MICROFINANCING

THE BACKBONE OF INDIAN ECONOMY

A Seminar Report

Submitted by

CHANISHA

MBA- 1 SEC- D

Roll No. 5836

in partial fulfillment for the award of the degree of

MBA

At

School of Management Studies

Punjabi University

ACKNOWLEDGEMENT

I avail this opportunity to express my heartfelt gratification to Mrs. Ratinder Kaur

for giving me such a prestigious opportunity to undergo a study on the topic of

“ Microfinancing- Backbone of Indian economy”

I wish to express my sense of obligation to the management of School of

Management Studies, Punjabi University Patiala.

I am sincerely thankful to the faculty of the department for their great support

and guidance in making my project successful through their lessons.

This acknowledgement would be incomplete if I don’t thank all those who have

made this report accomplished through their direct or indirect supervision.

Thus, I hereby incorporate my report to the best of my ability and skill.

Any mistake may be kindly forgiven.

TABLE OF CONTENTS

1. Abstract

2. Objectives of study

3. introduction

4. Microfinance-

Definition

History

The Challenge

Need for Micro financing- why did it arise?

Boundaries and Principles

5. Concepts and features of microfinance

6. Types of organizations & composition of the sector

7. Micro finance in India

Steps taken by India to promote micro financing

Debates at the boundaries

Growth of linked SHG's in the regions

Growth of linked SHG's in 13 Priority States

Agency wise share of SHGs financed

Sources of funds for microfinance operations

MFIs as a beneficial business strategy:-

Operating Expense Ratio of Indian MFIs by loan size

8. Financial needs of poor people

9. Ways in which poor people manage their money

10. Reasons for focus on poor women

11. Current scenario of Micro financing in India

Key concerns

Looking Ahead

12. List of top 10 companies in India

13. A Primer on Micro financing in India

14. Efficiency with the growth of MFIs

15. Micro-financings institutions in Punjab

Conclusion

Review of literature

References

ABSTRACT

MFIs could play a significant role in facilitating inclusion, as they are uniquely

positioned in reaching out to the rural poor. Many of them operate in a limited

geographical area, have a greater understanding of the issues specific to the rural poor,

enjoy greater acceptability amongst the rural poor and have flexibility in operations

providing a level of comfort to their clientele.

According to RBI :-

“Micro Credit is defined as provision of thrift, credit and other financial services

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

areas for enabling them to raise their income levels and improve living standards.

Micro Credit Institutions are those which provide these facilities.”

The mostly used service of MFIs is the micro-credit to begin, establish, sustain, or

expand very small, self-supporting businesses. The main aim of the micro-finance is

to improve the condition of the poor. In micro-credit the main focus remain on

women where groups of women in which every member of the group guaranteed the

repayment of all members is give a sum of money as a loan. The Government of India

has classified the MFIs as NBFCs (Non Banking Financial Company).

OBJECTIVES OF STUDY

To know about Micro financing.

To reflect the status of micro financing in India.

To collect information about the formal and non-formal MFIs in India i.e. the

composition of micro financing sector.

To know about the various NGOs and SHGs which are operating at the

national level.

To know about the various types of MFIs in Punjab.

It also collects information regarding how micro financing has helped in the

growth of Indian economy by bringing the rural sector into limelight.

INTRODUCTION

To define, 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. Microcredit is a financial innovation. It is the extension

of very small loans (microloans) to those in poverty designed to spur entrepreneurship.

These individuals lack collateral, steady employment and a verifiable credit history and

therefore cannot meet even the most minimal qualifications to gain access to traditional

credit. Microcredit is a part of microfinance, which is the provision of a wider range of

financial services to the very poor.

Microcredit or microfinance is based on a separate set of principles, which

are distinguished from general financing or credit. Microcredit emphasizes building

capacity of a micro-entrepreneur, employment generation, trust building, and help to the

micro-entrepreneur on initiation and during difficult times. Microcredit is a tool for

socioeconomic development.

Microcredit is increasingly gaining credibility in the mainstream finance

industry, and many traditional large finance organizations are contemplating microcredit

projects as a source of future growth, even though almost everyone in larger development

organizations discounted the likelihood of success of microcredit when it was begun.

Due to the success of microcredit, many in the traditional banking industry have

begun to realize that these microcredit borrowers should more correctly be categorized as pre-

bankable.

MFIs could play a significant role in facilitating inclusion, as they are uniquely

positioned in reaching out to the rural poor. Many of them operate in a limited

geographical area, have a greater understanding of the issues specific to the rural poor,

enjoy greater acceptability amongst the rural poor and have flexibility in operations

providing a level of comfort to their clientele.

There are several legal forms of MFIs. However, firm data regarding the number of MFIs

operating under different forms is not available. It is roughly estimated that there are

about 1,000 NGO-MFIs and more than 20 Company MFIs. Further, in Andhra Pradesh,

nearly 30,000 cooperative organizations are engaged in MF activities. However, the

company MFIs are major players accounting for over80% of the microfinance loan

portfolio. An attempt is made in the following table to capture the various forms of MFIs:

Microfinance-

Definition

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.

As defined by the Asian Development Bank (ADB), it is - A provision of a

broad range of financial services such as deposits, loans, payment services, money

transfers, and insurance to poor and low-income households and their micro-enterprises.

In the late 90s, numerous agencies involved in micro-financing operations in India started

adding other financial services, including micro-insurance to its micro-finance

operations.

Microcredit, a part of microfinance, is defined as provision of thrift, credit and

other financial services and products of very small amount to the poor in rural, semi-

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

standards. Micro Credit Institutions are those which provide these facilities.

History

Ideas relating to microcredit can be found at various times in modern history.

Individualist anarchist Lysander Spooner wrote about the benefits of numerous small

loans for entrepreneurial activities to the poor as a way to alleviate poverty. Ideas relating

to microcredit were mentioned in portions of the Marshall Plan at the end of World War

II.

Microcredit is a financial innovation. The origins of microcredit in its current

practical incarnation, with attention paid by economists and politicians worldwide, can be

linked to several organizations founded in Bangladesh, especially the Grameen Bank in

the 1970s and onward, for which its founder Muhammad Yunus was awarded the Nobel

Peace Prize in 2006. In this country, it has successfully enabled extremely impoverished

people to engage in self-employment projects that allow them to generate an income and,

in many cases, begin to build wealth and exit poverty.

The Challenge

Traditionally, banks have not provided financial services to clients with

little or no cash income. Banks must incur substantial costs to manage a client account,

regardless of how small the sums of money involved. For example, the total profit from

delivering one hundred loans worth $1,000 each will not differ greatly from the revenue

that results from delivering one loan of $100,000. But the fixed cost of processing loans

of any size is considerable: assessment of potential borrowers, their repayment prospects

and security; administration of outstanding loans, collecting from delinquent borrowers

and so on. There is a break-even point in providing loans or deposits below which banks

lose money on each transaction they make. Poor people usually fall below it.

In addition, most poor people have few assets that can be secured by a bank as collateral.

