Micro Finance and NGO's

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Micro Finance and NGOs

Self realization and self initiative are the two most powerful

weapons to wash poverty out from the world Chanakya

Worlds Greatest Ancient Economic and Political Scholar

Non-Governmental Organizations and voluntary action have

been part of the historical legacy 1 . In the context of contemporary

social empowerment, self realization and self initiative is the base for

the formation of self help groups. This is the logic motivated NGOs to

form SHGs in rural areas to empower them through developing theirinherent skills. Thus, SHG movement among the rural poor in different

parts of the country is emerging as a very reliable and efficient mode

for technology transfer 2 . Chanakyas philosophical statement has

transformed into the SHGs with the help of NGOs and their efforts.

Microfinance is the tool to empower the rural poor and also tool against

human deprivation. Microfinance is motivating sustainable

development through the supportive NGOs.

As a responsible welfare state in the democratic systems, it can

be also say that the growth of micro-finance in India has been in

response to the failure of institutional initiatives of rural credit system

and involvement of informal credit system. Rural credits especially

rural cooperatives. This is led to establishment of microfinance

institutions under the guidelines of NABARD.

This is quoted by Rimjhim Mousami Dass Micro-finance through SHGs: A Boon for the Rural Poorfrom S.B. Verma and Yaswant Tukaram Pawar, (Ed) Rural Empowerment through Self Help Groups, NonGovernmental Organizations and Panchayati Raj Institutions, New Delhi: Deep and Deep Publication,2005. p.16.1 . S.B. Verma and Y.T. Pawar, 2005. p.99.2 . Verma, S.B. and Pawar. Y.T. 2005, p. x.

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Microfinance institutions are highly encouraging. Microfinance

through SHG has become a ladder for the poor to bring them up not

only economically but also socially, mentally and attitudinally 3 . Initially,

SHGs and microfinance, as an instrument for social and economic

empowerment, are established by the non governmental

organizations. In the era of 21 st century, NGOs are transforming from

non-profit to profit making business model NGOs. Especially, the

success formula of microfinance non profit model is learned from the

PRODEM - Bolivia and Grameen Bank Bangladesh. It is proved that

committed for the social development NGOs can develop the society

through providing finance accessibility to the poor based on self help

model. Many NGOs (non-government organizations) in India came

forward to promote micro-finance. At present more than 1000 NGOs

are implementing micro-finance projects in India.

Some of them are leading MFIs (micro-finance institutions)

playing the role of social intermediation and building better society in

rural areas. These MFIs have adopted different strategies of peoples

livelihood through micro-finance delivery.

Microfinance Institutions:

The following are the some of leading microfinance institutions in

India working in the sector.

Association for Sarva Seva Farms (ASSEFA)

Mitrabharati - The Indian microfinance Information Hub Mysore

Resettlement and Development Agency (MYRADA)SADHAN - The Association of Community Development Finance

Institutions

SEWA: Self-help Women's Association

3 . Ibid, p.16.

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SKS India - Swayam Krishi Sangam

Streedhan - Banking with Rural Women

Working Women's Forum, Madras, India

The goals are

Eradicate Extreme Poverty & Hunger.

Achieve Universal Education.

Promote Gender Equality & Womens Empowerment.

Reduce Child Mortality

Combat Diseases

Developing Entrepreneurial Spirit

Between the 1950s and 1970s, governments and donors

focused on providing agricultural credit to small and marginal farmers,

in hopes of raising productivity and incomes. These efforts to expand

access to agricultural credit emphasized supply-led government

interventions in the form of targeted credit through state-owned

development finance institutions, or farmers' cooperatives in some

cases, that received concessional loans and on-lent to customers atbelow-market interest rates. These subsidized schemes were rarely

successful. Rural development banks suffered massive erosion of their

capital base due to subsidized lending rates and poor repayment

discipline and the funds did not always reach the poor, often ending up

concentrated in the hands of better-off farmers.

Meanwhile, starting in the 1970s, experimental programs in

Bangladesh, Brazil, and a few other countries extended tiny loans to

groups of poor women to invest in micro-businesses. This type of micro

enterprise credit was based on solidarity group lending in which every

member of a group guaranteed the repayment of all members. These

"micro enterprise lending" programs had an almost exclusive focus on

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credit for income generating activities (in some cases accompanied by

forced savings schemes) targeting very poor (often women) borrowers.

ACCION International , it is a Latin Americas one of the prime

microfinance institution working with the poor. In an early pioneer,

ACCION was founded by a law student, Joseph Blatchford, to address

poverty in Latin America's cities. Begun as a student-run volunteer

effort in the shantytowns of Caracas with $90,000 raised from private

companies, ACCION today is one of the premier microfinance

organizations in the world, with a network of lending partners that

spans Latin America, the United States and Africa.

SEWA Bank . In 1972 the Self Employed Women's Association

(SEWA) was registered as a trade union in Gujarat (India), with the

main objective of "strengthening its members' bargaining power to

improve income, employment and access to social security." In 1973,

to address their lack of access to financial services, the members of

SEWA decided to found "a bank of their own". Four thousand women

contributed share capital to establish the Mahila SEWA Co-operative

Bank. Since then it has been providing banking services to poor,

illiterate, self-employed women and has become a viable financial

venture with today around 30,000 active clients.

Grameen Bank . In Bangladesh, Professor Muhammad Yunus

addressed the banking problem faced by the poor through a

programme of action-research. With his graduate students in

Chittagong University in 1976, he designed an experimental credit

programme to serve them. It spread rapidly to hundreds of villages.

Through a special relationship with rural banks, he disbursed and

recovered thousands of loans, but the bankers refused to take over the

project at the end of the pilot phase. They feared it was too expensive

and risky in spite of his success. Eventually, through the support of

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donors, the Grameen Bank was founded in 1983 and now serves more

than 4 million borrowers. The initial success of Grameen Bank also

stimulated the establishment of several other giant microfinance

institutions like BRAC, ASA, Proshika, etc.

Through the 1980s, the policy of targeted, subsidized rural credit

came under a slow but increasing attack as evidence mounted of the

disappointing performance of directed credit programs, especially poor

loan recovery, high administrative costs, agricultural development

bank insolvency, and accrual of a disproportionate share of the

benefits of subsidized credit to larger farmers.

The basic tenets underlying the traditional directed credit

approach were debunked and supplanted by a new school of thought

called the "financial systems approach", which viewed credit not as a

productive input necessary for agricultural development but as just

one type of financial service that should be freely priced to guarantee

its permanent supply and eliminate rationing. The financial systems

school held that the emphasis on interest rate ceilings and credit

subsidies retarded the development of financial intermediaries,

discouraged intermediation between savers and investors, and

benefited larger scale producers more than small scale, low-income

producers.

Concept of Micro-Finance

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

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are two main systems of micro credit 4 . 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.

Concept and Features of Micro-Finance

Micro-finance, as is being practiced by the National Credit Fund

for Women or the Rashtriya Mahila Kosh (RMK), could be defined as a

set of services comprising the following activities:

Micro-credit:

Here, the following activities can be activated such as Small

loans; primarily for income generation activities, but also for

consumption and contingency needs.

