business of a household.

Finally, both agri-input and processing companies such as EID Parry, fast-moving

consumer goods (FMCG) companies such as Hindustan Levers, and consumer durable

companies such as Philips have realised the potential of this big market and are actively

using SHGs as entry points. Some amount of free-riding is taking place here by

companies, for they are using channels which were built at a significant cost to NGOs,

funding agencies and/or the government.

On the whole, the economic attractiveness of microfinance as a business is getting

established and this is a sure step towards mainstreaming. We know that mainstreaming

is a mixed blessing, and one tends to exchange scale at the cost of objectives. So it needs

to be watched carefully.

61

CHAPTER 9

ISSUES IN MICROFINANCE

MICRO FINANCE- ISSUES AND CONCERNS

Microfinance has drawn attention to an entire sector of borrowers who had been

previously poorly served by the formal financial sector. MF has successfully

demonstrated how to make lending to this sector a viable proposition. But there still

remain areas of concerns that have been raised by the critics time and again. There is now

a need to address these issues appropriately so that MF continues being seen as the

solution to unending problems of the poorest sections of our society. The areas of

concern identified are as follows:

Higher Rates of Interest: The rates of interest charged are quite high, typically 12 to 30

per cent, mainly on account of the high transaction cost for the average loan size that can

be quite small. Compared to the informal sector, perhaps the rates are lower, but issues

are raised whether these rates are affordable - in the sense whether they would leave any

surplus in the hands of the borrowers and lead to higher levels of living. For commercial

banks, the lower cost of funding, advantages of size and scale gives scope for cross

subsidization and their interest rates are more competitive compared to the MFIs, but they

have not been as successful in dealing with the last mile issue.

The Extent of Reach of SHG’s: The financial inclusion attained through SHGs is

sustainable and scalable on account of its various positive features. One of the distinctive

features of the SHGBLP has been the high recovery rate. However the spread of SHGs is

62

very uneven and is more concentrated in southern states. This regional imbalance needs

to be corrected and special efforts in this regard may have to be made by NABARD.

TABLE 2: REGION-WISE SPREAD OS SHG’s

SOURCE: NABARD Annual Report, 2007

Limited Role of SHGs: Another point of contention is that SHG’s have to graduate from

mere providers of credit for non-productive purposes to promoting micro enterprises.

There have been several institutional innovations in financial services by including civil

society. Followed by the success of SHG- BLP and Bangladeshi Grameen model, many

of the NGO’s have taken to financial intermediation by adopting innovative delivery

approaches.

Unfair Practices: Although the impact of MF has been positive on our society as a

whole what we should not forget is that these SHG’s and other bodies must be reviewed

periodically to ensure fairness. One has to be very cautious about the attempts being

made by the vested interest groups to substitute the need for expansion of formal banking

structure to the hitherto un-banked areas with SHGs and NGOs. The complaints of high

interest rates charged from ultimate borrowers and examples of coercion are not too

insignificant (Mitra, 2007). In absence of strict control there is a possibility that such

instances can increase thereby defeating the whole purpose of the MF system.

63

Huge Demand-Supply Gap: The Reserve Bank of India has identified large gap in the

demand and supply of credit to the poor and suggests the urgent need to widen the scope,

outreach and scale of financial services to cover the un-reached populace. Estimates

reveal that the credit support for poor households in India is of the order of Rs.450, 000

crore. Some micro level studies show that the poor still continue to depend on informal

sources of credit to up to 60 per cent of the household demand.

1. SUSTAINABILITY

The first challenge relates to sustainability. MFI model is comparatively costlier in

terms of delivery of financial services. An analysis of 36 leading MFIs by Jindal &

Sharma shows that 89% MFIs sample were subsidy dependent and only 9 were able

to cover more than 80% of their costs. This is partly explained by the fact that while

the cost of supervision of credit is high, the loan volumes and loan size is low. It has

also been commented that MFIs pass on the higher cost of credit to their clients who

are ‘interest insensitive’ for small loans but may not be so as loan sizes increase. It is,

therefore, necessary for MFIs to develop strategies for increasing the range and

volume of their financial services.

