Chapter: - 1

INTRODUCTION
Microfinance has been recognized as an effective tool in helping poor
people and developing rural economy since its beginning in the late
1970s.

Empirical

research

provides

convincing

evidence

for

its

significant contribution to social development in various economies.

However, we see huge variation at their performance level among
different economies. Considering their immense impact on economic
development and poverty reduction, it is important to understand
sustainability of the microfinance institutions (MFIs).

It is believed that the entry of MFIs would adversely impact informal

sector lenders. It is puzzling that even with enormous growth of MFIs
over the last few decades; we still see coexistence of these two forms
of lending. I analyze how informational as ymmetry may explain this
coexistence. I develop a simple theoretical model to explore the role of
informational constraint on the optimal contract offered by MFIs.
Among other findings, we see that MFIs objective to screen good
projects from the bad projects may put additional constraint in
removing informal sector lending or in increasing borrowers payoff. In
addition, in my thesis, I provide a review of empirical evidences on
microfinances poverty reduction effect. Finally, I briefly discuss the
issues related to sustainability of microfinance.

Microfinance is the provision of microcredit and other financial

services to the poor and low-income people. It emerges as one of the

most innovative intervention in the financial sector and brings huge
influence in economic development. Over the last few decades, it has
developed vigorously, becoming a powerful component of economic
development, poverty alleviation and economic regeneration strategies
around the world.
Microfinances growth and development has been extremely rapid since
its appearance in the late 1970s. During the 1970s and 1980s, the
microenterprise movement led to the emergence of nongovernmental
organizations (NGOs) that provided small loans for the poor. By the
end of 1997, microfinance institutions (MFIs) had 13.5 million clients.
As of December 31, 2007, 3552 microcredit institutions reported
reaching 155 million clients, 106 million of whom were among the
poorest when they took their first loan1. The United Nations declared
2005 the International Year of Microfinance.
What factors account for the emergence and growth of microfinance? It
was designed to combat the market failure problem experienced in most
of the underdeveloped and developing parts of the economy. For
several reasons, the poor has little access to credit. Due to lack of
information about poor borrowers ability to repay and their inability to
provide collateral, banks and other profit-oriented financial institutions
typically cannot provide credit to the poor. Thus, it has a direct adverse
effect on poverty reduction. Besides, lack of credit hampers growth of
business and creation of jobs, thus contributing to underdevelopment of
the poverty-struck areas. In absence of formal credit sector, many poor
people in rural areas borrow money from informal moneylenders. On
many occasions, informal money lending turned out to be more
exploitative and devastating to the poors economic situation. Thus, a
primary objective of MFIs was to provide financial services for poor

people and reduce exploitation by informal lender. It promises to bring

a series of exciting possibilities for extending markets and developing
small scale economy in a sustainable way.

Microfinance has also been recognized as an effective tool in

alleviating poverty (Daley-Harris 2002). The poorest and poverty
reduction have become the object of unprecedented attention at
international summits in the 1990s. Canada, through the Canadian
International Development Agency (CIDA), has committed to the
targets set by both the OECD International Development Goals and,
most recently, the Millennium Goals which focus on poverty reduction
for those living on less than a dollar a day.

It is clear from the evidence that there are strong potential synergies
between microfinance and the provision of basic social services for
clients

(Morduch

&

Haley,

2001).

The

benefits

derived

from

microfinance, basic education, and primary health are interconnected,

and programs have found that the impact of each can increase when
they are delivered together. This recognition has caused the government
to carry out microfinance as an important agenda in development.

Morduch

(2000)

has

also

emphasized

the

need

to

develop

the

institutional capacity in a cost effective way, in order to achieve

sustainability. However, it has been debated that emphasizing financial
sustainability can have an adverse effect of excluding the poorer
section of the economy because of the perception that the poor are at a
greater credit risk and that the unit cost of small loans tend to exceed
the

unit

cost

of

large

loans. Thus,

as

microfinance

movement

progresses over the years, it has been continuously evaluated and

modified accordingly to achieve the three important goals

extending market and freeing borrowers from the clutches of informal

moneylenders,
reduce poverty through social development and
building the credit sector in a sustainable way. Several microfinance
programs

have

been

designed

to

achieve

these

goals.