Micro-savings:

SHGs micro savings are called as thrift. The thrift is the basic

element for the success of microfinance. Thrift or small savings from

borrowers own resources.

The main features of the micro-finance

1. It is a tool for empowerment of the poorest women.

4 . Chauhan, Brij Raj (1990). Rural Urban Articulations , Etawah: A. C. Brothers. Chippa, M.L. (1987).

Commercial Banking Development in India: A Study in Regional Disparity. Jaipur: Printwell Publishers. p.

50-51.

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2. It is essentially for promoting self-employment; the opportunities

of wage employment are limited in developing countries - micro

finance increases the productivity of self-employment in the

informal sector of the economy - generally used for (a) direct

income generation (b) rearrangement of assets and liabilities for

the household to participate in future opportunities and (c)

consumption smoothing.

3. It is not just a financing system, but a tool for social change,

specially for women

4. Micro credit is aimed at the poorest; micro-finance lending

technology needs to mimic the informal lenders rather than the

formal sector lending.

It has to:

a) Provide for seasonality

(b) Allow repayment flexibility

(c) Eschew bureaucratic and legal formalities

(d) Fix a ceiling on loan sizes.

The positive aspects of formal financial system are that under

this system, micro-credit is available at low rate of interest with easy

and periodical repayments and moratorium period. The most important

aspect of this type of credit is that it is available for income generating

activities. But at the same time micro-credit from formal financial

system is not easily available. The system requires collateral or

security. It has complex legal and operational procedures, involving lot

of paper work. Since the process of credit disbursement is time

consuming, many times credit is not available in time. Finally, there is

a stigma attached to the poor people so that the bankers do not think

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them credit-worthy and feel that the recovery rate is unsatisfactory.

But this may not necessarily be true.

The positive aspects of informal system of micro-credit are that

the credit disbursement is easy and relatively quick. No collateral is

required and there is least paper work. Credit can be given for any

activity, especially for consumption and emergency purposes. Credit is

generally given for non-productive purposes as well. But at the same

time there is very high interest rate in informal micro-credit system.

Exploitation is also attached with this system. Moneylender takes

repayment at one time only. Based on these two systems of micro-

credit, we can define micro-credit as the provision wherein debtor

takes money either from formal or informal sources of credit on

unilaterally decided terms by the creditor. If we combine together

positive aspects of both the systems like, low rate of interest, easy and

periodical repayments with moratorium period, credit for income

generating activities, easy process of disbursement, no collateral or

security and less paper work etc., we come closer to understanding the

concept of micro-finance. The Task Force on Supportive Policy andRegulatory Framework for Micro-Finance constituted by NABARD

(National Bank for Agriculture & Rural Development) defines micro-

finance as the provision of thrift, saving, credit and financial services

and products of very small amounts to the poor in rural, semi-urban

and urban areas for enabling them to raise their income levels and

improve their standard of living.

The emergence of microfinances prime objective is to bridge the

gap between demand and supply of funds in the lower rungs of the

rural economy, the formal sector took the initiative to develop a

supplementary credit delivery mechanism by encouraging institutional

arrangements outside the financial system with the launching of

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NABARDs pilot scheme, microfinance to cure the illness of rural

poverty gained visibility ion the India development landscape 5 .

Services of micro-finance are being provided by various MFIs. In

India, the Task Force mentioned above, has classified these MFIs under

three categories as mentioned below: 3 Not-for-Profit MFIs: These

include Societies registered under Societies Registration Act 1860 or

similar State Acts, Public Trusts registered under the Indian Trust Act

1882 and Non- Profit Companies registered under Section 25 of the

Companies Act 1956. Mutual Benefit MFIs: Such as State Credit Co-

operatives, National Credit Co-operatives and Mutually Aided Co-

operative Societies (MACS). For-Profit MFIs: Bodies like Non-Banking

Financial Companies (NBFCs) registered under the Companies Act

1956 and Banks which provide micro finance along with their other

usual banking services could be termed as micro-finance service

providers of this type.

Examples of Recent Innovations in Worlds Financial Services

for the Poor:

1. CCACN (Central de Cooperativas de Ahorroy Crdito

Financieras de Nicaragua) is marketing its "Agriculture Salary"

savings product to farmers. The goal of the product is to smooth the

flow of income from the proceeds of an annual or semi-annual harvest.

Each credit union works with its farmers to identify their individual

expenses and determine a monthly "salary" (portion of harvest

proceeds on deposit combined with an above-market interest rate) tobe withdrawn from the credit union. In its infancy stage, the credit

unions have noted an interest from agriculture-based clients in such a

savings management program.

5 . S.B. Verma and Y.T. Pawar, 2005. p.100.

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2. Caja los Andes in Bolivia offers four loan repayment options that

fit the cash flow of various agricultural activities, including an end-of-

term payment for both principal and interest that fits single crop

activities, and unequal payments at irregular intervals for farmers that

have planted several crops with different harvesting periods. Flexibility

is also provided in loan disbursements, and farmers can receive the

sanctioned loan amount in as many as three installments.

3. PRODEM in Bolivia has introduced a combination of biometric

fingerprint and Smart Cards to deliver financial services to its clients.

Biometric technology measures an individual's unique physical or

behavioral characteristics, such as fingerprints, facial characteristics,voice pattern, and gait, to recognize and confirm identity. Although the

technology is still new, growing awareness of the importance of data

security is increasing adoption steadily. Prodem's fingerprint

verification has reduced fraud, error, and repudiation of transactions.

Staff had not had to deal with forgotten PIN numbers or unauthorized

use of cards and accounts so they have more time to provide personal

service and advice to clients.

4. International Remittance Network (IRnet): In late 1999,

WOCCU, in partnership with Vigo, a money transfer firm, launched

IRnet. As of June 2003, 173 credit unions in Central America offer

IRnet, expanding the possibilities for sending remittances through 800

US credit union points of service. The Central American credit unions

distribute remittances primarily to rural clients. The distributing credit

unions help to integrate remittance recipients into the formal financialsector through trained staff who cross-sell services. When a non-

member enters a credit union to pick up a remittance, a staff person

encourages this person to become a credit union member and save a

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portion of the remittance in an interest-bearing voluntary savings

account 6 .

5. Unibanka (Latvia): Prior to introducing credit scoring, Unibanka, a

commercial bank, viewed microfinance loans as too costly to deliver.

With the assistance of Bannock Consulting, Unibanka instituted a

credit-scoring system based on qualitative client data because

sufficient quantitative data was not available to develop a statistical

model 7 .

6. Managed ASCAs: A number of local organisations in the Nyeri

District of Kenya provide management services to group-based loan

funds. The groups operate as Accumulating Savings and Credit

Associations (ASCAs) and receive management services provided by

ASCA Management Agencies (AMAs). The AMA model serves a wider

client base than the mainstream donor funded MFIs who tend to focus

their attention on micro and small entrepreneurs. The clientele of AMAs

are also drawn from other socio-economic strata, including salaried

workers such as nurses, teachers and civil servants as well as

subsistence and semi-commercial farmers. Hence their reach into the

rural areas is much greater than the MFIs 8 .