Seen from a broader perspective, it has long been accepted that the development of a

healthy national financial system is an important goal and catalyst for the broader goal of

national economic development. However, the efforts of national planners and experts to

develop financial services for their nations' majorities have often failed since World War

II. Because of certain difficulties, when poor people borrow they often rely on relatives

or a local moneylender, whose interest rates can be very high. Hopes of quickly putting

them out of business have proven unrealistic, even in places where microfinance

institutions are very active.

While the success of Grameen Bank (which now serves over seven million poor

Bangladeshi women) has inspired the world, it has proved difficult to replicate this

success in practice. In nations with lower population densities, meeting the operating

costs of a retail branch by serving nearby customers has proven considerably more

challenging.

Need for Micro financing: why did it arise?

Since the 1950s, various governments in India have experimented with a large number of

grant and subsidy based poverty alleviation programmes. Studies show that these

mandatory and dedicated subsidised financial programmes, implemented through

banking institutions, have not been fully successful in meeting their social and economic

objectives:

The common features of these programmes were :

i. target orientation

ii. based on grant/subsidy, and

iii. credit linkage through commercial banks.

These programmes

a. were often not sustainable

b. perpetuated the dependent status of the beneficiaries

c. depended ultimately on government employees for delivery

d. led to misuse of both credit and subsidy and

e. were treated at best as poverty alleviation interventions.

Banks too never really looked on them as a profitable and commercial activity.

According to a 1995 World Bank estimate, in most developing countries the formal

financial system reaches only the top 25% of the economically active population - the

bottom 75% have no access to financial services apart from moneylenders -

In India too the formal financial institutions have not been able to reach the poor

households, and particularly women, in the unorganised sector. Structural rigidities and

overheads lead to high cost of making small loans. Organisational philosophy has not

been oriented towards recognising the poor as credit worthy. The problem has been

compounded by low level of influence of the poor, either about their credit worthiness or

their demand for savings services. Micro-finance programmes have often been

implemented by large banks at government behest. Low levels of recovery have been

further eroded due to loan waiver programmes leading to institutional disenchantment

with lending to small borrowers.

All this gave rise to the concept of micro-credit for the poorest segment along with a new

set of credit delivery techniques. With the support of NGOs an informal sector

comprising small Self Help Groups (SHGs) started mobilizing savings of their members

and lending these resources among the members on a micro scale. The potential of these

SHGs to develop as local financial intermediaries to reach the poor has gained

recognition due to their community based participatory approach and sustainability -

recovery rates have been significantly higher than those achieved by commercial banks

inspite of loans going to poor, unorganised individuals without security or collateral.

Success stories in neighbouring countries, like Grameen Bank in Bangladesh, Bank

Rakiat in Indonesia, Commercial & Industrial Bank in Phillipines, etc., gave further boost

to the concept in India in the 1980s.

The Global Summit on Micro Finance held in Washington in Feb ‘97 set a global target

of covering 100 million poor families with credit by 2005 - it was expected that 25-30

million of these could be in India alone.

The poor in India define the micro-finance market. The Planning Commission estimate of

1993-94 says 36% of the population or 320 million people live below the poverty line -

there would be 140-150 million women alone living below the poverty line. Assuming

that only 30% of the country’s poor women are ready to adopt micro-finance as a method

of poverty alleviation, it is estimated that 40-45 million poor women would need credit.

As against this, it is estimated that all agencies in India engaged in the provision of

micro-finance services, would have together covered barely 1 million poor people by the

close of 1998-99.

The most prominent national level micro-finance apex organisation providing micro-

finance services for women in India is the National Credit Fund for Women or the

Rashtriya Mahila Kosh (RMK).

Boundaries and Principles

Theoretically, microfinance may encompass any efforts to increase access to, or improve

the quality of, financial services poor people currently use or could benefit from using.

For example, poor people borrow from informal moneylenders and save with informal

collectors. They receive loans and grants from charities. They buy insurance from state-

owned companies. They receive funds transfers through remittance networks (like

Hawala).

There are not many bright lines that can sharply distinguish microfinance from similar

activities. Claims could be made that a government that orders state banks to open

deposit accounts for poor consumers, or a moneylender that engages in usury, or a charity

that runs a heifer pool are engaged in microfinance. Furthermore, correcting the problem

of access is best done by expanding the number of financial institutions available to them,

as well as the capacity of those institutions. In recent years there has been increasing

emphasis on expanding the diversity of those institutions as well, since different

institutions serve different needs.

Some principles that summarize a century and a half of development practice were

encapsulated in 2004 by Consultative Group to Assist the Poor (CGAP) and endorsed by

the Group of Eight leaders at the G8 Summit on June 10, 2004.

1. Poor people need not just loans but also savings, insurance and money transfer

services.

2. Microfinance must be useful to poor households: helping them raise income, build

up assets and/or cushion themselves against external shocks.

3. "Microfinance can pay for itself." Subsidies from donors and government are

scarce and uncertain, and so to reach large numbers of poor people, microfinance

must pay for itself.

4. Microfinance means building permanent local institutions.

5. Microfinance also means integrating the financial needs of poor people into a

country's mainstream financial system.

6. "The job of government is to enable financial services, not to provide them."

7. "Donor funds should complement private capital, not compete with it."

8. "The key bottleneck is the shortage of strong institutions and managers." Donors

should focus on capacity building.

9. Interest rate ceilings hurt poor people by preventing microfinance institutions from

covering their costs, which chokes off the supply of credit.

10. Microfinance institutions should measure and disclose their performance – both

financially and socially.

Microfinance can also be distinguished from charity. It is better to provide grants to

families who are destitute, or so poor they are unlikely to be able to generate the cash

flow required to repay a loan. This situation can occur for example, in a war zone or after

a natural disaster.

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 :

a) Micro-

credit:

Small loans; primarily for income generation activities, but also

for consumption and contingency needs.

b) Micro-

savings:

thrift or small savings from borrowers’own resources.

The main features of the micro-finance services being provided are :

1. It is a tool for empowerment of the poorest; the higher the income and better the

asset position of the borrower, the lower the incremental benefit from further equal

doses of micro-credit is likely to be.

2. Delivery is normally through Self Help Groups (SHGs).

3. 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.

4. It is not just a financing system, but a tool for social change, specially for women -

it does not spring from market forces alone - it is potentially welfare enhancing -

there is a public interest in promoting the growth of micro finance - this is what

makes it acceptable as a valid goal for public policy.

5. Because 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.

Microfinance approach is based on certain proven truths which are not always

recognised. These are :

That the poor are bankable; successful initiatives in micro finance demonstrate that

there need not be a trade off between reaching the poor and profitability - micro

finance constitutes a statement that the borrowers are not ‘weaker sections’ in need

of charity, but can be treated as responsible people on business terms for mutual

profit.

That almost all poor households need to save, have the inherent capacity to save

small amounts regularly and are willing to save provided they are motivated and

facilitated to do so .