But

the

performances of these programs are mixed. They have both positive and
negative impacts.

Although microfinance gets considerable success in bringing basic

financial services to rural areas and to the poor sections, it does not
necessarily reduce the volume of informal money lending. Informal
lenders seem to be thriving even in regions where MFIs have built
microcredit programs. Jain & Mansuri (2003) gave considerable
evidence that MFI clients not only borrow money extensively in the
informal market but also use informal loans to repay MFI debt.

What can explain such coexistence of MFIs with informal money

lenders? I develop a simple model to explore how informational
as ymmetries can constraint MFIs to raise its borrowers payoff from
borrowing MFI loans. As a result, some borrowers are always well off
borrowing from informal money lenders, provided that the lender has
better information about the project than MFIs do. Additionally, MFIs
are also constrained with the fact the optimal contract they offer should
also be able to screen good projects from the bad projects. The
objective to screen good projects gives an incentive to raise the interest
rate, and thereby reduces borrowers incentive to borrow from MFIs.
My model of optimal MFI contract under asymmetric information

shows that the installment structure of the loan repayment schedule

may allow the informal credit market to survive. My model also shows
that informational constraint that MFIs have, reduces their ability to
reduce poverty. I provide a brief literature review of the mixed
evidence on MFIs performance on poverty reduction. Many MFIs have
been able to lend money to the poor in developing countries, while the
poorest of the poor, generally, have not been reached.

Many microfinance programs are financially supported by governments

and

international

organizations.

When

these

financial

resources

terminate, it will be difficult for MFIs to maintain the operation of the

microfinance programs. As a result of this, microfinance programs face
resource constraints and are not self-sufficient (Meyer 2002). MFIs
ability to expand their service to the poor and the poorest of poor will
be restrained. Therefore, microfinance institutions should find possible
solutions to survive and not to depend so much on donors and
governments. Thus, it is practically meaningful to explore and study
the sustainability of MFIs. The thesis discusses the important issues
related

to

financial
sustainability
and

provides

review of the
theoretical
arguments
from

the

existing

literature.

1.1 GOALS
The goals are
Eradicate Extreme Poverty & Hunger.
Achieve Universal Education.
Promote Gender Equality & Womens Empowerment.
Reduce Child Mortality
Combat Diseases
Developing Entrepreneurial Spirit

Previous researches have focused on different goals of microfinance

and how they are achieved. In my thesis, I will pay attention to three
main goals:
(1) solving the market failure problem,
(2) reducing poverty, and
(3) bringing out development in a sustainable way.

It is easy to see why one of microfinances goals is to solve the market

failure problem-reaching the poor and undeveloped sectors, and
reducing exploitation by informal moneylenders. The financial systems
are not highly advanced in the poor regions of the world and the poor
have little access to credit through formal credit sector. One of the

reasons behind absence of formal credit sector is the information

problem.

In particular, banks have little information about the type of projects

the poor people would invest in. Additionally, the poor people can
hardly provide collateral for security. As loans from the formal banking
sectors are often refused, the potential borrowers approach informal
money lenders who provide loan at an extremely high interest rate,
leading to further economic problem. The emergence of microfinance
can possibly break this circle. Microfinance programs emphasize small,
frequent, regular payments and create incentives for poor borrowers to
make these payments. It has the promise to reduce the informal lending
by providing financial services to the poor.

With such a large proportion of the worlds population living in

poverty, the use of microfinance should also be a key to reduce poverty
and encourage economic growth. It has many roles in reducing poverty.
First, it targets the poorer section of the market, which is otherwise
deprived of formal credit. Thereby it expands the market. Second, it
converts savings of poor households to credit to others. Third, it works
as a much needed insurance for the poor people, who otherwise have
little support in smoothing consumption. Finally, it explores potential
synergies between microcredit and other basic development services
such as health care, education etc. Many MFIs have developed a range
of services to address the requirement of the poor, such as the Income
Generation for Vulnerable Group Development (IGVGD) program of
BRAC, Bangladesh. CGAPs Poverty Assessment tool can be used to
compare clients and no-clients of MFIs in the same community.

Although the microfinance service provides huge support to help the

poor people and change their life greatly, many present microfinance
institutions cannot achieve financial sustainability. The main reason is
that most institutions are still small and vulnerable to constraints on
their funding resources. They are unable to continuously offer credit
and wide-ranging service for the poor and thus have limited function on
regional poverty alleviation.