7. ICICI Bank (India): Two state banks in India (Corporation and

Canara) partnered with an NGO to provide salaried low-income workers

with access to savings. The project uses the already established

6 . WOCCU: A Technical Guide to Rural- Finance Exploring Products. WOCCU Technical Guide # 3,

December 2003.

7 . CGAP it innovation series: Credit Scoring.8 . Nthenya Mule, Susan Johnson, Robert Hickson. Wambui Mwangi. The Managed ASCA Model:Innovation in Kenya's Microfinance Industry. Micro-Save Africa. 2001.

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automatic teller machines (ATMs) in the factories to offer a recurring

savings product, along with education on personal finance 9 .

8. Microenterprise Access to Banking Services (MABS) in the

Philippines nurtures the expanded use of the credit bureau by rural

banks, which was started in 2001 to minimize client over indebtedness

and defaults. MABS has helped to integrate the rural banks'

microenterprise loan clients into an existing national credit bureau, by

creating an e-mail encryption program that allows rural banks to share

information electronically at a low cost 10 .

9. The National Microfinance Bank in Tanzania (NMB) was

created to retain the extensive rural branch network of the National

Bank of Commerce (NBC) when it was privatized in 1997. The key to

making it commercially viable has been rigorous control of costs

through drastic simplification of the business model and tight

managerial oversight. Key initiatives have been correct pricing of

products, particularly payments and remittance services, which had

traditionally been cross-subsidized by other product lines, and the

development of microfinance products, mainly small (average US

$400) individual loans 11 .

10. ADOPEM (Dominican Republic) thoroughly evaluated its PDA

(Personal Digital Assistants) program and recorded dramatic

improvements. Client retention improved significantly, and the number

of days between application and disbursement dropped from five days

9 . CGAP it innovation series10 . Anita Campion and John Owens, MABS: A Sustainable Approach to Rural Microfinance,

Microbanking Bulletin, July 2003.

11 . Rural financial services: Implementing the bank's strategy to reach the rural poor (Work in Progress).

Rural Private Sector, Markets, Finance and Infrastructure Thematic Group. Rural Sector Board, The World

Bank. Washington, D.C. March 2003.

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to two days. Expenses for paperwork dropped by 60% and data entry

expenses dropped by 50% 12 .

11 The international NGO Technoserve has developed an

inventory credit scheme in Ghana that enables farmers' groups to

obtain higher value for their crops by providing post-harvest credit

through linkage with a rural financial institution. Instead of selling their

entire crop at harvest - when prices are lowest - in order to meet cash

needs, small-scale farmers in the scheme store their crop in a

cooperatively-managed warehouse and receive a loan of about 75-80%

of the value of the stored crop, which serves as collateral. This loan

permits them to clear their accumulated debts and satisfy immediatecash requirements. Then, when prices have risen in the off-season, the

farmers either sell the stored crop or redeem it for home

consumption 13 .

12. Savings-based, Agriculture-oriented Rural Credit Unions -

SICREDI - Brazil specializes in agricultural lending, primarily for the

production of rice, wheat, beef, fodder, fish, vegetables and for

agricultural equipment. Loan approvals are based upon the members'

savings history and credit record, with the size limited to 50 percent of

production costs and dependent upon the potential return of crop sale

at harvest as well as household income and debt obligations. The

borrower makes monthly interest payments and then a balloon

payment of the principal at harvest time. In addition, SICREDI

participates in the PROAGRO national crop insurance, for which a

12 . CGAP IT Innovation Series. Washington, D.C.: CGAP, October 2003.

13 . Rural financial services: Implementing the bank's strategy to reach the rural poor (Work in Progress).

Rural Private Sector, Markets, Finance and Infrastructure Thematic Group. Rural Sector Board, The World

Bank. Washington, D.C. March 2003.

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premium is added on the loan rate. PROAGRO pays 100% of the loan

loss if the crop fails 14 .

13. Producer Associations as Clients of a Financial Institution:

GAPI and CLUSA in Mozambique: GAPI offers investment andworking capital loans to fora (federations of associations) of small

farmers and small and micro-enterprises. Loans are secured through a

solidarity group-like guarantee between the participating fora. Each

forum on-lends to its member associations, who collect the produce

from their individual members and other area farmers and deliver it to

the forum in return for the loan. About 80% of the profits from the sale

of produce are handed back to the associations - the remaining 20% of the profits are kept by the forum as interest payments 15 .

14. Equity Building Society (EBS) in Kenya has emerged as one of

Kenya's leading microfinance institutions, with over 155,000 savings

clients and 41,000 borrowers. Once insolvent, EBS transformed itself

into a profitable financial-service provider by rigorously focusing on the

needs of its clients - in particular, by developing a wide range of

market-based financial products and services, including a mobile

banking service 16 .

The above mentioned experiences shows that effective

functioning with focus group oriented will success in the area of

14 . WOCCU: A Technical Guide to Rural- Finance Exploring Products. WOCCU Technical Guide # 3,December 2003.

15 . Pearce, Douglas. "Buyer and Supplier Credit to Farmers: Do Donors Have a Role to Play?" preparedfor Paving the Way Forward for Rural Finance: An International Conference on Best Practices, held June

2-4, 2003.

16 . Source: CGAP Case Studies In Donor Good Practices No. 8. Donors as Silent Partners in MFI Product

Development: Micro Save-Africa and Equity Building Society in Kenya. July 2003.

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microfinance. At the global microfinance scenario, most of the

institutions are providing loans for the purpose of agriculture and allied

services, micro enterprises and other rural based micro economic

activities.

Growth of Micro-Finance Sector at Global Level

Let us look at the historical account of the emergence and

growth of micro finance sector at the global level. The Grameen Bank,

Bangladesh, was started as an experiment in 1976 and accorded a

special banking charter in 1983. In 1981 NDF (National Development

Foundation), Jamaica, was started with support of Pan AmericanDevelopment Foundation. In 1983 ADEMI (Association for Development

of Micro Enterprises) was established in Dominican Republic, Santo

Domingo with support from ACCION, an International Agency. In 1984

BRI (Bank Rakayat Indonesia) started micro-finance in Indonesia. In

1984, K-REP (Kenya Rural Enterprise Programme) was set up by USAID

(United States Agency for International Development) to develop credit

programmes for micro-enterprises through NGOs intermediation. In

1986 ACEP (Agence de Credit Pour L Enterprise Privee) was

established in Senegal with the support of USAID.

In 1986, PRODEM (Foundation for the Promotion and

Development of Micro Enterprises) which was established by USAID

and ACCION International in Bolivia, started micro finance. Later on it

was converted into a bank called Bancosol (Banco Solidario) in 1992. In

1987 IDH (Instituto de Desarrollo Hondurando) was started in Honduras

with the support of Opportunity International. In 1992, BANPECO

(Banco Nacional del Pequeno Comercio) that is, National Bank for Small

Traders was renamed as BNCI (Banco Nacional de Comercio Interior),

that is National Bank for Domestic Commerce and started micro-

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financing in urban areas of Mexico. Micro-Credit Summit (2-4 February,

1997) held at Washington D.C. was organized to launch a global

movement to reach 100 million of the worlds poorest families,

especially the women of those families, with credit for self-

employment, by the year 2005.