That easy access to credit is more important than cheap subsidised credit which

involves lengthy bureaucratic procedures - (some institutions in India are already

lending to groups or SHGs at higher rates - this may prevent the groups from

enjoying a sufficient margin and rapidly accumulating their own funds, but

members continue to borrow at these high rates, even those who can borrow

individually from banks).

'Peer pressure' in groups helps in improving recoveries.

Types of Organizations and Composition of the Sector

Microfinance providers in India can be classified under three broad categories: formal,

semiformal, and informal.

Formal Sector

The formal sector comprises of the banks such as NABARD, SIDBI and other regional

rural banks (RRBs).

They primarily provide credit for assistance in agriculture and micro-enterprise

development and primarily target the poor. Their deposits at around Rs. 350billion and

of that, around Rs. 250billion has been given as advances. They charge an interest of 12-

13.5% but if we include the transaction costs (number of visits to banks, compulsory

savings and costs incurred for payments to animators/staff/local leaders etc) they come

out to be as high as 21-24%.

Semi - formal Sector

The majority of institutional microfinance providers in India are semi-formal

organizations broadly referred to as MFIs. Registered under a variety of legal acts, these

organizations greatly differ in philosophy, size, and capacity. There are over 500 non-

government organizations (NGOs) registered as societies, public trusts, or non-profit

companies.

Informal Sector

In addition to friends and family, moneylenders, landlords, and traders constitute the

informal sector. While estimates of their importance vary significantly, it is undeniable

that they continue to play a significant role in the financial lives of the poor.

Micro-finance in India:-

In India there is much need of tools of poverty eradication like micro-finance and self

help group. Since India has one of the largest numbers of poor in the world. More than

27% or 30 crore people in India live below poverty line (earn less than $1 per day). And

about 87 percent of the poorest households do not have access to easy credit. The demand

for microcredit has been estimated at up to $30 billion but the supply for the same is less

than $2.2 billion combined by all involved in the sector. Hence to alleviate them from the

crutches of poverty and to reduce the number of poor to the half of the current level as

envisaged in the Millennium Development Goal setup by the UN which is to be achieved

till the year 2015 the Government has taken several steps but they are not sufficient. The

Government has also directed the banks for priority sector lending. Though the concept

of micro-finance is not new for India since Ela Bhatt in the year 1974 established the

Self-Employed Women's Association (SEWA). India is still an agriculture-based country

and this sector contributes substantially to the GDP of India. Around seventy percent of

the Indian population still depends on agriculture and allied areas for livelihood. And

most of the farmers don’t have access to the basic financial services. Also this sector has

a large growth opportunity. This is why most of the companies are now focussing on this

sector and making their business strategy keeping in mind this segment of consumers.

The impact of this sector can be easily seen in the case where most of the FMCG (Fast

Moving Consumer Goods) companies are coming with the smaller and value for money

pack and with introductory prices for their products. But still this sector has not been able

to get access to all the financial services. Following are some details about the rural

economy in India :-

A target of Rs 225,000 crores for farm credit has been set for the financial year 2007-2008.50 lakh new farmers have been brought under the banking system.

Agricultural Insurance to facilitate agricultural loans to the farmer.

Allocation for the Rural Infrastructure Development Fund to be increased substantially.

In the financial year 2006-07, 35 projects were successfully completed.

Additional irrigation of 900,000 hectares has been targeted in the financial year 2007 - 2008.

For better farm yields modern farming techniques has been set up.

Direct disbursement of subsidy to rural Indian farmers has been arranged through a pilot program.

Rs. 78000 crore farm loan has been waived by the Government in the year 2008-09 budget.

The MSP (Minimum Support Price) for most of the crops have been increased, hence there will be more supply of money in the rural market.

As the economy of any country develops, the share of agriculture sector in the GDP

(Gross Domestic Product) decreases, with the number of people working in this sector. In

Indian economy also the contribution of agriculture sector in GDP has decreased from

40% to 25% between the years 1980 to 2000 but there has not been any substantial

decrease in the number of the people employed in this sector which is now approximately

58% from 60% in the same period. So we can say that the agriculture sector still employs

the major part of workforce in the country. This shows that the productivity n this sector

has not improved as it should be. This might be due to the lack of the resources which

can be provided by the micro-financing. Not only agriculture but the rural economy can

grow with the help of other allied services like the demand for milk, meat eggs are

increasing which can be catered through the rural economy and in this way the other

micro-finance activity of micro insurance (cattle, crop etc.) can also be developed. The

other rural businesses are the handicraft and wood business which also need economic

help. Rural people have very low access to institutionalized credit (from commercial

bank). Because of the following reasons :-

Bankers feel that it is full of risks and uncertainties.High transaction costs involved, hence percentage of transaction cost involved in the small loans which is not a beneficial business for banks.

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.

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.

Steps taken by India to promote micro-financing

It set up development banks, such as SIDBI, NABARD which focused on rural credit and

micro-financing. NGOs and SHGs were encouraged to become the government’s arm in

extending micro-credit to the poor. They were provided supplementary credit needed to

fund the credit, paper work was reduced between them and the banks. Also, the

government assisted in mobilizing funds from formal financial institutions to meet the

larger credit needs of these organizations. Banks have been given freedom to formulate

their own lending norms keeping in view ground realities. They have been asked to

devise appropriate loan and savings products and the related terms and conditions

including size of the loan, unit cost, unit size, maturity period, grace period, margins, etc.

Such credit covers not only consumption and production loans for various farm and non-

farm activities of the poor but also include their other credit needs such as housing and

shelter improvements.

Debates at the boundaries

There are several key debates at the boundaries of microfinance.

Practitioners and donors from the charitable side of microfinance frequently argue for

restricting microcredit to loans for productive purposes–such as to start or expand a

microenterprise. Those from the private-sector side respond that because money is

fungible, such a restriction is impossible to enforce, and that in any case it should not be

up to rich people to determine how poor people use their money.

Perhaps influenced by traditional Western views about usury, the role of the traditional

moneylender has been subject to much criticism, especially in the early stages of modern

microfinance. As more poor people gained access to loans from microcredit institutions

however, it became apparent that the services of moneylenders continued to be valued.

Borrowers were prepared to pay very high interest rates for services like quick loan

disbursement, confidentiality and flexible repayment schedules. They did not always see

lower interest rates as adequate compensation for the costs of attending meetings,

attending training courses to qualify for disbursements or making monthly collateral

contributions. They also found it distasteful to be forced to pretend they were borrowing

to start a business, when they were often borrowing for other reasons (such as paying for

school fees, dealing with health costs or securing the family food supply). The more

recent focus on inclusive financial systems affords moneylenders more legitimacy,

arguing in favour of regulation and efforts to increase competition between them to

expand the options available to poor people.

Modern microfinance emerged in the 1970s with a strong orientation towards private-

sector solutions. This resulted from evidence that state-owned agricultural development

banks in developing countries had been a monumental failure, actually undermining the

development goals they were intended to serve. Nevertheless public officials in many

countries hold a different view, and continue to intervene in microfinance markets.