Therefore, another goal of microfinance is to bring out development in

a sustainable way. Robinson (2000) has pointed The microfinance
revolution is currently emerging in many countries around the world.
This term refers to the large-scale, profitable provision of microfinance
services-small savings and loans to economically active poor people by
sustainable financial institutions. This means MFIs should bring out
development in a sustainable way, and then MFIs can offer large-scale
provision of financial services to low-income people.

1.2 HISTORY OF MICROFINANCE

Over the past centuries, practical visionaries, from the Franciscan
monks who founded the community-oriented pawnshops of the 15th
century to the founders of the European credit union movement in the
19th century (such as Friedrich Wilhelm Raiffeisen) and the founders
of the microcredit movement in the 1970s (such as Muhammad Yunus
and Al Whittaker), have tested practices and built institutions designed
to bring the kinds of opportunities and risk-management tools that
financial services can provide to the doorsteps of poor people. While
the success of the Grameen Bank (which now serves over 7 million

poor Bangladeshi women) has inspired the world, it has proved

difficult to replicate this success. In nations with lower population
densities, meeting the operating costs of a retail branch by serving
nearby customers has proven considerably more challenging. Hans
Dieter Seibel, board member of the European Microfinance Platform, is
in favour of the group model. This particular model (used by many
Microfinance institutions) makes financial sense, he says, because it
reduces transaction costs. Microfinance programmes also need to be
based on local funds.
The history of microfinancing can be traced back as far as the middle
of the 1800s, when the theorist Lysander Spooner was writing about the
benefits of small credits to entrepreneurs and farmers as a way of
getting the people out of poverty. Independently of Spooner, Friedrich
Wilhelm Raiffeisen founded the first cooperative lending banks to
support farmers in rural Germany
The modern use of the expression "microfinancing" has roots in the
1970s when organizations, such as Grameen Bank of Bangladesh with
the microfinance pioneer Muhammad Yunus, were starting and shaping
the modern industry of microfinancing. Another pioneer in this sector
is Akhtar Hameed Khan.
Microfinance in India can trace its origins back to the early 1970s
when the Self Employed Womens Association (SEWA) of the state of
Gujarat formed an urban cooperative bank, called the Shri Mahila
SEWA Sahakari Bank, with the objective of providing banking services
to poor women employed in the unorganised sector in Ahmedabad City,
Gujarat. The microfinance sector went on to evolve in the 1980s around
the concept of SHGs, informal bodies that would provide their clients
with

much-needed

savings

and

credit

services.

From

humble

beginnings, the sector has grown significantly over the years to become

a multi-billion dollar industry, with bodies such as the Small Industries

Development Bank of India and the National Bank for Agriculture and
Rural

Development

devoting

significant

financial

resources

to

microfinance. Today, the top five private sector MFIs reach more than
20 million clients in nearly every state in India and many Indian MFIs
have been recognized as global leaders in the industry.

1.3 BENEFITS AND LIMITATIONS :

The benefits of microfinance are that it helps to manage the assets of
the poor and generates income. Through microfinance institutions such
as credit unions, financial non-governmental organizations and even
commercial banks poor people can obtain small loans and safeguard
their savings. The limitations of microfinance are that through this
savings plan participants are losing money by having to pay a fee. The

user can also pay back their loans whenever they chose therefore
encouraging a borrower to have various outstanding loans. The lender
is also vulnerable in that there is no guarantee of the loan being repaid
in the given arranged timeframe, and the consequences to defaulting
are not defined.

When looking at a micro-finance initiative, there are three main

benefits and limitations for the model. These are based on a basic
micro-finance initiative though they can be applied to many variations.
When looking at the three benefits and limitations, they revolve around
three key ideas, poverty, mistrust, and promoting change.
A micro-finance initiative wishes to address these issues in a positive
way. For example, micro-finance can be an alternative program to
address poverty reduction where the tools needed to raise an individual
or a family out of poverty are given to them directly. In a microfinance project these tools include money primarily, and may also be
accompanied with a savings program, and financial help. Along with
poverty reduction, a micro-finance initiative can aim to avoid a general
sense of mistrust between the citizens and their national banks. The
money in this case, is not coming from a bank, but rather within the
community which allows those participating to foster social capital and
community cohesion. Lastly, a microfinance initiative can promote
larger

poverty

reduction

movements

by increasing

the

financial

knowledge of the average citizen.