Meanwhile, micro credit programs throughout the world

improved upon the original methodologies and defied conventional

wisdom about financing the poor. First, they showed that poor people,

especially women, had excellent repayment rates among the better

programs, rates that were better than the formal financial sectors of

most developing countries. Second, the poor were willing and able topay interest rates that allowed microfinance institutions (MFIs) to cover

their costs. 1990s These two features - high repayment and cost-

recovery interest rates - permitted some MFIs to achieve long-term

sustainability and reach large numbers of clients.

Another flagship of the microfinance movement is the village

banking unit system of the Bank Rakyat Indonesia (BRI), the largest

microfinance institution in developing countries. This state-owned bank

serves about 22 million micro savers with autonomously managed

micro banks. The micro banks of BRI are the product of a successful

transformation by the state of a state-owned agricultural bank during

the mid-1980s.

The 1990s saw growing enthusiasm for promoting microfinance

as a strategy for poverty alleviation. The microfinance sector

blossomed in many countries, leading to multiple financial services

firms serving the needs of micro entrepreneurs and poor households.

These gains, however, tended to concentrate in urban and densely

populated rural areas.

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It was not until the mid-1990s that the term "micro credit" began

to be replaced by a new term that included not only credit, but also

savings and other financial services. "Microfinance" emerged as the

term of choice to refer to a range of financial services to the poor, that

included not only credit, but also savings and other services such as

insurance and money transfers.

Today, practitioners and donors are increasingly focusing on

expanded financial services to the poor in frontier markets and on the

integration of microfinance in financial systems development. The

recent introduction by some donors of the financial systems approach

in microfinance - which emphasizes favorable policy environment andinstitution-building - has improved the overall effectiveness of

microfinance interventions. But numerous challenges remain,

especially in rural and agricultural finance and other frontier markets.

Today, the microfinance industry and the greater development

community share the view that permanent poverty reduction requires

addressing the multiple dimensions of poverty. For the international

community, this means reaching specific Millennium Development

Goals (MDGs) in education, women's empowerment, and health,

among others. For microfinance, this means viewing microfinance as

an essential element in any country's financial system.

Non-Institutional or Informal Sources of Micro-Credit in India

In nutshell, one can say that RFIs do not fulfill the credit needs of

the farmers, rural producers and the rural poor in general, resulting in

non-institutional sources of credit. The indirect reason responsible for

the growth of non-institutional sources of credit was also the economic

weakness of the Jajmani System* . The non-institutional sources of

credit would include big farmers, big farmer-cum-money-lenders,

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The Profile of Microfinance in India

The profile of micro finance in India at present can be traced out

in terms of poverty, it is estimated that 350 million people live Below

Poverty Line and this translates to approximately 75 million

households with annual credit demand by the poor in the country is

estimated to be about Rs. 60,000 crores.

The following are some of important components of microfinance:

Cumulative disbursements under all microfinance programmes is

only about Rs. 5000 crores.(Mar. 04)

Total outstanding of all microfinance initiatives in India estimated to

be Rs. 1600 crores. (March 04)

Only about 5 % of rural poor have access to microfinance.

Though a cumulative of about 20 million families have accessed

microfinance to the extent of Rs. 5000 crores, the total outstanding

is estimated to be only about Rs. 1600 crores. The active borrowers

are estimated to have a per capita outstanding of only Rs. 2500. While 10 % lending to weaker sections is required for commercial

banks, they neither have the network for lending and supervision on

a large scale nor the confidence to offer term loans to big MFIs.

The non poor comprise of 29 % of the outreach .

The Status of Microfinance

Considerable gap between demand and supply for all financial

services

Majority of poor are excluded from financial services. This is due to,

inter-alia, the following reasons

Bankers feel that it is fraught with risks and uncertainties.

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High transaction costs

Unfavourable policies like caps on interest rates which effectively

limits the viability of serving the poor.

While MFIs have shown that serving the poor is not an unviable

proposition there are issues that have constrained MFIs while

scaling up. These include

Lack of an appropriate legal vehicle

Limited access to equity

Difficulty in accessing low cost on-lending funds (as of now they are

unable to offer savings services in a legitimate manner.

Limited access to Capacity Building support which is an important

variable in terms of quality of the portfolio, MIS, and the

sustainability of operations.

About 56 % of the poor still borrow from informal sources.

70 % of the rural poor do not have a deposit account

87 % have no access to credit from formal sources.

Less than 15 % of the households have any kind of insurance.

Negligible numbers have access to health insurance (0.4 %) and

crop insurance (0.2 %). NABARDs bank linkage program has cumulatively reached a total of

9.4 lakh SHGs with about 1.4 crore households .

Related Issues

Designing financially sustainable models

Aim for community participation & ownership

Increase outreach and scale up operations

Demonstrate that banking with the poor is viable

Build professional systems and processes.

Ensure transparency and enhance credibility through disclosures.

Provide support for capacity building initiatives .

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Opportunities for Micro-Finance Sector in India

Keeping in view of above mentioned issues relating to how and

why the rural informal credit system is strengthened, NGOs are need

to sensitize the state institutions and NGOs it self has to take initiatives

for the rural banking in micro rural credit system. Moreover, rural

population is a major population segment in India.

According to the 2001 Census of India 2001, 72.22 percent of the

total population is rural and dependent on agriculture and allied

activities for their livelihood. Due to the failure of agricultural reforms

and not adopting a farmer-oriented agricultural policy, growth rate of

employment in agriculture sector has declined from 2.32 per cent in

1972-73 to 1.2 per cent in 1983 to 0.65 per cent in 1985. Agriculture

contributed only 31.7 percent to GDP in 1993-94 down from 56.5 per

cent in 1951. But this is not the complete picture of the rural economy.

The rural economy has a strong base for employment generation.

Rural economy still accounts nearly 40 per cent of Indias GDP

including 10 per cent of RNFS. Share of exports in GDP has increased

from 6.2 per cent in 1991-92 to 9.2 per cent in 1994-95. Major

contribution to exports comes from the agricultural and allied sectors

such as handloom, power loom, gem and jewellery, handicrafts,

carpets, leather and mineral products, all of which have at least one

primary rural production base.

The rural market share of both consumer durable and non-

durable products exceeds 40- 50 per cent for most items and is

growing every year. Papola (1991) while analysing the trends in rural

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non-farm employment, based on the analysis of the data from the

quinquennial rounds of the National Sample Survey during the 1970s

and 1980s, reveals that the share of rural area in total employment

has declined from around 82 per cent in 1977-78 to 78 per cent in

1987-88; that the share of the rural nonagricultural employment has

increased from around 14 per cent to 17 per cent in total employment;

and from 17 per cent to 22 per cent in rural employment.