There has been a long-standing debate over the sharpness of the trade-off between

'outreach' (the ability of a microfinance institution to reach poorer and more remote

people) and its 'sustainability' (its ability to cover its operating costs—and possibly also

its costs of serving new clients—from its operating revenues). Although it is generally

agreed that microfinance practitioners should seek to balance these goals to some extent,

there are a wide variety of strategies, ranging from the minimalist profit-orientation of to

the highly integrated not-for-profit orientation. This is true not only for individual

institutions, but also for governments engaged in developing national microfinance

systems.

Microfinance experts generally agree that women should be the primary focus of service

delivery. Evidence shows that they are less likely to default on their loans than men.

Industry data from 2006 for 704 MFIs reaching 52 million borrowers includes MFIs

using the solidarity lending methodology (99.3% female clients) and MFIs using

individual lending (51% female clients). The delinquency rate for solidarity lending was

0.9% after 30 days (individual lending—3.1%), while 0.3% of loans were written off

(individual lending—0.9%). Because operating margins become tighter the smaller the

loans delivered, many MFIs consider the risk of lending to men to be too high. This focus

on women is questioned sometimes, however. A recent study of microenterpreneurs from

Sri Lanka published by the World Bank found that the return on capital for male-owned

businesses (half of the sample) averaged 11%, whereas the return for women-owned

businesses was 0% or slightly negative.

Microfinancial services are needed everywhere, including the developed world. However,

in developed economies intense competition within the financial sector, combined with a

diverse mix of different types of financial institutions with different missions, ensures

that most people have access to some financial services. Efforts to transfer microfinance

innovations such as solidarity lending from developing countries to developed ones have

met with little achievement.

Some other facts about Indian MFIs are given below :-

Growth of linked SHG's in the regions

From the above table we can easily see that the main beneficiary of the micro-finance

system have been the southern states, where the density of the MFIs have been more than

the northern region. This is why the Government has chosen 13 priority states for

focussing more and providing the basic financial services. The reason behind the lagging

of northern states might be the lack of the awareness and literacy. This is the place where

we need to implement the Grameen Bank’s policy of making 16 decisions while giving

loans and need to educate the people and train the people about where and how to invest

their loaned money and make maximum output from it. Now let us see the growth of

SHGs in the 13 priority states nominated by the government:

Growth of linked SHG's in 13 Priority States

As per the data available in above table, the SBLP (SHGs Bank Linkage Programme) has

expanded by 37 percent in 13 priority states which account for 67 percent of the rural

poor. These states have been identified by NABARD in 2005 for their special efforts and

location – specific strategies. The Western region experienced the fastest growth i.e.

about 63% of all regions due to rapid growth in Maharashtra and the share of western

region in the total number of groups linked is only 5 percentage points behind its share of

the total number of poor. The central and eastern regions are still lagging behind their

share of the poor by 21 and 11 percentage points respectively. Growth in the central

region was only 24% and subsequently, in the East was 33%. The main concerns have

been the states like Himachal Pradesh, Jharkhand, Madhya Pradesh and Uttar Pradesh.

Though there are some states which have done better in this regard and have more

numbers of SHGs than the other like Uttar Pradesh, Maharashtra, Orissa, West Bengal

and Rajasthan. Here we can note that some states like Maharashtra, Bihar, Assam and

Rajasthan has reported a tremendous growth in the number of SHGs.

The main source for the finance of the SHGs and micro loans in India has majorly been

the commercial banks and RRBs (Regional Rural Banks).

Agency wise share of SHGs financed

The above table shows respective share of commercial banks, RRBs and cooperatives in

financing SHGs. As clearly visible, the share of commercial banks has gone up in 2006-

07, both in respect of number of loans and amounts disbursed, at the most of the expense

of RRBs in respect of share of number of loans and subsequently, at the expense of the

cooperatives in respect of share of loans disbursed. Now the main problem in front of our

MFIs is to arrange for the funds. Till now the main source of funds for Indian MFIs have

been the institutional debts and donations. And hence they are not self dependent and

they have to manage for their funds from different sources whereas the Grameen Bank is

self dependent for its funds. The main reason behind it is that the Grameen Bank is

allowed to accept deposits from its customers and in India it is not allowed to accept

deposits.

Sources of funds for microfinance operations

As clearly seen from the above bar graph, the whole structural shift has taken place due

to an increase in debt financing among Indian MFIs while net worth as a proportion of

the total has been reduced and a very limited flow of grants have failed to keep pace with

growth. The funds have been readily available from both private and public commercial

banks thereby facilitating the borrowings to reach three quarters of total liabilities on MFI

balance sheets.

MFIs as a beneficial business strategy:-

The MFIs have been proved a very effective and profitable business strategy over the

years. The Indian as well as the other countries MFIs have earned a handsome profit

below are some data regarding it :-

The above mentioned data is about State Bank of India. It shows that the number of

SHGs linked, the amount disbursed, the number of beneficiaries are increasing i.e. the

service is being available to more and more persons effectively and efficiently.

Similarly the ICICI bank and many other banks apart from NABARD, the apex body for

the rural and agricultural financing, have done impressive work from the model was

derived from the SHG-Bank linkage program of NABARD. Through this program, banks

financed Self Help Groups (SHGs) which had been promoted by NGOs and government

agencies. NABARD’s bank linkage program has cumulatively reached a total of 9.4 lakh

SHGs with about 1.4 crore households. Grameen Bank which has so far loaned $6.5

billion is a highly successful micro-lender. It had started with providing a loan of $27 to a

group of impoverished women in the year 1976. Over 95% of the Grameen Bank's 3.8

million members are women. It has reversed conventional banking practice by removing

the need for collateral and created a banking system based on mutual trust,

accountability, participation and creativity. It has lifted people in 80,000 villages of

Bangladesh out of poverty. It pays out $500 million a year in loans and has a repayment

record that exceeds 98%. It currently has loans in the hands of borrowers totalling over

US$300 million, with deposits of a similar amount. In India SKS micro-finance alone has

made loans worth $149 million and is said to be among the world's fastest-growing

microfinance organizations. The commercial banks have main problem about micro-

lending is that the processing fees and other fees for a small loans is very high as a

percent of the total loan size which makes it a non profitable business for them but after

bank linkage initiative by NABARD they have found it very profitable and beneficial for

both of them, the customer and the bank.

Operating Expense Ratio of Indian MFIs by loan size

Analysis of operating expense ratio by loan size is the major determinant of operating

efficiency. As the loan size increases from Rs. 3,000 to Rs. 10,000, the operating expense

ratio declines from 25% down to an average of around 12%. That is why, the normal

banks do not provide small size loans directly but they hire a third party lender for such

loans. And the commercial banks have linkages with the other local NGOs and SHGs to

operate successfully and profitably. There are several insurance schemes are also very

popular among the rural people like insuring their livestock, managing agriculture risk

like SEWA and Rainfall Insurance etc.

Financial needs of poor people

Financial needs and financial services.

In developing economies and particularly in the rural areas, many activities that would be

classified in the developed world as financial are not monetized: that is, money is not

used to carry them out. Almost by definition, poor people have very little money. But

circumstances often arise in their lives in which they need money or the things money

can buy.