However, these initiatives are not without limitations. These limitations
focus

on

the

same

issues

as

stated

before,

but

the

negative

consequences that may occur. For example, while there may be mistrust
in the national banking system, there can be microfinance initiatives
where the outside creator takes advantage of those participating. The

money may not end up in the right places, resulting in distrust to all
who have interest in monetary programs, and could potentially ruin the
chance of any further microfinance projects becoming successful.
Secondly, when creating a microfinance project, time may be an issue.
What happens when the program is finished and the people who were
participating are still in poverty? In this case, it may be more
beneficial for there to be an on-going program. To see what would be
an appropriate choice in regards of time, the community must be
assessed before the project is put in place. Lastly, in regards to
limitations, someone is always going to be left out. Not everyone can
be a part of the program, and therefore one must decide who is going to
participate.

Often,

for

community development

project

to

be

sustainable, all must be affected positively.

There are two ways in which the needs of the poor are not being met by
micro finance. Firstly, the poor need to store savings for the long run;
such as for their retirement, widowhood or their heirs but the examples
such as saving up, down and through do not directly meet these needs.
Secondly, the poors ability to save fluctuates with time and so they
may not be able to save the fixed rate of saving. These two
shortcomings are difficult for the poor and they often get excluded or
exclude themselves (Rutherford, 2009). Poor people have to take a risk
to turn their savings in to large lump sum of money because there is no
perfect s ystem that would protect their deposits. For example, there is a
lack of trust among the members and the organizer; most community
micro finance projects only include family and close friends and do not
reach beyond that. Also, there is no or very little growth in the amount
of money that they save if saving up but if saving down, there is an
interest rate that the members have to pay.

Also, there are complications associated with implementing microfinance projects in Canada. For an example, inflation rates make it
difficult to analyze interest rates across countries, so ASCAs in high
inflation would have to charge more interest on their loans which may
result in their funds to decline in value themselves (Rutherford, 2009).
In

many countries, ASCAs have

become

permanent

institutions

referred to as Credit Unions, Savings and Credit Co-operatives.

Rutherford argues that credit unions are not owned by the poor because
they require specialized skills and higher educated personals to
regulate the operation of these institutions themselves (Rutherford,
2009). Although these institutions aim to benefit the poor, they are very
different from neighborhood ASCAs and issues arise when they purse
collateral or securities for loans given. Similarly, there are language
barriers between formal federal banks and credit unions that causes
complications (McMillian,2010).

The major benefit of microfinance projects is that it allows low income

families to save their money; most of the poor live day to day with the
little money that they earn and cannot afford to save. Poor people need
such alternatives in order to turn their savings in to large lump sums or
receive large sums and pay monthly with low interest rates. Banks and
other money lending institutions have high interest rates and simply
wont extend loans to poor people with little or no assets or
employment. Microfinance helps the poor people get access or save
funds over a period of time with low interest rates. Also, the poor could
solve their own issues by working together as a community and this
creates trust and social capital in their communities. It also leads to
stability and growth in their households, as well as their communities

1.4 "Scope and growth of Microfinance in India"

Nobel Laureate Muhammad Yunus is credited with laying the foundation of the
modern MFIs with establishment of Grameen Bank, Bangladesh in 1976.

Microfinance in India started in the early 1980s with small efforts at forming informal

self-help groups (SHG) to provide access to much-needed savings and credit services
to the marginal population more importantly in rural areas.

From this small beginning, the microfinance sector has grown significantly in the past
decades. National bodies like the Small Industries Development Bank of India
(SIDBI) and the National Bank for Agriculture and Rural Development (NABARD)
are devoting significant time and financial resources to Microfinance sector.

The World Bank has called South Asia the cradle of microfinance. Statistics
indicate that some 45% of all the people in the world who use microfinance services
are living in South Asia. However, the overall percentage of the poor and vulnerable
people with access to financial services remains small, amounting to less than 20 % of
poor households in India.