2. LACK OF CAPITAL

The second area of concern for MFIs, which are on the growth path, is that they face

a paucity of owned funds. This is a critical constraint in their being able to scale up.

Many of the MFIs are socially oriented institutions and do not have adequate access

to financial capital. As a result they have high debt equity ratios. Presently, there is no

reliable mechanism in the country for meeting the equity requirements of MFIs.

The IPO issue by Mexico based ‘Compartamos’ was not accepted by purists as they

thought it defied the mission of an MFI. The IPO also brought forth the issue of

valuation of an MFI.

64

The book value multiple is currently the dominant valuation methodology in

microfinance investments. In the case of start up MFIs, using a book value multiple

does not do justice to the underlying value of the business. Typically, start ups are

loss making and hence the book value continually reduces over time until they hit

break even point. A book value multiplier to value start ups would decrease the value

as the organization uses up capital to build its business, thus accentuating the negative

rather than the positive.

3. FINANCIAL SERVICE DELIVERY

Another challenge faced by MFIs is the inability to access supply chain. This

challenge can be overcome by exploring synergies between microfinance institutions

with expertise in credit delivery and community mobilization and businesses

operating with production supply chains such as agriculture. The latter players who

bring with them an understanding of similar client segments, ability to create micro

enterprise opportunities and willingness to nurture them, would be keen on directing

microfinance to such opportunities. This enables MFIs to increase their client base at

no additional costs.

Those businesses that procure from rural India such as agriculture and dairy often

identify finance as a constraint to value creation. Such businesses may find

complementarities between an MFI’s skills in management of credit processes and

their own strengths in supply chain management.

ITC Limited, with its strong supply chain logistics, rural presence and an innovative

transaction platform, the “E-choupal”, has started exploring synergies with financial

service providers including MFIs through pilots with vegetable vendors and farmers.

Similarly, large FIs such as Spandana foresee a larger role for themselves in the rural

economy ably supported by value creating partnerships with players such as

Mahindra and Western Union Money Transfer.

ITC has initiated a pilot project called ‘pushcarts scheme’ along with BASIX (a

microfinance organization in Hyderabad). Under this pilot, it works with twenty

women head load vendors selling vegetables of around 10- 15 kgs per day. BASIX

65

extends working capital loans of Rs.10,000/- , capacity building and business

development support to the women. ITC provides support through supply chain

innovations by:

1. Making the Choupal Fresh stores available to the vendors, this avoids the hassle

of bargaining and unreliability at the traditional mandis (local vegetable markets).

The women are able to replenish the stock from the stores as many times in the

day as required. This has positive implications for quality of the produce sold to

the end consumer.

2. Continuously experimenting to increase efficiency, augmenting incomes and

reducing energy usage across the value chain. For instance, it has forged a

partnership with National Institute of Design (NID), a pioneer in the field of

design education and research, to design user-friendly pushcarts that can reduce

the physical burden.

3. Taking lessons from the pharmaceutical and telecom sector to identify

technologies that can save energy and ensure temperature control in push carts in

order to maintain quality of the vegetables throughout the day. The model

augments the incomes of the vendors from around Rs.30-40 per day to an average

of Rs.150 per day. From an environmental point of view, push carts are much

more energy efficient as opposed to fixed format retail outlets.

4. LACK OF CONDUCIVE REGULATORY FRAMEWORK

Despite having proved its mettle as a sound financial intervention for the poor,

microfinance today stands in a state where the future path of its growth in the

country, especially in terms of the institutional form it will take, still remains

uncertain. MF has enabled the policy makers and planners to discover a potential

tool for poverty alleviation but the enabling environment for its own growth looks

elusive (Shylendra, 2003). It is recognised that successful scaling up of MF

intervention for a larger impact requires promoting strong network of institutions

delivering microfinance with sound practices. However, the MF sector is faced

with many problems in this regard.

66

Excluding the formal financial institutions, the sector consists of a large number

of unregulated NGOs dealing with the poor and other small clients (Satish, 2005).