In Stuart Rutherford’s recent book The Poor and Their Money, he cites several types of

needs:

Lifecycle Needs: such as weddings, funerals, childbirth, education, homebuilding,

widowhood, old age.

Personal Emergencies: such as sickness, injury, unemployment, theft, harassment

or death.

Disasters: such as fires, floods, cyclones and man-made events like war or

bulldozing of dwellings.

Investment Opportunities: expanding a business, buying land or equipment,

improving housing, securing a job (which often requires paying a large bribe), etc.

Poor people find creative and often collaborative ways to meet these needs, primarily

through creating and exchanging different forms of non-cash value. Common substitutes

for cash vary from country to country but typically include livestock, grains, jewellery

and precious metals.

As Marguerite Robinson describes in The Microfinance Revolution, the 1980s

demonstrated that "microfinance could provide large-scale outreach profitably," and in

the 1990s, "microfinance began to develop as an industry". In the 2000s, the

microfinance industry's objective is to satisfy the unmet demand on a much larger scale,

and to play a role in reducing poverty. While much progress has been made in developing

a viable, commercial microfinance sector in the last few decades, several issues remain

that need to be addressed before the industry will be able to satisfy massive worldwide

demand. The obstacles or challenges to building a sound commercial microfinance

industry include:

Inappropriate donor subsidies

Poor regulation and supervision of deposit-taking MFIs

Few MFIs that meet the needs for savings, remittances or insurance

Limited management capacity in MFIs

Institutional inefficiencies

Need for more dissemination and adoption of rural, agricultural microfinance

methodologies.

Ways in which poor people manage their money

Saving up

Rutherford argues that the basic problem poor people as money managers face is to

gather a 'usefully large' amount of money. Building a new home may involve saving and

protecting diverse building materials for years until enough are available to proceed with

construction. Children’s schooling may be funded by buying chickens and raising them

for sale as needed for expenses, uniforms, bribes, etc. Because all the value is

accumulated before it is needed, this money management strategy is referred to as 'saving

up'.

Often people don't have enough money when they face a need, so they borrow. A poor

family might borrow from relatives to buy land, from a moneylender to buy rice, or from

a microfinance institution to buy a sewing machine. Since these loans must be repaid by

saving after the cost is incurred, Rutherford calls this 'saving down'. Rutherford's point is

that microcredit is addressing only half the problem, and arguably the less important half:

poor people borrow to help them save and accumulate assets. Microcredit institutions

should fund their loans through savings accounts that help poor people manage their

myriad risks.

Saving down

Most needs are met through mix of saving and credit. A benchmark impact assessment of

Grameen Bank and two other large microfinance institutions in Bangladesh found that for

every $1 they were lending to clients to finance rural non-farm micro-enterprise, about

$2.50 came from other sources, mostly their clients' savings. This parallels the experience

in the West, in which family businesses are funded mostly from savings, especially

during start-up.

Recent studies have also shown that informal methods of saving are unsafe. For example

a study by Wright and Mutesasira in Uganda concluded that "those with no option but to

save in the informal sector are almost bound to lose some money – probably around one

quarter of what they save there.

The work of Rutherford, Wright and others has caused practitioners to reconsider a key

aspect of the microcredit paradigm: that poor people get out of poverty by borrowing,

building microenterprises and increasing their income. The new paradigm places more

attention on the efforts of poor people to reduce their many vulnerabilities by keeping

more of what they earn and building up their assets. While they need loans, they may find

it as useful to borrow for consumption as for microenterprise. A safe, flexible place to

save money and withdraw it when needed is also essential for managing household and

family risk.

 REASONS FOR FOCUS ON POOR WOMEN

The National Credit Fund for Women or the Rashtriya Mahila Kosh (RMK) is

working exclusively for poor women. Its loans are available solely and entirely to this

target group. The reasons for this are several :

Among the poor, the poor women are the most disadvantaged - they are

characterized by lack of education and access to resources, both of which are

required to help them work their way out of poverty and for upward economic and

social mobility.

The problem is more acute for women in countries like India, despite the fact that

women’s labour makes a critical contribution to the economy - this is due to low

social status and lack of access to key resources.

Evidence shows that groups of women are better customers than men - they are

better managers of resources - benefits of loans are spread wider among the

household if loans are routed through women - mixed groups are often

inappropriate in Indian society - record of all-male groups is worse than that of all-

women groups, everywhere.

RMK - ITS PROFILE, AIMS & OBJECTIVES, ROLES

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

particularly in the unorganised 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 India’s 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 organisation of

women’s groups for thrift and savings and effective utilisation of credit.

To use the group concept and the provision of credit as an instrument of women’s

empowerment, socio-economic change and development.

To cooperate with and secure the cooperation of the Government of India, State

Governments, Union Territory administrations, credit institutions, industrial and

commercial organisations, 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 executive officer 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.

The Kosh has three main roles:

Wholesaling Role -

It acts as a wholesaling apex organisation for channelising funds from government

and donors to retailing intermediate microfinance organisations (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 -

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 realises 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].

Advocacy Role - whereby RMK acts as an advocate or agent for influencing

development and micro-finance policy and creating a more enabling policy and

legal environment for spread of micro-finance activities in India. Being a creation

and a representative of the government, RMK has a particular advantage in this

area.

Current Scenario of Micro - financing in India

With 75 million poor households potentially requiring financial services, the

microfinance market in India is among the largest in the world. Estimates of

household credit demand vary from a minimum of Rs. 2,000 to Rs. 6,000 in rural

areas and Rs. 9,000 in urban settings. Given that 80 percent of poor households are

located in rural areas, total credit demand ranges between Rs. 255 billion and Rs.

500 billion. However, only Rs.18 billion of this amount has been generated so far.

The reason for this is that major portion for rural crediting has been from the

informal sector and this is at a very high interest rate, thus reducing the volumes of

such credits, and by far has been for investment purposes (13%) and more for

family emergencies (29%) and social expenditures (19%).

There are a number of factors why rural crediting by the formal sector has not

taken pace so far.

High fiscal deficits have meant that Government is appropriating a large share

of financial savings for itself.

Persisting interest rate restrictions reduce the attractiveness of lending,

particularly to small, rural clients.

On the other hand, informal credits have been attractive albeit high interest rates

due to:

Flexible repayment options

Convenience and frequency with which such loans can be accessed

Less reliance on collateral (only 16.5% of households report providing

collateral against the loan)

Meeting the Demands

Inadequacies in rural access to formal finance and the seemingly extortionary

terms of informal finance for the poor provide a strong need and ample space for

innovative approaches to serve the financial needs of India’s rural poor. A gap of

as high as 85%-90% in supply and demand cannot be closed by only the existing

MFIs because many, particularly the younger and smaller organizations, lack the

institutional capacity to expand.

Key Concerns

All said and done however, there are certain key issues that need to be tackled

before ensuring the benefits of micro-financing would reach their optimum levels.

Scaling-Up Microfinance: Microfinancing through formal and semi-formal can

reach self-sustainability only when there is substantial volume which they can

generate.