With financial inclusion emerging as a major policy objective in the country,

Microfinance has occupied centre stage as a promising conduit for extending financial
services to unbanked sections of population The microfinance sector has emerged as
one of the most promising tool for ameliorating poverty in India. The microfinance in
India involves forming self help groups, usually a group of 5 to 20 persons and
providing them credit through bank linkage. Therefore in India, it is often called as
SHG Bank linkage programme.

NGOs in microfinance sector, also called as microfinance institution provide that

linkage between banks and self help groups. With the help of credit and guidance
from NGOs, the SHGs strive to come out of the quagmire of poverty. Another
advantage found in Indian SHG movement is that most of the beneficiaries are
women and thus it is becoming an important instrument of bridging the gulf of gender
inequality.

With the growth of microfinance industry many small and large Microfinance

Institutions (MFI) had emerged in India and the largest MFI is SKS Microfinance Ltd
which is also listed in the stock market, only such institution in India.

The microfinance sector is having a healthy growth rate and it is currently a Rs.20,000
Cr. industry. The SHG-Bank Linkage Programme and the Microfinance Institutions
put together achieved a growth in their customer base by about 10.8 percent. The
combined borrowing customer base increased to 93.9 million from 86.3million in the
previous year.

Despite of healthy growth over the years, there number of concerns have emerged
related to the sector, like regulation, transparent pricing, low financial literacy etc. In
addition to these concerns there are a few emerging concerns like cluster formation,
insufficient funds, multiple lending and over-indebtedness which are arising because
of the increasing competition among the MFIs.

On a national level there has been a spate of actions taken to strengthen the regulation
of MF sector including, enactment of microfinance regulation bill by the Government
of Andhra Pradesh, implementation of sector-specific regulation by Reserve Bank of
India and most recently, release of Draft Microfinance Institutions (development and
regulation) Bill.RBI credit policy capped household income at Rs. 120000/- and credit
limit at Rs. 50000 for all MFI customers. This is to better target the beneficiary
population to the bottom quartile population.
Major challenges faced by microfinance in India are challenges related to access to
finance, governance and management, demand for low interest rates and managing
competition. It further adds that:

The single biggest challenge for microfinance lies in the area of training and
capacity development;
On the supply side, there is a lack of service providers and comprehensive,
integrated and relevant training modules

 Limited reach in the northern and eastern parts of the country

Range of products tends to be limited to simple credit offerings
On the demand side, not enough attention is being paid to training for senior
management
Absence of social audit in many cases

For the improvement of MF in India, Malegam Committee recommended measures to

improve functioning of MFIs regarding the prevalent practices of MFIs in regard to
interest rates, lending and recovery practices to identify trends that impinge on
borrowers interests, to delineate the objectives and scope of regulation of NBFCs
undertaking microfinance by the Reserve Bank and the regulatory framework needed
to achieve those objectives. Few recommendations were accepted by the government
but more reforms are needed in the sector to assure sustainable and pro-poor growth
of the industry.
International Finance Corporation has itself launched an MFI namely Utkarsh in Uttar
Pradesh and Bihar for the development of the MF in two of the most poor states in
India. It is poised to to increase access to finance and microfinance services in
relatively under-served areas. With IFCs support, Utkarsh is working to diversify its
products, develop sound internal systems and processes, and introduce a system of
social audit. The company aims to reach an estimated 250,000 women borrowers by
June 2013.

The potential of microfinance to ensure financial inclusion and thereby inclusive

development is not hidden from anybody and therefore aforesaid challenges must be
redressed on urgent basis. a better understanding of the diversity of womens
livelihood and a better understanding of the range of constraints, motivations, skills
and capabilities of women through the livelihood framework might help in better
operation of microfinance services.

Update your GK and read General Awareness Topics, Stay informed and inspired at

MBA Rendezvous
Can Chinese Slowdown risk Indian Economy?Can Chinese Slowdown risk Indian
Economy? How Labour Reforms Can Boost Business Environment in India?How
Labour Reforms Can Boost Business Environment in India? Futuristic India at
Shanghai Cooperation OrganizationFuturistic India at Shanghai Cooperation
Organization What impact can be possible out of PMs Central Asia Visit?What
impact can be possible out of PMs Central Asia Visit? Slowing Industrial Production:
Reasons & SolutionsSlowing Industrial Production: Reasons & Solutions Can GST
Turn into a Tax System Reform?Can GST Turn into a Tax System Reform?