Much of the MF intervention by the NGO sector is in the form of a project,

lacking the much needed organisational form and capacity. As estimated above,

there are over 1,700 NGO-MFIs involved in microfinance. A large number of

these NGOs are either trying to promote or even transform themselves into full-

fledged microfinance institutions (Shylendra and Saini, 2003). The NGOs, having

crossed the stage of infancy in microfinance activity more under an informal

framework, are now looking forward to a conducive and an appropriate regulatory

environment to grow further. Lack of suitable legal and regulatory framework

which clearly recognises the role of NGOs in microfinance and enables them to

scale up their operations or transform themselves as financial intermediaries is

identified as one of the major hurdles being faced by the NGOs. Such a scenario

is also leading to many distortions in the sector. In the absence of a suitable

regulatory framework, many NGOs are either stagnating in the delivery of

microfinance or able to deliver only a fragmented service (Shylendra, 2003).

Without a clear formal recognition, the status of microfinance activity of the

NGOs, especially savings mobilisation, has remained vague and even illegal.

Since the entry point and other prudential norms are so rigid or high under

existing framework, many NGOs, despite good past record, have decided to

remain small and local in delivering microfinance. While some have decided to

set up non-banking financial companies (NBFC) providing only partial service,

others are forced to run two institutions with additional cost. Even formation of a

regulated MFI is taking a very long time, given many legal hurdles faced

(Fernandez, 2004). Those which are registered as societies or cooperatives have to

put up with the problem of interference of politicians or bureaucracy to the

detriment of their much needed autonomy. Only a very few states have enacted

acts for autonomous or self-reliant cooperatives under which full fledged MFIs

could be formed.

5. HR ISSUES

67

Recruitment and retention is the major challenge faced by MFIs as they strive to

reach more clients and expand their geographical scope. Attracting the right talent

proves difficult because candidates must have, as a prerequisite, a mindset that fits

with the organization’s mission.

Many mainstream commercial banks are now entering microfinance, who are

poaching staff from MFIs and MFIs are unable to retain them for other job

opportunities.

85% of the poorest clients served by microfinance are women. However, women

make up less than half of all microfinance staff members, and fill even fewer of the

senior management roles. The challenge in most countries stems from cultural notions

of women’s roles, for example, while women are single there might be a greater

willingness on the part of women’s families to let them work as front line staff, but as

soon as they marry and certainly once they start having children, it becomes

unacceptable. Long distances and long hours away from the family are difficult for

women to accommodate and for their families to understand.

6. MICROINSURANCE

First big issue in the micro insurance sector is developing products that really respond

to the needs of clients and in a way that is commercially viable.

Secondly, there is strong need to enhance delivery channels. These delivery channels

have been relatively weak so far. Micro insurance companies offer minimal products

and do not want to go forward and offer complex products that may respond better.

Micro insurance needs a delivery channel that has easy access to the low-income

market, and preferably one that has been engaged in financial transactions so that they

have controls for managing cash and the ability to track different individuals.

Thirdly, there is a need for market education. People either have no information about

micro insurance or they have a negative attitude towards it. We have to counter that.

We have to somehow get people - without having to sit down at a table - to

68

understand what insurance is, and why it benefits them. That will help to demystify

micro insurance so that when agents come, people are willing to engage with them.

7. ADVERSE SELECTION AND MORAL HAZARD

The joint liability mechanism has been relied upon to overcome the twin issues of

adverse selection and moral hazard. The group lending models are contingent on the

availability of skilled resources for group promotion and entail a gestation period of

six months to one year. However, there is not sufficient understanding of the drivers

of default and credit risk at the level of the individual. This has constrained the

development of individual models of micro finance. The group model was an

innovation to overcome the specific issue of the quality of the portfolio, given the

inability of the poor to offer collateral. However, from the perspective of scaling up

micro financial services, it is important to proactively discover models that will

enable direct finance to individuals.

69

CHAPTER 10

DATA ANALYSIS

AND

INTERPRETATION

70

ANALYSIS

Q.1.) To which state do you belong?