Effective policy, legal and regulatory framework - An enabling policy, legal

and regulatory framework is critical to scaling-up. For this the govt. needs to take

certain steps as:

Reducing minimum start-up capital requirements to facilitate the

transformation of MFIs into NBFCs

Encouraging multiple sources of equity for MFIs

Developing a set of prudential norms that are more appropriate to institutions

serving the poor, and set up supervision mechanisms around those norms.

Inclusiveness and competition in the microfinance sector can generate high

payoff. This will not only give the borrower a no of options for raising debt, but

also drive the costs down to raise them.

Proven Impact of Micro-financing

The effects of micro-financing trickling down to the poorest of Indians can already

be observed in the Indian economy.

Improvement in Asset Position

The average increase in assets was about 72%, from Rs6,843 to Rs11,793 in real

terms (in one to three years) in most of the households where micro-financing has

been extended. Before given the credit, one in three households had no assets;

after that, it changed to one in six.

Increase in Savings

While most households given micro-credits were having negligible or no savings,

this improved to Rs. 160-Rs. 460 and in some cases, the average household

savings rose to as high as Rs. 1444.

Changes in Borrowing Patterns

With improvement in above two factors, people were more ready to borrow from

the semi-formal and formal sector rather than their traditional creditors i.e. friends

and family, moneylenders, landlords.

Looking Ahead

What will it take for micro credit to become a mainstream mode for lending? One

option is to provide other financial services similarly built around small amounts

of money, such as micro insurance. There is tremendous scope to design well

adapted insurance products for the poor in the insurance sector as well. A number

of initiatives that should be taken in this area as:

Mothering of Development Innovations

The institution aims to promote and nurture new ideas on different development

themes, which have larger potential to address the livelihoods and development of

the poor in a region viz., microfinance, small scale irrigation, dry land agriculture,

ICT for poor, working with panchayats.

Promoting Institutions to reach Scale

Exclusive thematic organizations will be promoted to undertake development

work with a sub-sectoral focus. The primary role of the institutions is promotional

and to ensure that benefits reach a large number of poor with quality.

Human Resource Development

The institution would bring young professionals into the development sector and

provide them an opportunity to practice and develop relevant knowledge, attitudes

and skills to work long term in the development sector.

Hence, with proper regulation and a major thrust given by the government to

provide a suitable environment for micro-financing, it would certainly bring out

the most optimum results in alleviating poverty from the country and allowing the

poorest on Indian in joining the bandwagon of prosperity and growth, that India is

poised to achieve in the years to come.

Self-Help Group (SHG)

A Self-Help Group (SHG) is a registered or unregistered group of micro

entrepreneurs having homogenous social and economic background voluntarily,

coming together to save small amounts regularly, to mutually agree to contribute

to a common fund and to meet their emergency needs on mutual help basis. The

group members use collective wisdom and peer pressure to ensure proper end-use

of credit and timely repayment thereof. In fact, peer pressure has been recognized

as an effective substitute for collateral.

Advantages of financing through SHGs

An economically poor individual gain strength as part of a group. Besides,

financing through SHGs reduces transaction costs for both lenders and borrowers.

While lenders have to handle only a single SHG account instead of a large number

of small-sized individual accounts, borrowers as part of a SHG cut down expenses

on travel (to & from the branch and other places) for completing paper work and

on the loss of workdays in canvassing for loans.

The SHG model was initiated by the National Bank for Agriculture and Rural

Development (NABARD) through the SHG-Bank Linkage Programme in the

early 1990s. Today the SHG model, which links informal groups of women to the

mainstream banking system, has the largest outreach to microfinance clients in the

world.

List of Top Microfinance Companies in India

1. Spandana Sphoorty Financial Ltd (SSFL)

2. SKS Microfinance Ltd (SKSMPL)

3. Asmitha Microfin Ltd (AML)

4. Share Microfin Limited (SML)

5. Shri Kshetra Dharmasthala Rural Development Project (SKDRDP)

6. Bhartiya Samruddhi Finance Limited (BSFL)

7. Bandhan

8. Cashpor Micro Credit (CMC)

9. Grama Vidiyal Micro Finance Pvt Ltd (GVMFL)

10. Grameen Financial Services Pvt Ltd (GFSPL)

A Primer on Microfinance in India

Indian microfinance is dominated by two operational approaches: self-help groups

(SHGs), and microfinance institutions (MFIs), in addition to a few cooperative forms.

The SHG model was initiated by the National Bank for Agriculture and Rural

Development (NABARD) through the SHG-Bank Linkage Programme in the early

1990s. Today the SHG model, which links informal groups of women to the mainstream

banking system, has the largest outreach to microfinance clients in the world. MFIs

emerged in the late 1990s to harness social and commercial funds available for on-

lending to clients. Today there are over 1,000 Indian MFIs.

According to estimates from Intellecap's inverting the Pyramid: The Changing Face of

Indian Microfinance (2007), SHGs and MFIs have together disbursed USD 3.7 billion in

microloans through March 2007. While the SHG model provides the majority of

disbursements, the MFI model has demonstrated a higher growth rate. From 2003 to

2007, the MFI disbursement share rose from 28% to 47% of all Indian microfinance

loans - a value of USD 1.7 million. Despite such growth, estimates suggest that the

current supply of microcredit amounts to only about 7% of potential demand.

Self-Help Groups

According to NABARD, almost 3 million SHGs have linked to nearly 500 banks since

the program started, reaching over 11 million households across.

SHG Federations

Some NGOs such as MYRADA and Dhan Foundation have promoted federations. These

apex institutions aggregate savings from SHGs and act as intermediaries between

financial institutions and SHGs. SHG Federations were envisioned as an exit strategy for

the promoting agencies and a means of ensuring SHG sustainability. However, most

federations have yet to demonstrate operational self-sufficiency, the ability to mobilize

sustained financial resources and most importantly, the institutional capacity to run

without the promoting agency's support.

Financing Strategies

Commercial banks, regional rural banks (RRBs) and cooperative banks primarily fund

the SHG-Bank Linkage Programme, and NABARD in turn re-finances them. Credit lines

to SHGs are critically limited, as they are based on a certain multiple of SHG members'

savings accounts within banks. While the cumulative savings of SHGs could serve as a

low-cost source of funds for on lending, their potential is limited by the lack of

aggregated savings across SHGs. Commercial equity investments are not available to for

SHGs due to their informal status

Illusive socio-economic impacts

SHGs form a critical link for poor women to access a variety of financial services. They

are effective platforms for women to participate in politics through awareness campaigns

and community action. SHGs have also emerged as "last mile" channels for government

to distribute financial benefits and for corporations to retail their products through

member-entrepreneurs. Even so, questions remain about the ability of SHGs to attain a

primary objective - economic empowerment of poor women.

Microfinance Institutions (MFIs)

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.

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.

Scaling up Indian Microfinance: Opportunities and Considerations for the Future

While Indian microfinance has grown substantially over the last decade, future success

will require informed decisions and proactive strategies by key stakeholders, taking

advantage of emerging opportunities and mitigating potential risks.