Employment in the * W H. Wiser in his study of Karimpur village

of United Provinces of India during 1930s found that Jajmani System is

an example of solidarity in inter-caste relationships, but at the same

time it does not represent symmetrical interrelationship for the

members of different castes involved in the system. He found that the

system has economic weakness.

Rural non-agricultural activities have thus been growing much

more rapidly than the overall employment, agricultural employment

and also urban employment. In fact, the non-agricultural rural

employment has grown at an average rate of about 5 per cent duringthe ten-year period 1977-78 to 1987-88. Consequently, there has been

a shift from agriculture in which employment has grown at a rate of

only 0.74 per cent, to the non-agricultural activities.

It is because of decrease in self-employment and regular wages/

salaried employment in agriculture and increase in employment in

non-agricultural sector. Micro-enterprises established in RNFS

contribute about 40 per cent of the gross industrial turnover and 34

per cent of total exports. RNFS is the potential sector for employment

generation through establishment of micro-enterprises.

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There is a need to match the decline in agriculture sector with

the gain in non-farm activities, to absorb the surplus labour from

agriculture. Eighth Five-Year Plan document (Government of India

1992: 122) states that: "In the long run, however, it must be

recognized that agriculture and other land-based activities, ever with a

reasonably high rate and possible diversification of growth, will not be

able to provide employment to all the rural workers at adequate levels

of incomes.

Indian microfinance continued growing rapidly towards the main

objective of financial inclusion, extending outreach to a growing share

of poor households, and to the approximately 80 percent of the

population which has yet to be reached directly by the banks. The

larger of the two main models, the Self-Help Group (SHG) Bank Linkage

Programme (SBLP) covered about 143 million poor households in

March 2006 and provided indirect access to the banking system to

another 14 million, including the "borderline poor".

Although firm estimates are lacking, the other, MicrofinanceInstitution (MFI) model served 7.3 million households, of which 3.2

million were poor. Even allowing for a degree of overlap of borrowers

from both models, the total number of poor households being reached

was roughly a fifth of all poor households, as well as a smaller share of

the larger number of non-poor households who have yet to be reached

by the formal financial sector.

Apart from providing financial services to both these segments of

the population, there is widespread evidence that much stronger

competition provided to the informal sector has significantly improved

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the terms of credit provided to both segments by the informal sector,

which is losing share to both the formal and (semi-formal) MFI sector 17 .

SHG Bank Linkage Programme

Of the two major models of microfinance in India, the SHG Bank

Linkage Programme (SBLP) is by far the dominant model in terms of

number of borrowers and loans outstanding 18 . The cumulative number

of SHGs linked has grown almost tenfold in the last five years, to

achieve an outreach of about 31 million families through women's

membership in about 2.2 million SHGs by March 2006. Not all SHGs are

currently "linked" in the sense of having loans outstanding to the

banks or federations, and only an estimated half of their members are

poor. However, this still means about 14 million poor households have

been reached so far. Moreover the entire membership is saving

regularly, and has access to a ready source of small emergency and

consumption loans in the form of loans extended out of the group's

own funds 19 .

NGOs Involvement in Micro-Finance and Strategies of Peoples

Livelihood

However, there is no smooth flow of funds from any sources to

provide loans to the rural poor for establishing their micro enterprises

in the RNFS. Karmakar 20 laments that: Moneylenders rarely provide

credit for capital assets acquisition. They concentrate on lending for

consumption needs and social/ medical contingencies while traderlenders provide working capital. Thus, venture capital for the rural non-17 . Prabhu Ghate, Microfinance in India: A state of the sector Report 2006, New Delhi, Microfinance India,

p .11 .18 . Ibid. p. 27.19 . Ibid,20 . Karmakar, K.G. (1999). Rural Credit and Self-Help Groups: Micro-finance Needs and Concepts inIndia. New Delhi: Sage Publications, p 164.

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farm sector is generally financed from own resources and

supplemented by loans from friends and relatives. The time taken for

getting a loan sanctioned by a bank for the rural non-farm sector can

very from two months to 18 months. Some moneylenders do provide

bridge loans to those rural borrowers who have been sanctioned bank

loans but have yet to receive the funds.

Based on the observations of the failure of development policy

and administration, with a weak role played by the State in supporting

the institutions of development, Shah (1996) emphasized the

importance of developing NGOs as change agents. Government of

India 21 also realized its failure in properly implementing development

projects and decided to involve NGOs during the Seventh Five-Year

Plan, in executing development projects.

The NGOs strength lies in target group approach, flexibility,

experimentation, innovation, grassroots presence and motivation. By

learning from the example of Grameen Bank, Bangladesh, many NGOs

in India, came forward to provide financial services to the rural poorand RNFS enterprises. For NGOs, it is also a shift in approach from

development to empowerment wherein they can plan their withdrawal

strategy from service delivery projects and think of their own

sustainability by providing financial services. At present there are

almost 600 NGOs involved in micro-finance delivery systems in India.

These NGOs have adopted different strategies of promoting peoples

livelihood through micro-finance. These strategies are based on their

clientele, approach, focus area, interest rate, savings linkages,

21 . Government of India, Seventh Five Year Plan (Vol. I): Perspective, Objectives, Strategy, Macro-

dimensions and Resources and (Vol. II): Sectoral-Programmes of Development. New Delhi: Planning

Commission.

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collateral, coverage and organisational/ legal structure. These

strategies can be classified into four broad categories, namely, SHG

promotion, MFI, micro-enterprise development and social development.

The SHG promotion approach is based on the premise that the

NGO promotes SHGs and provides them services as financial advisor.

This ultimately leads to build the capacity of SHGs in terms of savings

mobilization, linking them with banks and providing technical support

in starting viable micro enterprises by the members of SHGs members.

In this approach NGO basically is a mediating contact between SHGs

and banks. NGO also examines creditworthiness of the SHGs so that

bank can lend money to the SHGs.

In all this NGO gets some financial support in terms of grant from

Apex Financial Institutions (AFIs) like NABARD and RMK (Rashtriya

Mahila Kosh). The examples of such NGOs who are following SHG

promotion approach are: MYRADA in Karnataka, SHARE in Andhra

Pradesh, RDO (Rural Development Organisation) in Manipur, PREM

(Peoples Right and Environment Movement) in Orissa & AndhraPradesh, YCO (Youth Charitable Organisation) in Andhra Pradesh,

Anarde (Acil Navsarjan Rural Development Foundation) in Gujarat,

PRADAN (Professional Assistance for Development Action) &

RUDSOVAT (Rural Development Society for Vocational Training) in

Rajasthan and ADITHI in Bihar.

Micro-Finance Institution Strategy

The approach of promoting MFIs is based on the premise that

AFIs like SIDBI (Small Industries Development Bank of India), RMK and

other donor agencies provide bulk lending, soft loan and some grant to

such NGOs which can act as MFIs by on-lending the money to the poor

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people/ SHGs/ Federations/ smaller NGOs. These MFIs stimulate the

credit demand of the poor people. They also provide technical support

for the beneficiaries to ensure proper utilization of loans and

repayment. At the same time they meet their cost of funds, cost of

credit management and cost of default through the spread of interest

and generate surplus for the viable operation of micro-finance.