Distribution across the states

05

1015202530354045

Andhra Pradesh Bihar Haryana Uttar Pradesh West Bengal

States

No.o

f res

pond

ents

The graph below shows the state-wise distribution of the sample size indicating that the

maximum no. of respondents is from “Haryana”.

Q.2.) What is your age?

71

Age wise distribution

10%

23%

55%

12%

18-25

25-35

35-45

Above 45

The graph below shows the age wise distribution of the sample, showing maximum no. of

respondents being from the age group of “35-45” years.

Q.3.) What is your occupation?

Occupation wise distribution

0

5

10

15

20

25

30

35

Farmer Housewife Service Small business Others

Occupation

No.o

f res

pond

ents

The figure below shows the occupation wise distribution of the sample size taken. It

shows that the maximum no. of respondents belong to “Service” category.

Q.4.) Have you ever taken a loan from any of the following institutions?

72

No.of respondents with financial institutions

05

1015202530354045

Bank MFI Moneylender SHG N.A

Financial institutions

No.o

f res

pond

ents

The figure above shows the no. of respondents taking finance from the different

microfinance institutions with “Moneylender’s” leading the pack among the financial

institutions.

Q 5)

Awareness about the banks among the respondents

0

10

20

30

40

50

60

Central bank ICICI SBI Others None

Banks

No.o

f res

pond

ents

The above figure shows that maximum no of respondents are aware about others banks.

Q6)

73

Financial needs

0 5 10 15 20 25 30 35 40 45 50

1-3 times

3-5 times

5-6 times

None

Fina

ncia

l nee

d

No.of respondents

The figure above indicates the frequency with which the people avail to the financing

needs within a span of 2-3 years with maximum people availing the facility of

microfinance 1-3 times within a span of 2-3 years .

Q7)

Duration of the loan taken

15%

29%

3%

35%

18%

6-12 months

12-18 months

18-24 months

2 or more years

None

The bar graph shown above shows the duration for which the people avail the amount

of loan taken from different financial institutions with the maximum percentage being

of the people taking loan for duration of “more than 2 years”.

Q8)

74

Distribution of amount taken and rate of interest paid

0

1

2

3

4

5

6

10-20% 20-30 30-40 Above 40

Rate of interest

No.o

f res

pond

ents

0

5

10

15

20

25

30

35

40

No.o

f res

pond

ents

5,000-20,000

20,000-30,000

30,000-50,000

Above 50,000

The figure above shows that the frequency of the amount of loan taken up and the rate

of interest paid by the sample population. The most amount of loan taken up is

“Rs.50, 000 or over” and the interest rate paid up by these people is “10-20%”.

Q9)

Financial needs

0 5 10 15 20 25 30 35 40 45 50

1-3 times

3-5 times

5-6 times

None

Fina

ncia

l nee

d

No.of respondents

The figure above indicates the frequency with which the people avail to the financing

needs within a span of 2-3 years with maximum people availing the facility of

microfinance 1-3 times within a span of 2-3 years.

75

Q10)

Interest rate paid across occupations

0 2 4 6 8 10 12 14 16

Farmer

Housewife

Small business

Service

OthersO

ccup

atio

n

No.of respondents

N.A

Above 40

30-40

20-30

10-20%

The following graph shows the distribution of people belonging to different occupations

and the interest rate paid by them for availing the microfinance facility with the farmer’s

and the servicemen paying a interest of 10-20% and the people belonging to others

paying a interest of around 30-40%.

76

CHAPTER 11

KEY FINDINGS

1. With a population of 70 million people, which is almost 70% of the Indian

villages, majority of them, do not even own a bank account. This itself represents

the scope of micro-finance in the Indian economy, and the growth possibilities of

the same.

2. The analysis of the above data gathered through the research conducted indicates

that among the people availing to the finance at this level have the knowledge

about the commercial banks providing this facility at much cheaper rate of

interests as compared to the Self-help groups, SEWA bank, Micro-finance

institutions, Money lender’s, etc.

3. The apex financial institutions in the country have also recognized the importance

of micro-finance and have been taking measures to encourage this. However, their

77

efforts are still incomplete and more defined and stringent regulatory measures

are called for.

