PROJECT PROPOSAL

TITLE OF THE PROJECTMICRO FINANCING – THE ROAD

AHEAD

SUBMITTED TO: MR. SHREEKANT IYENGAR

SUBMITTED BY: YASH SOLANKI (55)

DATE: - 13th October, 2010

Forbes brought a special issue on microfinance in December 2007 wherein it said: "microfinance has become a buzzword of the decade, raising the provocative notion that even philanthropy aimed at alleviating poverty can be profitable to institutional and individual investors." This revolutionary and pro-poor economic activity has been recognized worldwide as an efficient tool to combat poverty, create jobs and generate income. Above all, it has been regarded as a tool of financial inclusion – that is, including masses in the progress of mankind.

ABSTRACT In any country the house holds which are poor face lot of constraints when it comes to investing, saving and protecting their livelihood. The financial intermediation from a third party is very significant for them and a good amount of time is devoted to find a considerable solution to this problem. There are many low financial solutions available to low income groups around their local area, though most of it charge sky high interest rates and requires an asset as a mortgage. But many families who do not own personal property cannot access this route. The micro finance sector trying to match the convenience and flexibility of informal sector which is unmatched by the formal sector. The key 'mantra' of 1980's and 1990's women , groups , graduation , micro enterprises and micro credit are now making way for convenient , reliable , continuous and flexible range of services in the new century . In my study I am doing detailed analysing of the current micro financing sector in India and comparing Indian micro financing with the best practices of the world.

INTRODUCTIONAccording to Yaga Venugopal Reddy, India and the Global Financial Crisis: Managing Money and Finance (1997) “ Since the early national plans, independent India’s government has emphasized the link between improving access to financial markets and reducing poverty, a stance that has had

influence globally. The early strategy gave the lead role to state-run banks, who were charged with loosening the grip of traditional informal-sector moneylenders through the use of targeted low-priced loans”

There are newer approaches in India like which includes partial deregulation of interest rates, new cooperatives with an institutional form which have a focus on intermediating their own members opportunities. The users of micro financing now mainly includes small scale farmers who need financial support for irrigation, crop cultivation and growing live stock. In 1990's there was a gradual shift to financing women, who came forward to avail the financial opportunities with the help of self help groups. Earlier the men were the main benefactors. Now a typical beneficiary of micro financing is defined as either men or women from poor house holds who seek a variety of savings and financial services for a diverse set of consumption activities.

Since independence, various governments in India have experimented with a large number of grant and subsidy based poverty alleviation programmes. These programmes were based on grant/subsidy and the credit linkage was through commercial banks only. As a result, these programmes became unsustainable, perpetuated a dependant status on the beneficiaries and depended ultimately on the govt. employees for delivery. This not only led to misuse of both credit and subsidy but banks never looked at it as a profitable and commercial activity as well.

Hence was adopted the concept of micro-credit in India. Success stories in neighboring countries, like Grameen Bank in Bangladesh, Bank Rakiat in Indonesia, Commercial & Industrial Bank in Philippines etc, gave further boost to the concept in India in the 1980s. India thus adopted the similar model of extending credit to the poorest sector and took a no. of steps to promote micro-financing in the country.

MICRO FINANCE DEFINED According to Robinson (2001) “ micro finance as small-scale financial services—primarily credit and savings—provided to people who farm, fish or herd” and adds that it refers to all types of financial services provided to low-income households and enterprises “

Good Micro Finance

Microfinance is the provision of financial services to low-income clients, including consumers and the self-employed, who traditionally lack access to banking and related services.

More broadly, it is a movement whose object is "a world in which as many poor and near-poor households as possible have permanent access to an appropriate range of high quality financial services, including not just credit but also savings, insurance, and fund transfers." Those who promote microfinance generally believe that such access will help poor people out of poverty.

THE FINANCIAL OUT LOOK OF POOR The poor household consider the financial intermediation as a day to day activity not as a reward or privilege for being engaged in certain behaviour . They look at the financial providers as partners at work not as patrons. They have no gender barriers when it comes to availing the finance, or does not seek to invest only in micro finance. They expect that the financial intermediation should not only come through a group but to individuals and not part of any social development projects. They also do not seek to obtain the finance from only one partner but are used to a variety of multiple portfolios.

MICRO FINANCING IN INDIA The understanding of India's economy , growing gap between the rich and poor , and the growth will help to make a reasonable discussion on

commercial micro financing and the impact of micro finance sector in rural India.

ECONOMY India is home to more than 1.3 billion people in 2008 and constitutes one sixth of the world population. India has world’s largest democracy and an emerging economic super power. The countries growth is also strong with real GDP expected to grow around 8.3 % in 2010. The situation in India is that the wealth which is created increasingly is not availed by all citizens. The micro financing is one progressive approach for the poor people to achieve improvement in livelihood, which is also the goal of national and international communities, so that they get some benefit of the countries growth.