The examples of such MFIs are Sewa Bank & FWWB in Gujarat,

BASIX in Andhra Pradesh and RGVN (Rashtriya Grameen Vikas Nidhi) in

north-eastern states, Orissa and Bihar. 8.3 Micro-Enterprise

Development Strategy Entrepreneurship is one of the most important

inputs in the economic development of a country and of the regions

within the country. Economic growth and industrialization are the by-

products of entrepreneurship.

It is a breeding ground for the development of small-scale

enterprises. The term EDP (Entrepreneurship Development

Programme) means a programme of entrepreneurship development

designed to help a person in strengthening his/ her entrepreneurialmotive and in acquiring skills and capabilities necessary for playing

his/her entrepreneurial role effectively. It inculcates entrepreneurial

traits into a person and develops his/her personnel, financial, technical,

managerial and marketing skills. There are number of programmes

which are aimed at providing informational or managerial inputs

required by a new entrepreneur. However, a programme not touching

upon entrepreneurial motivation and behaviour cannot be called an

EDP 22 .

22 . Desai, Vasant. Entrepreneurial Development (Vol. I): Principle, Programmes and Polices. Bombay:

Himalaya Publishing House. 1991.

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NGOs are actively involving in microfinance to make successful

and effective in terms of identification of place or location, pre-

promotional activities, selection of potential entrepreneurs,

entrepreneurial training, monitoring and follow-up mechanism. NGOs

are playing important role as catalyst in helping the rural unemployed

persons to acquire training through MEDPs (Micro-Enterprise

Development Programmes) so that they can become self-employed by

starting their enterprises in RNFS. Moreover, they can also become job

providers instead of job seekers.

Thus, institutionalization of MEDPs through NGOs can be an

alternative approach of rural development in India. The success of any

MEDP in terms of starting the enterprises by the trainees trained under

it depends mainly upon the availability of loan. Micro-finance sector

can provide help to solve this problem. Micro-finance for micro-

enterprise development is a proper approach in India.

Some of the NGOs in India have adopted the approach of micro-

enterprise development through micro-finance. The examples are CDF(Co-operative Development Foundation) in Andhra Pradesh, LHWRF

(Lupin Human Welfare Research Foundation) in Rajasthan, UPLDC

(Uttar Pradesh Land Development Corporation) in Uttar Pradesh and

Group Enterprise Development Project of EDI (Entrepreneurship

Development Institute of India) in Nagaland.

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Growth trends in the SHGs Bank Linkage Programme

Source: NABARD annual reports and data sheet for 2005-06published in Prabhu Ghate, Microfinance inIndia: A state of the sector Report 2006, New Delhi, Microfinance India, p.28.

Social Development Strategy

The social development approach of micro-finance is based on

the premise that people should earn money by investing in viable

micro-enterprises. They should earn profit from their enterprises. Major

share of the profit should be reinvested in enterprises for their growth.

The other share of the profit should be spent on social development

that is, health, education, housing, sanitation etc.

By earning profit from the viable micro-enterprises, people will

increase their paying ability for services delivered to them under

different social development projects run by NGO and States/ Central

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Government. For the NGOs and Government it can be a process of

gradual withdrawal and for people, decrease dependency on the NGOs

and Government. Such projects have micro-finance as a major

component coupled with social service delivery.

These projects have demonstrably positive effects. The examples

of such projects are Indo- Canada Agriculture Extension Project in Uttar

Pradesh, IFFDC (Indian Farm & Forestry Development Corporation)

project of farm and forestry development in Uttar Pradesh and

Rajasthan, ICDS (Integrated Child Development Services) project of

RASS (Rayalseema Sewa Samiti) in Andhra Pradesh and Conversion of

ICDS project into Indira Mahila Yojana.

Role of Financial Institutions in Micro-Finance

Especially during 1991-92, NABARD launched projects to provide

micro credits to SHGs by bank linkages. In the same way, NGOs also

have done excellent work in the areas of microfinance. tSince the

emergence of micro-finance sector in India, role of AFIs has becomesignificant. NABARD initiated the process of micro-finance in India

through linkage programme of SHGs under Automatic Refinance

Scheme. SIDBI is second important player in microfinance, providing

bulk lending to MFIs. RMK is the third player providing loans to NGOs

for on lending to the women SHGs. These are the three major AFIs in

India. Each has a different approach in micro-finance sector.

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Comme

Models of Micro Finance

There are different models followed by the different microfinance

institutions in India. The following are the some of established

microfinance and their activities in microfinance can be seen here.

Grameen bank S pandana

Grameen koota

Swayam krishi sangam

Danda credit society

Grameen Bank

Grameen Bank (GB) has reversed conventional banking practiceby removing the need for collateral and created a banking system

based on mutual trust, accountability, participation and creativity. GB

provides credit to the poorest of the poor in rural Bangladesh, without

any collateral. Professor Muhammad Yunus , the founder of

"Grameen Bank"

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As of July, 2004, it has 3.7 million borrowers, 96 percent of whom

are women. With 1267 branches, GB provides services in 46,000

villages, covering more than 68 percent of the total villages in

Bangladesh.

Inter General features of Grameen credit are :

a. It promotes credit as a human rightb. Its mission is to help the poor families to help themselves to

overcome poverty. It is targeted to the poor, particularly poor

women.

c. Most distinctive feature of Grameen credit is that it is not

based on any collateral, or legally enforceable contracts. It is based

on "trust", not on legal procedures and system.

d. It is offered for creating self-employment for income-

generating activities and housing for the poor, as opposed to

consumption

e. It was initiated as a challenge to the conventional banking

which rejected the poor by classifying them to be "not

creditworthy". As a result it rejected the basic methodology of the

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conventional banking and created its own methodology.

f. It provides service at the door-step of the poor based on the

principle that the people should not go to the bank, bank should go

to the people.

g. In order to obtain loans a borrower must join a group of

borrowers.

h. Loans can be received in a continuous sequence. New loan

becomes available to a borrower if her previous loan is repaid.

i. All loans are to be paid back in installments (weekly, or bi-

weekly).

j. Simultaneously more than one loan can be received by a

borrower.

k. It comes with both obligatory and voluntary savings

programmes for the borrowers.

l. Grameen credit's thumb-rule is to keep the interest rate as

close to the market rate, prevailing in the commercial banking

sector, as possible, without sacrificing sustain-ability. Reaching the

poor is its non-negotiable mission. Reaching sustainability is a

directional goal. It must reach sustainability as soon as possible, sothat it can expand its outreach without fund constraints.