4. The technological innovations in microfinance have been indeed remarkable.

However, there exists a further need for innovating low-cost lending technologies

so that the provision of such services can be achieved economically and

affordably.

5. Foreign banks have also begun to identify the potential in this untapped sector and

have to be encouraged to venture into this – that too with commercial

justifications.

6. The commercial banks within the country also should be encouraged to extend the

reach of their services to the rural poor and provide them with services which

nurture a ‘voluntary savings’ culture at affordable rates.

CHAPTER 12

RECOMMENDATIONS AND SUGGESTIONS

1. Most of the efforts of the apex financial institutions have been directed at the

promotion of micro-credit, and not micro-finance. This bias has not only ignored

the need of other financial services for the rural poor, but has also been counter-

productive.

2. Increase the supply of financial services to the unbanked by developing more such

institutions, lowering the transaction costs, increasing the marketing of such

services etc.

3. Design and develop new innovative models for the provision of such services and

low-cost technological offerings so as to increase their access to formal loans and

other financial services.

78

4. There is also an urgent need for the existing banks to revamp their practices and

redesign their banking operations, so as to incorporate microfinance as a long-

term growth strategy.

5. The formal documentation procedure for procuring loans can also be made more

user-friendly to the illiterate and uneducated poor, who will be accessing these

loans.

6. The apex organization can play not just the role of an intermediary, but also a

‘market development’ role, wherein it can transform funds from government and

donors into MFI structures, transfer of technology, training of staff members etc.

7. Educate and emphasize on a “repayment”, “no-default” and “voluntary savings”

culture amongst the rural poor.

8. Expand the institutional structure in terms of commercial bank branch expansion,

setting up of more RRB’s and MFI’s, special credit programs for channelizing

subsidized credit to the rural sector, allocate compulsory sectors under RBI

guidelines, namely the “priority sector lending”, encourage foreign banks to

venture into microfinance by showing them the commercial point of view.

Commercial banks can also be encouraged to become involved in microfinance to

ensure an appropriate regulatory and prudential framework. The elements of an

optimal policy context are:

sound macroeconomic policies and basic infrastructure to ensure a growing

economy (especially increasing complexity in the financial sector)

minimal restrictions to profitable lending, particularly no interest rate caps

enhanced ability to establish a small commercial bank which can focus on this

sector (such as a low minimum capital requirement)

appropriate prudential regulations for this market including capital adequacy

ratios, asset quality indicators and unsecured loan limits.

79

CHAPTER 13

LIMITATIONS

1. The study is limited to a very few people only, since in-depth interviews were

conducted, and hence the development and efforts put in by various commercial

banks towards microfinance in India cannot be effectively measured.

2. Since no structured questionnaires were used, the study can be subject to

perceptual biases of the interviewee and there can be changes in the answers or

opinions, of both, the interviewer and interviewee.

80

CHAPTER 14

CONCLUSION

It is becoming increasingly apparent that addressing financial exclusion will require a

holistic approach in creating awareness about financial products, education, advice on

money management, debt counselling, savings and affordable credit.

The Role of Banks: The banks must evolve specific strategies to expand the outreach of

their services in order to promote financial inclusion. One of the ways in which this can

be achieved in a cost-effective manner is through forging linkages with microfinance

institutions and local communities. Banks should give wide publicity to the facility of no

frills account.

Widespread Use of Technology: Technology plays a major role in providing access to

banking products in remote areas. According to Prof. M.S. Swaminanthan, the noted

agricultural scientist, “SHGs, will however, become sustainable only if they have

backward linkages with technology and credit and forward linkages with processing and

marketing organisations.” ATMs cash dispensing machines can be modified suitably to

81

make them user friendly for people who are illiterate, less educated or do not know

English.

The Role of NGO’s & SHG’s: Banks need to redesign their business strategies to

incorporate specific plans to promote financial inclusion of low income group treating it

both a business opportunity as well as a corporate social responsibility. For an initiative

of such high magnitude it is essential that they make use of all available resources

including technology and expertise available with them as well as the MFIs and NGOs.