Funder coordination for retail microfinance

Most investors, apart from a few funds such as Bellwether, Lok Capital, and Aavishkaar-

Goodwell, tend to focus on the established Category 1 MFIs, leaving plenty of room for

more early-stage MFI investments. Complementing this, the space can benefit from

specialized microfinance debt financing vehicles that provide an alternative to

commercial bank funding and an increased participation from capital markets through

mechanisms such as bond issues and securitization.

Supporting infrastructure needed

As in any industry, microfinance can expect to see a period of consolidation with mergers

and acquisitions, innovative financing mechanisms as well as unfamiliar risks such as

competition and inadequate growth management. To complement this, parallel

investments need to build a supporting ecosystem. Specialized advisory assistance is

particularly relevant for MFIs that plan IPOs and bond issues and experiment with

technology interventions such as mobile banking. Human resources for microfinance,

both in terms of quantity and quality, will prove to be a key challenge, especially with a

booming Indian economy and increasing competition for good quality human resources.

Adoption of good governance practices and quality monitoring and reporting will be

critical to ensure balanced growth and satisfied stakeholders

Policy

Recognizing that SHGs and MFIs can form key actors in the pursuit of an inclusive

financial system, the Indian policy makers have tried to adopt many promotional and

regulatory measures over time, the latest being the proposed Microfinance Bill. The bill

is expected to identify a specialized regulator and guidelines for NGO-MFIs while the

for-profit entities will be governed by the Reserve Bank of India regulations. Their legal

status will determine their future scope of services, ability to mobilize various types of

finance and to be part of the mainstream financial system.

Credit Mechanisms Adopted by HDFC (India) for Funding the Low Income Group

Beneficiaries

HDFC has been making continuous and sustained efforts to reach the lower income

groups of society, especially the economically weaker sections, thus enabling them to

realise their dreams of possessing a house of their own.

HDFCs' response to the need for better housing and living environment for the poor,

both, in the urban and rural sectors materialised in its collaboration with Kreditanstalt fur

Wiederaufbau (KfW), a German Development bank. KfW sanctioned DM 55 million to

HDFC for low cost housing projects in India. HDFCs' approach to low-income lending

has been extremely professional and developmental in nature. Negating the concept of

dependence, HDFCs' low cost housing schemes are marked by the emphasis on people’s

participation and usage of self-help approach wherein the beneficiaries contribute both in

terms of cash and labour for construction of their houses. HDFC also ensures that the

newly constructed houses are within the affordability of the beneficiaries, and thus

promotes the usage of innovative low cost technologies and locally available materials

for construction of the houses.

For the purpose of actual implementation of the low cost housing projects, HDFC

collaborates with organisations, both, Governmental and Non-Governmental. Such

organisations act as co-ordinating agencies for the projects involving a collective of

individuals belonging to the Economically Weaker Sections. The projects could be either

in urban or rural areas.

The security for the loan is generally the mortgage of the property being financed.

The construction work is regularly monitored by the co-ordinating agencies and HDFC.

The loans from HDFC are disbursed depending upon the stages of construction. To date,

HDFC has experienced 100% recovery for the loans disbursed to various projects.

Efficiency with Growth of MFIs:-

Following is the table showing the data about the scenario of Indian micro-finance :-

Fact sheet on coverage and growth of Indian microfinance, 2007-08

Most of the Indian MFIs are working in profit. Following is the table showing the

operating and financial information about the SKS Micro-finance India :-

Operating and Financial Information

The above table clearly shows that there is progress in almost all the fields for the SKS

Micro-Finance.

There have been both positive and negative critical developments in the Indian MFI

sector. On the positive side, there has been leverage of MFIs newly found management

expertise to achieve scale and spread their operations well beyond their traditional

operational areas. On the negative side, they have been under attack from politicians and

bureaucrats dominant in some of their traditional operational areas in Andhra Pradesh and

Karnataka as their loan recovery practices are under scrutiny and their interest rates

appear to be exorbitant. So these types of irregularities should not be there. And there

should be a sense of responsibility in the staff of all the MFIs and proper training should

be given to them. There are some social responsibilities of MHIs like reaching poor or

excluded clients, improving the quality and appropriateness of financial services,

contributing to employment and enterprise growth, improving the economic and social

conditions of clients and their households, and ensuring social responsibility to clients, to

staff and to the communities in which they work. These should also be taken care.

There have not only been rural MFIs but also the urban MFIs and There has been an

upsurge of interest in urban microfinance with several recent start-ups in the metros,

promoted by professionals who have a proven track record of successful careers in

banking and other fields. And new micro-finance services like health insurance,

education loans etc.

These are given below :

As can be seen from the table that the percentage of people using these facilities are still

very low and hence this sector has a lot of potential.

Technology:-

The use of technology is another important aspect of the Indian MFIs and technological

solutions such as branchless banking is needed. Ujjivan for instance is taking advantage

of broadband connectivity in urban areas by centralizing all data entry at the head office

and having the branches merely scan daily loan transaction data sheets and transmit them

by email. SEWA and Swadhaar are using biometric smart cards to make it easier for their

members to operate savings accounts through ATMs, since they tend to forget their PINs.

There is a very god usage of IT by MFIs like they are using several software for the

Grameen model like FAMIS Plus, Delphix, Micro Financier, Banksoft etc. IIT Chennai,

The Tenet group, and ICICI Bank have designed a secure, low cost, and low maintenance

ATM called the Gramateller. The idea behind this is to increase financial institutions'

outreach and penetration in rural areas.

MICRO FINANCING INSTITUTIONS IN PUNJAB

* Mother Self-Help Groups

* Punjab Pradesh Mahila Congress

* Punjab National Bank

* Umeed Khanna Foundation

* Help the People Fund

* PCI

* Bhai Ghanya Health Insurance Scheme

Mother Self-Help Groups

http://www.punjabeducation.gov.in/sub-pages/mshg.htm

This link is an EXCELLENT resource and provides a list of mother self-help groups by

village and district. If you click on the village names, you can find the names and roles of

members.

Punjab Pradesh Mahila Congress

Mahila Congress will be forming self-help groups and microfinance programs for

women.  

Punjab National Bank 

Punjab National Bank plans to open Micro Credit Centers in all states, launching its first

center in the region at village Maloya in Chandigarh. It also gave life insurance to 2,000

female members from self help groups through a social security group scheme called

Janashree Bima Yojna.

Micro Credit

The Bank continued to promote Micro Finance through formation & credit linkage of

Self Help Groups which is an effective instrument for increasing the income level and

reducing poverty and unemployment. Adequate thrust is being given to financing Tenant

Farmers’ Groups (TFGs). In addition, the Bank has laid emphasis on capacity building

and training of intermediaries, such as

NGOs /Volunteer Vahinis and the ultimate beneficiaries. During 2007-08, the Bank

contributed Rs 22.75 lakh to the corpus formed for providing financial assistance towards

infrastructure for the RUDSETI being run by J&K Government. Further, the Board

approved a budget of Rs 13.09 lakh for recurring expenses of RUDSETI at Distt. Solan,

Himachal Pradesh, established in association with Ambuja Cement Foundation. As at end

March 2008, the Bank has credit-linked 1,18,952 SHGs, registering a growth of 18.2

percent.