Grameen credit gives high priority on building social capital. It is

promoted through formation of groups and centres, developing

leadership quality through annual election of group and centre

leaders electing board members when the institution is owned by the

borrowers

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SPANDANA

Institution's Mission

Spandana envisions itself as a financially self sustainable Micro

Finance Institution with a diversified ownership. It is committed to

strengthening significantly the socio-econmic status of poor women

in Rural and Urban areas by providing technical and financial services

on a continued basis for establishing their identity and self-image

Background and Main Challenges

There are two important challeges ahead. Spandana at present is

a non profit making society and has initiated the process of

transformation into a regulated Company. Spandana has

outperfromed the most performing organisations by setting up trends

with high level of efficiency, productivity and thereby profitabilitylevels. Thus the biggest challenge lies in retaining these levels in the

pace of increasing competition.

Products Loans

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Voluntary Savings

Insurance

Main Funding Sources Grants

Loans

Savings

Largest funder for Micro Finance

The following institutions are the important funders:

ICICI Bank, SIDBI, Indian Overseas Bank, HDFC Bank, IDBI Bank, ABNAMRO Bank, ING Vysys Bank, HDFC, FWWB, UTI Bank

Swayam Krishi Sangam

Swayam Krishi Sangam (self-cultivation society) is an initiative in

rural India to empower the poorest of the poor to become self-reliant. In

June 1998, SKS began operating its main activity, microfinance, which

follows the Grameen Bank model by seeking to eradicate poverty byproviding small loans for income generating activities through a process of

collective peer lending.

SKS established its first womens banking sangams (centers) in the

Narayankhed region. As of July 2005, SKS Microfinance has grown to

include 32 branches in Six Districts of Telangana and serves over 100,000

clients. Swayam Krishi Sangam began its education activities by

implementing a Preschool (Balwadi) Program in February 2001 in one of

the poorest parts of Indiathe Narayankhed region of Medak district in

Andhra Pradesh.

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RASHTRIYA MAHILA KOSH - Its Profile, Aims & Objectives,

Roles

It has been felt for some time in India that the credit needs of

poor women, particularly in the unorganized sector, have not been

adequately addressed by the formal financial institutions in the

country. The vast gap between demand for and supply of credit to this

sector established the need for a National Credit Fund for Women.

The National Credit Fund for Women or the Rashtriya Mahila

Kosh (RMK) was set up in March 1993 as an independent registered

society by the Department of Women & Child Development in

Government of Indias Ministry of Human Resource Development with

an initial corpus of Rs. 310,000,000 - not to replace the banking sector

but to fill the gap between what the banking sector offers and what the

poor need.

Its main objectives are:

To provide or promote the provision of micro-credit to poor women

for income generation activities or for asset creation.

To adopt a quasi-informal delivery system, which is client friendly,

uses simple and minimal procedures, disburses quickly and

repeatedly, has flexibility of approach, links thrift and savings with

credit and has low transaction costs both for the borrower and for

the lender.

To demonstrate and replicate participatory approaches in the

organization of womens groups for thrift and savings and effective

utilization of credit.

To use the group concept and the provision of credit as an

instrument of womens empowerment, socio-economic change and

development.

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To cooperate with and secure the cooperation of the Government of

India, State Governments, Union Territory administrations, credit

institutions, industrial and commercial organizations, NGOs and

others in promoting the objectives of the Kosh.

To disseminate information and experience among all these above

agencies in the Government and non-government sectors in the

area of microfinance for poor women.

To receive grants, donations, loans, etc., for the furtherance of the

aims and objectives of the Kosh.

The office of the Kosh is situated in New Delhi. The Kosh does not

have any branch offices. The Executive Director is the chief executiveofficer of the Kosh. The Executive Director functions under the overall

supervision, direction and control of the Governing Board. The

Governing Board comprises 16 members consisting of senior officers of

the Government of India and State Governments, specialists and

representatives of NGOs active in the field of microfinance for women.

The Governing Board is chaired by the Minister in charge of the

Department of Women & Child Development in the Government of

India. The General Body of the Kosh consists of all members of the

Board, institutional members and individual members.

RMK- Main Roles:

Wholesaling Role - I t acts as a wholesaling apex organization for

channelising funds from government and donors to retailing

intermediate microfinance organizations (IMOs). [The Kosh has so far

received only a one-time grant from government and has not needed

to raise funds from any other sources].

Market Development Role -

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It develops the supply side of the micro finance market by

offering institution building support to new and existing-but-

inexperienced IMOs by structures of incentives, transfers of

technology, training of staff and other non-financial services -

[The Kosh realizes that it can play a value adding wholesaling

role only when a sufficiently large and well established micro

finance sector already exists - this depends on the number of

IMOs and the sustainability of IMOs - subsidized institution

building increases the equity of any IMO as much as grants do -

large and premature disbursement of funds to the IMO can

reduce the effectiveness of any institution building effort.

Micro finance programmes of CAPART

The Council for Advancement of Peoples Action and Rural

Technology (CAPART) is set up by the Ministry of Rural Development,

Government of India, to fund voluntary organizations and community

based organizations engaged in serving rural areas. CAPART occupies

a significant space in shaping the development innovations of NGOsand catalyzing development initiatives to reach the poor.

The main objective of the scheme is:

To fund VOs and CBOs already working with self help groups toextend their reach to new areas and improve the quality of existing

groups

To extend training support to potential VOs and registered CBOswho are desirous of working in the area of micro finance and self

help groups.

To identify and support VOs and registered CBOs havingoutstanding experience in formation of SHGs and micro finance who

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would act as resource centers. The unit cost for the promotion of

group is worked out to a maximum of Rs.9, 000/- per group, which

includes expenditure for a 3-year project cycle.

To fund Rs.10, 000/- per SHG without interest, where bank linkagesare not available as revolving fund.

to finance up to Rs.2.00 lakhs as bridge funds for a federation of over 100 active SHGs

SHARE Micro Finance Limited

Introduction

SML started operations in 1989 as a not-for-profit society. It was thefirst MFI in India to obtain a NBFC (non-deposit accepting) license and

also the first Indian MFI to carry out a microfinance securitization

transaction.

SML has employed a for-profit approach to create social returns by

channeling funds from development institutions and commercial

banks as collateral-free loans to Joint Liability Groups (JLGs). JLGs are

the central element of the Grameen lending methodology adopted by

SML.

Vision

To improve the quality of life of the poor by providing access to

financial and support services add to be a viable financial institution

developing sustainable communities.

Our Mission

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To mobilize resources to provide financial and support servicesto the poor, particularly women, for viable productive income

generation enterprises enabling them to reduce their poverty

Objectives

To provide financial services predominantly to poor women.

To create opportunities for self- employment for the

underprivileged.

To train rural poor in simple skills and enable them to utilize the

available resources and contribute to employment and income

generation in rural areas.

MFI loa

i

Loan Proposals and their Processing

In the first step, every member who intends to access credit from the

company has to complete the compulsory group training programme

and Group Recognition Test organized by the company. This

programme is conducted by the Field Credit Assistant (FCA) or a

designated staff member, authorised by SML.

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Primary data is collected in a prescribed format from borrower/member

to comply with the KYC (Know your Customer) norms.