NGOs have played a commendable role in promoting SHGs and linking them with banks.

NGOs, being local initiators with their low resources, are finding it difficult to expand in

other areas and regions. There is, therefore, a need to evolve an incentive package which

should motivate these NGOs to diversify into other backward areas.

Efficient Delivery of Services: In dealing with the needs of rural enterprises and of small

and medium enterprises in urban areas, new delivery mechanisms need to be developed.

The objective is to economize on transaction costs and provide better access to the

currently under-served. To serve new rural credit needs, innovative channels for credit

delivery will have to be found.

Developing a Regulatory Framework: In view of the rising micro-finance activities in

the country, a need has been felt to regulate the unregulated business in this sector and

also provide legal framework to facilitate the credit flow in rural areas (Tiwari, 2006).

The Micro Financial Sector (Development and Regulation) Bill 2007 has been tabled in

the Parliament (The Hindu Business Line, March 2007). MFIs fear that regulation might

stifle growth, but analysts say that it is important to put them under scanning.

Escalating Micro-Insurance: Micro-insurance is a key element in the financial services

package for people at the bottom of the pyramid. The poor face more risks than the well

off. It is becoming increasingly clear that micro-insurance needs a further push and

guidance from the Regulator as well as the Government.

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REFERENCES

1. Rangarajan C. (2007), Financial Inclusion: Some Key Issues, Lecture delivered at Mangalore University,Mangalore, and August 10, 2007; http://www.thehindubusinessline.com/2007/02/19/stories/2007021901971400.htm

2. Thorat, Usha (2007a), Taking Banking Services to the Common Man – Financial Inclusion, Deputy Governor, Reserve Bank of India at the HMT-DFID Financial Inclusion Conference 2007, Whitehall Place, London, UK, June 19; http://www.rbi.org.in/scripts/BS_SpeechesView.aspx?Id=218

3. Mahendra Dev S, Financial Inclusion: Issues and Challenges, Economic and Political Weekly, Vol. 41;No. 41 October 14-October 20, 2006

4. Hans, V. Basil, Towards a Vibrant Indian Agriculture, Kisan World, Vol. 33, No.2, February, pp. 18-20, 2008

5. Jayasheela, Dinesha P.T and V. Basil Hans: Financial Inclusion and Microfinance in India: An Overview, 2008; papers.ssrn.com/sol3/papers.cfm?abstract_id=1089680

6. Satish P. (2005), Mainstreaming Indian Micro Finance, Economic and Political Weekly, Vol. 40 No. 17, April 23 to April 29, 2005, pages 1731-1739, 2005.

7. Sa–Dhan Micro finance Resource Centre (2004), Indian Experience of Micro Finance: A Sustainable Banking Solution to the Poor; http://www.sa-dhan.net/ResourcePatrika.htm

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8. Karmakar, K.G. (2002) Micro finance revisited, Financing Agriculture, Vol.34, No.2, April-June 2002.

9. Beyond Microcredit: Putting Development Back into Microfinance; Book by Thomas Fisher, M.S. Sriram, (2002)

10. Mahendra Dev S, Financial Inclusion: Issues and Challenges, Economic and Political Weekly, Vol. 41;No. 41 October 14-October 20, 2006

11. Nadarajan S. and R. Ponmurugan (2006), Self Help Groups: Bank Linkage Programme, Kisan World, Vol. 33.

12. NABARD Annual Report 200713. Priya Basu, Pradeep Srivastava; Exploring Possibilities Microfinance and Rural

Credit Access for the Poor in India, Economic and Political Weekly, Vol. 40 No. 17 April 23 - April 29, 2005.

14. Shahidur R. Khandker, (1998), Fighting poverty with micro credit: Experience in Bangladesh, Oxford University Press, New York; http://www-wds.worldbank.org/servlet/main?menuPK=64187510&pagePK=64193027&piPK=64187937&theSitePK=523679&entityID=000094946_99030406225421

15. Ledger wood Joanna, (2000) Microfinance: Sustainable Banking with the Poor, The World Bank Washington D C 2000.

16. Patil, Shobhadevi R. (2006), Role of self help groups in sustainable development: an NGO experience, Participative Development, Vol. 5, No 1, Jan-Mar, 2006, pp 55-64.