Promoting Financial Inclusion

Launch of Rickshaw Projects

The Bank launched two Rickshaw Projects for assisting the rickshaw pullers to become

self reliant. While one project was launched at Varanasi (UP) in association with Centre

for:

Rural Development (CRD), an NGO, the other was launched at Patna (Bihar) with

MicroFinance Institution “Sammaan Foundation”, a non-profit organization.

Financial Literacy and Education Counselling

In order to foster a “financially inclusive growth”, the biggest challenge is the challenge

of financial education because an important reason for financial exclusion is lack of

awareness on the part of people regarding the importance of being the customers of a

bank. A social revolution is needed and the Financial Literacy and Education

Counselling Centres are required to face this challenge.

Towards this, the Bank being the SLBC Convenor in the States of Punjab and Haryana

opened 9 such Centres (7 in Lead Districts of Punjab and 2 in Lead Districts of Haryana).

PNB Farmers’ Welfare Trust working as BC

PNB Farmers’ Welfare Trust has also been acting as the Business Correspondent. For

this, the Trust launched “Kisan Bandhu Scheme” wherein local youth have been trained

to contact the people in the villages for (i) opening of Bank accounts and (ii) providing

extension services.

PNB Centenary Rural Development Trust working as BC

PNB Centenary Rural Development Trust’s Matki Jharoli unit is also working as

Business Correspondent.

Mobile ATMs

As a unique initiative, the Bank has launched 4 mobile ATMs on April 14, 2008. These

ATMs will mainly cover unbanked rural/slum areas under Circle Office Delhi. They will

be stationed at pre-determined destinations for specific time. The ATM services will be

available to PNB customers as well as other banks’ customers under sharing

arrangement.

Punjab State Co-Operative Agricultural Development Bank Ltd

National Bank of Agriculture and Rural Development (NBARD)

 

Umeed Khanna Foundation

Umeed Khanna Foundation (UKF) was established in 1996, and is operating in Sangrur,

the poorest district of Punjab, India. It began by providing health services to the

underprivileged and has recently received a loan from Grameen Trust, to provide

microcredit to the poor in Sangrur and Barnala town. So far, Umeed has assisted over

40,000 people and has recently broadened their projects to include activities in the field

of basic literacy, women empowerment, family welfare, youth development, up-liftment

of the poor farmers, and drug rehabilitation programs.

Conclusion

The Indian economy at present is at a crucial juncture, on one hand, the optimists are

talking of India being among the top 5 economies of the world by 2050 and on the other

is the presence of 260 million poor forming 26 % of the total population. The enormity of

the task can be gauged from the above numbers and if India is to stand among the comity

of developed nations, there is no denying the fact that poverty alleviation & reduction of

income inequalities has to be the top most priority. India’s achievement of the

Millennium Development Goals of halving the population of poor by 2015 as well as

achieving a broad based economic growth also hinges on a successful poverty alleviation

strategy.

In this backdrop, the impressive gains made by SHG-Bank linkage programme in

coverage of rural population with financial services offers a ray of hope. The paper

argues for mainstreaming of impact assessment and incorporation of local factors in

service delivery to maximize impact of SHG –Bank linkage programme on achievement

of MDGs and not letting go this opportunity.

REVIEW OF LITERATURE

The concept of micro-finance was given by Bangladeshi economist Mohammad Yunus in

the year 1976 and was successfully implemented in Grameen Bank. Micro-finance is

providing basic financial services to the poor or the people who don’t have any

creditworthiness. The basic financial services not only mean the micro-loans but also the

savings, insurance (crop, cattle etc.), housing loans and other financial products and

services. Most MFIs usually travel to clients to give loans and receive loan payments.

And most of the times the loans are disbursed to a group of people usually called Self

Help Group (SHGs).

The MFIs have been proved a very effective and profitable business strategy

over the years. The Indian as well as the other countries MFIs have earned a handsome

profit. The number of SHGs linked, the amount disbursed, the number of beneficiaries

are increasing i.e. the service is being available to more and more persons effectively and

efficiently. There have been both positive and negative critical developments in the

Indian MFI sector. On the positive side, there has been leverage of MFIs newly found

management expertise to achieve scale and spread their operations well beyond their

traditional operational areas. On the negative side, they have been under attack from

politicians and bureaucrats dominant in some of their traditional operational areas in

Andhra Pradesh and Karnataka as their loan recovery practices are under scrutiny and

their interest rates appear to be exorbitant. So these types of irregularities should not be

there. And there should be a sense of responsibility in the staff of all the MFIs and proper

training should be given to them. There are some social responsibilities of MFIs like

reaching poor or excluded clients, improving the quality and appropriateness of financial

services, contributing to employment and enterprise growth, improving the economic and

social conditions of clients and their households, and ensuring social responsibility to

clients, to staff and to the communities in which they work. These should also be taken

care.

REFERENCES

http://www.punjabgovt.nic.in/GOVERNMENT/finance/Slbc102-Minutes%20.pdf

http://lnweb90.worldbank.org/exteu/SharePapers.nsf/7795535c333f8172c1257162003d5b69/0a0e95f1471f1d4c852571fd004dae86/$FILE/Alok%20Misra.pdf

http://images.google.co.in/imgres?imgurl=http://www.microfinancefocus.com/news/wp-content/uploads/2009/12/Copy-of-India-Summit-088.jpg&imgrefurl=http://www.microfinancefocus.com/news/2009/12/09/myth-of-single-digit-interest-rate-in-microfinance-vijay-mahajan-keynote/&usg=__hEoCVUW34-EZtlVH55Vi-nl_h3c=&h=396&w=336&sz=79&hl=en&start=2&um=1&itbs=1&tbnid=h9xuTRNNIW_asM:&tbnh=124&tbnw=105&prev=/images%3Fq%3Dmicrofinancing%2Bin%2Bindia%26hl%3Den%26sa%3DN%26um%3D1

http://images.google.co.in/imgres?imgurl=http://www.peopleseconomics.com/wp-content/uploads/2009/05/microfinance_india.jpg&imgrefurl=http://www.peopleseconomics.com/%3Fp%3D657&usg=__DDG1MNb0fv1_AdDT2ULM36DsuNs=&h=294&w=274&sz=39&hl=en&start=3&um=1&itbs=1&tbnid=pBjjfjQ9dcoHkM:&tbnh=115&tbnw=107&prev=/images%3Fq%3Dmicrofinancing%2Bin%2Bindia%26hl%3Den%26sa%3DN%26um%3D1

http://en.wikipedia.org/wiki/Microfinance

http://www.coolavenues.com/know/fin/micro_1.php

http://www.gdrc.org/icm/conceptpaper-india.html

http://www.microfinanceinpunjab.com/microfinance-institutions.html