POVERTY In order to analyse the costs and benefit of micro financing includes understanding the environment where they live. The main purpose and motive behind the micro financing is poverty reduction .More than quarter of the population in India is below poverty line. There are significant disparity between the rich and poor as the wealth is concentrating more on corporate sector. The government of India’s poverty reduction strategy concentrates on improving infrastructure, social development and rural livelihood.

LITERATURE REVIEW According to Morduch The Economics of Micro finance 2000 “ Three questions have taken important place in academic discussions while talking about micro-finance. The first question is whether micro-Finance a phenomenon of rural society? When we talk about micro-finance, the popular perception is that it is a phenomenon of rural society. The second question is whether micro-finance a phenomenon of developing countries? The third question is whether micro-finance an industry of social sector? “

According to Christen et al., (1995). “Micro finance has existed, although mostly in the shadows and unseen by casual observers, since the rise of formal financial systems, and indeed probably pre-dates them. It has only been within the last four decades, however, that serious global efforts have been made to formalize financial service provision to the poor. This process began in earnest around the early to mid-1980s and has since gathered an impressive momentum. Today there are thousands of MFIs providing financial services to an estimated 100 - 200 million of the world’s poor “

The evolution and rise of micro finance industry is a remarkable achievement in the eradication of poverty. It has shown that eradicating poverty through self financing the poor and even turning a profit out of it is possible. The interest of scholars has always lagged behind the development of micro finance sector. There is very little publication of scholarly articles about micro financing.

According to Morduch (2000) “ unlike formal sector financial institutions, the large majority of MFIs are not "sustainable," where sustainability is equated in micro finance literature and parlance with financial self-sufficiency.4 Instead, most MFIs are able to operate without covering their costs due to subsidies and gifts from governments and other donors. Notwithstanding, the micro finance industry is dominated by an institutionalise paradigm “

According to Nourse (2001), Woller (2002a) “MFIs provide similar products and services to their customers as formal sector financial institutions. The scale and method of delivery differ, but the fundamental services of savings, loans, and insurance are the same. Notwithstanding, to date most efforts to formalize micro finance have focused on enterprise lending (loans for enterprise formation and development) which remain by far today the dominant product offered by MFIs. This, however, has slowly begun to

change. Increasingly today MFIs have begun to offer additional products, such as savings, consumption or emergency loans, insurance, and business education.”

According to Chauhan 1951 “before we understand the concept of micro-finance, it would be worthwhile to understand the term micro-credit as the two terms are closely related to each other. Poor people need micro credit for various and different purposes. It may be to meet the major household expenses; emergency needs or even basic livelihood support. There are two main systems of micro credit One is formal financial institutions, banks and co-operatives, which provide micro-credit to the poor people under different schemes for livelihood support or helping them to start micro-enterprises. The other is informal system comprising traditional moneylenders, pawnbrokers and trade specific lenders. Both the systems have their own positive and negative aspects”.

RESEARCH METHODOLOGY The tools that are used for studying the micro finance organizations are mainly same as that used for studying the commercial banks. This is because most of the MFI have now turned to work with the structure of a commercial bank. However the main intention of micro financing is to eradicate poverty and not business development the proper analysis is a mix of traditionally used methods for assessing the commercial banks and assessing the poverty. The analysis is basically done with indicators such as financial, strategic and social strength of MFI

PRIMARY RESEARCH The primary research has following components

Interview Questionnaires Participant Observation Non-Participant Observation

In this research the primary research will be conducted through interviews with the beneficiaries of the micro financing and with key personnel in the field. There will be minor amount of non-participant observation where the facts and figures collected are observed for reliability and validity.

Advantages

The personal interviews will result in fewer refusal of response and have more validity. We can also obtain good qualitative data from small sample. However the interview method may result in more personal bias . The non-participant observation is used to clarify and validate the data and have the advantage of an independent opinion. However this may also result in personal bias. The interview conducted will be structured and all the participants will be faced with same questions.

SECONDARY RESEARCH The data base formed using published reports (financial), journals on the concerned subject, websites and direct enquiry . Financial analyses of the some MFI are done using normal ratio and other financial analysis techniques. Though most of the study is structured in a qualitative manner sufficient quantitative data are provided to support the qualitative hypothesis.

TIMELINE4 Months

BENEFECIARIES Financial institutions Banks People who want micro-finance

TENTATIVE CONTENTS Introduction to Micro finance. Evolution of Micro finance. What is Micro Finance? Micro Finance in India Micro finance- models, initiatives & institutes. SWOT Analysis of Micro finance. Challenges. Criticisms Future of Micro finance. Conclusion. References.

BIBLIOGRAPHY www.ifmr.ac.in www.google.com www.microfinanceinsight.com www.investopedia.com www.books.google.com www.thaindian.com www.authorstream.com www.knowledge.allianz.com www.indiamicrofinance.com