17. Tiwari, Ravish (2006), Micro-finance Bill referred to GoM after objections, The Indian Express, Dec 16. Available at http://www.indianexpress.com/story/18680.html.

18. The Hindu Business Line (2007), Micro-finance Bill tabled, March 20. Available at http://www.thehindubusinessline.com/2007/03/21/stories/2007032105170600.htm (accessed January 30, 2008).

19. GOI(2008), Report on the Committee on the Financial Inclusion, January 200820. Commercial Banks and Microfinance: Evolving Models of Success; By Jennifer

Isern, Lead Microfinance Specialist, CGAP and David Porteous, Consultant; UNITED NATIONS CAPITAL DEVELOPMENT FUND Newsletter; Issue 17 / October2005; http://www.uncdf.org/english/microfinance/pubs/newsletter/pages/2005_10/news_banks.php

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P.T and V. Basil Hans;

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24. CONCEPT PAPER: Microfinance Institutions in India; Piyush Tiwari and S.M. Fahad,

25. Chatterjee. Arup; From exclusion to Inclusion; Finance for the Poor, June 2008, Vol. 9 ; No.2

26. ICICI bank Annual Report 200727. Impact assessment of microfinance; EDA Rural systems pvt, ltd. July 200328. Robert W. Herdt; Learning from Experience: Agriculture Credit and Microcredit;

December, 200629. R Srinivasan and M S Sriram; Microfinance: An Introduction; IIMB Management

review; Vol. 15; No. 230. Microfinance development strategy; Asian development bank; 200031. Todd j. Markson, Michael hokenson; What works ICICI bank Innovations in

Rural Finance; Michigan business school; Aug 200332. Raven Smith; The Changing face of rural finance in India: The costs and benefits

of transforming; The Fletcher School; 200633. Erica Field and Rohini Pande; Repayment Frequency and Default in Micro-

Finance: Evidence from India; 34. Housing Development Finance Corporation;

http://www.gdrc.org/icm/conceptpaper-india.html35. Transparency and performance in Indian microfinance36. http://www.microfinancegateway.org/content/article/detail/1344637. http://www.cgap.org/p/site/c/38. http://www.m-cril.com/

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ANNEXURE-I

QUESTIONNAIRE

NAME: STATE:

Q.1.) In which of the following options does your age falls?

a.)18-25 b.)25-35 c.)35-45 d.) 45 or above

Q.2.) What is your occupation?

a.)Own a small business b.)Farmer c.)Service d.)Housewife

e.)Others

86

Q.3.)Are you aware about all microfinance options available in India?

a.)Yes b.) No

Q.4.) Have you ever taken a loan from any of the following institutions?

a.) Self-help groups b.) Micro finance Institutions c.)Money lender

d.) Commercial banks e.) Not applicable

Q.5.) Of how much amount have you taken up the loan?

a.)5,000-20,000 b.)20,000-30,000 c.)30,000-50,000 d.)50,000 or above

e.) Not applicable

Q.6.) How much interest are you paying/had paid on a loan?

a.)10-20% b.)20-30% c.)30-40% d.) Above 40

e.) Not applicable

Q.7.) About which of the following banks have you heard of providing this facility?

a.) State bank of India b.)Central bank c.)Standard Chartered bank d.) Others e.) None

Q.8.) When somebody tells you about it, then would you go for taking up a loan from a commercial bank?

a.)Yes b.)No

Q.9.) How frequently you go for financing your personal needs in about 2-3 years?

a.) 1-3 times b.) 4-5 times c.) 6-8 times d.) 8 or more times

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e.) None

Q.10.) When not able to pay loan on time, do you face any problems in getting a loan for the next time?

a.)Yes b.)No c.)Not applicable

Q.11.) For how much duration do you generally take up a loan?

a.) 6-12 months b.)12-18 months c.)18-24 months d.)Greater than 2 years

e.) Not applicable

88