FCA should verify the loan application and completely fill the following

information:

Date of application

Borrower identification particulars

Loan product details

Loan Amount

Need for Loan

Applicable interest rates

Term of the Loan Repayment particulars

Acceptance by the borrowers family member / the relevant SHG

members

The expected date of loan disbursement should be mentioned on the

loan application form and to be intimated to the borrower / member.

Loan appraisal and Terms & conditions

FCA or designated staff of the Company should convey to the

borrower/member the amount of loan sanctioned along with the terms

and conditions including the annualized rate of interest and method of

repayment of the loan.

Disbursement procedure of loans

Authorized staff of SML should verify the Loan application along with all

securities, sureties and approvals, which is applicable as per the

applicable policy of the company.

Demand promissory Note

Surety or guarantee

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SHG members/Group acceptance

Family members acceptance

Acceptance of the terms and conditions by the borrower/member for

rate of interest, processing charges if any and repayment terms

Documentation for Hypothecation or charge creation or any security or

surety/guarantee

The acceptance letter

Letter of confirmation of deposit of security documents

The Company keeps all the documents in the safe custody in the

respective premises by the authorized persons. Loan passbook has tobe given to every borrower/member for each loan. The loan passbook

contains the repayment schedule, effective interest rate and other

processing charges etc. The company gives prior notice of any change

in the interest rate and other charges to the borrower / member.

The company takes a decision whether to recall / accelerate the

payment or performance under the loan agreement / Promissory Note

as agreed with the borrower/member under intimation.

The Role of NGOs

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Non-Government Organizations (NGOs) have emerged as an

integral part of the institutional structure for addressing poverty as

well as rural development, gender equality, environmental

conservation, disaster management, human rights and other social

issues.

The NGOs, in order to support social and economic empowerment of

the poor, have vastly widened their activities to include group

formation, micro credit, formal and non-formal education, training,

health and nutrition, family planning and welfare, agriculture and

related activities, water supply and sanitation, human rights and

advocacy, legal aid and other areas.

These organizations mostly follow the target-group strategy under

which the poor with similar socioeconomic interests are organized into

groups to achieve their objectives.

Co-ordinating the role of NGOs

In order to meet the need for a one-stop service to the NGOs, the

Government created the NGO Affairs Bureau in 1990. Located in the

Prime Ministers Secretariat, the Bureau enables the NGOs to obtain

their registration clearance, approval and permission through a single

agency of the Government within a specified time frame. The aim of

the Bureau is to ensure quality performance of the NGO sector and its

accountability to the state.

With a view to providing a regular forum of dialogue between the

Government and the NGOs for increased mutual understanding and

cooperation, the Government-NGO Consultative Council (GNCC) has

been formed with representatives from the Government, NGOs and the

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civil society. The GNCC works as an advisory council toward resolving

issues arising out of Government-NGO interaction and collaboration.

Empowerment of Women through DWCRA / SHG Approach

Self-help Groups:

SHG is a group of rural poor who have volunteered to organise

themselves into a group for eradication of poverty of the

members

The members of SHG save regularly and convert their savings

into a common fund known as Group Corpus

The group agrees to use this common fund and such other funds

that they may receive as a group through a common

management

A small, economically homogeneous and affinity group of

rural/urban poor, voluntarily formed to save and contribute to a

common fund to be lent to its members as per the groupsdecision and for working together for social and economic uplift

of Their families and community

Self-help group (SHG) or a sangha is a voluntary association of

people, which functions democratically and accountably, to

achieve the collective goals of the group.

Organizing disabled persons into sanghas unites and makes

them visible in the larger community.

Members can support one another by sharing information on

the availability of services and resources, help to make

decisions on individual matters, help one another and so on.

Concept of SHG:

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Self Help Group (SHG) is a small voluntary association of poor

people, preferably from the same socioeconomic background. They

come together for the purpose of solving their common problems

through self-help and mutual help. The SHG promotes small savings

among its members. The savings are kept with a bank. This common

fund is in the name of the SHG. Usually, the number of members in

one SHG does not exceed twenty.

The concept of SHG is based on the following principles :

Self-help supplemented with mutual help can be a powerful

vehicle for the poor in their socioeconomic development;

Participative financial services management is more responsive

and efficient;

Poor need not only credit support, but also savings and other

services;

Poor can save and are bankable and SHGs as clients, result in

wider out reach, lower transaction cost and much lower risk costs

for the banks; Creation of a common fund by contributing small savings on a

regular basis;

Flexible democratic system of working;

Loaning is done mainly on trust with a bare documentation and

without any security;

Amounts loaned are small, frequent and for short duration;

Defaults are rare mainly due to group pressure; and

Periodic meetings non-traditional savings.

Essential Features of SHGs:

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The following are the major essential features to be kept in mind

for successful functioning of SHGs.

Group members come together voluntarily.

Basis of coming together is mutual help.

Homogenous group.

Regular interaction among group members

Group independently takes decision and manages its activities.

Basis of people coming together is affinity.

All group members' participation is the process.

Cooperation and discussion are the cornerstone of its

functioning group maintains its own accounts

SHG's ROLE OF NGOs

NGOs play the crucial role of facilitators in group formation anddevelopment

Quality of group can be influenced by the capacity of facilitatori.e., NGO

NGOs also help in training and capacity building of facilitatorsbeing used by DRDAs

DRDAs may support NGOs or Network of CommunityCoordinators who are engaged in the task of initiating and

sustaining the group development process

Community Coordinator take up the responsibility of managing10-15 SHGs in a cluster consisting of 4-5 villages with in a

radius of 4-5Kms.

The poor people, on whose shoulders the success of sector is

depending, are also participating in the growth of this sector.

Government is also interested and is closely monitoring the sector

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from the policy and regulatory point of view. The sector has also

opened scope for research, training and consultancy. In a holistic

perspective micro-finance is a process of social intermediation and

building social capital.

Process of Social intermediation is an investment that is made

for development of both human resources and institutional capital to

make marginalized groups self-reliant in preparing them to engage in

formal financial intermediation. According to Elaine and Barton 23 , social

intermediation is a financial intermediation with a capacity building

component, aimed at those sectors of society that lack access to credit

and savings facilities. It can be understood by transformation of

beneficiaries into clients or customers and creation of local institutions

that bridge the gap between the formal financial institutions and

marginalized groups. The concept of social capital is the key

theoretical element in social intermediation, derived from the

anthropological and sociological literature.

It is quite fact that the involvement of banks with grass rootNGOs/SHGs also improves their appreciation of the problems of the

poor in accessing formal credit and brings about change in their

outlook, responsiveness and perception. NGO as financial

intermediation, the success of microfinance is seen in the rural areas.

NGOs can be expected to fast internalize the culture and practice

associated with efficient conduct of the business of microfinance. The

rise of NGOs doing business in microfinance has opened the floodgates

of aid in at least in rural India 24 .

23 . Elaine, Edgcomb & Barton, Laura Social Intermediation and Microfinance Programmes: A Literature

Review, USA: Micro-Enterprises Best Practices. The SEEP Network. 1998.24 . S.B. Verma and Y.T. Pawar, 2005. p.101.

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Micro Finance and NGO's

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