Charter :- 2
LITERATURE REVIEW
(P.Shakila, 2014) Polit and Hungler in the year (2001) stated that the term Literature
Review is often used to cover both the process of searching for relevant literature
and the critical reporting of the literature. Cormack in the year (1991) stated that
Literature Review means to systematically read, critically appraise, and then
synthesize the material into a coherent, structured, and logical review of the literature.

This paper
presents a systematic review of the current use of those modern microfinance
developments for the microfinance systems and their actual level. Microfinance
modern recent development prediction is a significant part of microfinance quality
assurance. A problem is microfinance is to expect the possibility that the microfinance
contains problem. Problem in microfinance system are major problems that need to be
resolved. The problem prediction in microfinance system is significant because it can
help in directing test effort, reducing cost, and increasing quality of microfinance
development and its reliability .in this research paper I have studied various
predictions, examined, & the performance of these recent microfinance development
of India. The main aim is to examine the performance of recent development of
microfinance in microfinance a problem prediction. Problem prediction using these
techniques helps in improving the quality of the microfinance recent development.

Introduction

This paper enunciates the importance, need of review of literature and the
relatedreview of studies to the topic.Microfinance in India is of a comparatively
recent origin. In the last two decades there has been a rapid growth in the number of
institutions offering microfinance education. With the diversion of sizeable economics
and financial servicesin this strategic area of national development, there should be
simultaneousendeavors

to

explore

and

study

the

various

factors

that

affectsmicrofinance financial education , right from the identification of the

microfinance needs, selection of microfinance institutions, the modus operandi of the
microfinance process, the supportive climate provided to themicrofinance in the
organization the subsequent impact of the course on the microfinance efficiency and
its effect on the organization. Recent Microfinance Development is major problem in
microfinance systems that need to be resolved. There are many number of
microfinance industries having number of faults are delivered to the market. In this
paper, a literature review for selected Microfinance Industry Development researches
is presented. The Study shows that an increasing volume of Microfinance Industry
Development researches have been conducted in diverse range of areas. The Research
Paper is results of these presented based on Literature Review Researches. This
review is intended to provide impetus in Microfinance Industry Development research
and help simulate further interest.

Identified Microfinance Systematic Literature Reviews Research and

Extent of Systematic Studies Research
Shinde keshav in the year (2014)
has done their research in the topic Impact of microfinance and self help groups
(SHG) on Rural Market Development their analysis about the study conducted by
NABARD revealed that financial services required by poor households are: safekeeping of small surpluses in the form of thrift; access to consumption loans to meet
emergency needs and financial services and products. The benefits in terms of higher
income, consumption, and savings matter for the poor, the focus here is broader, as an
attempt is made to assess some key dimensions of womens empowerment-defined

broadly as expansion of freedom of choice and action to shape their own lives.
Concluded with areas of future research emphasizing on review of literature on SHGs,
the experiences of several leading NGOs involved in the formation of SHGs and
interviews with chief executives and staff of other NGOs/ projects promoting SHGs.

Devi S. Kavitha (2014)

has reviewed on the topicMicro Finance and Women Empowermentthis topic in
this article is the presentation in a succinct and applicative manner of several decision
making processes. Microfinance gained impetus primarily because it promised the
social and economic uplift of women in developing countries across Asia, Latin
America, and Africa. Countries in these regions have patriarchal societies that harbor
gender-biased traditions preventing the liberation of women. The ability to generate
and control their own income can further empower poor women.
Research shows that credit extended to women has a significant impact on their
families' quality of life. Of these methods microfinance providers tend to involve the
husbands of their female clients when talking business, because his support if vital.
Additionally, any plan to fight poverty cannot solely focus on one gender and
circumstances therefore; many microfinance programs serve men as well.

Ugiagbe Ernest Osas(2014)

has done his research in the topicA Survey of the Perception of the Services of
MicroFinance Institutions by the Female Service Users in Benin City, South-South,
Nigeriaand has reviewed this paper to investigate the struggles of managerial
identity in relation to the process of becoming/being the perceptions of the services of
the micro finance Institutions by the women service users, and how the services of
micro Institutions affect businesses of the beneficiaries of the micro credit loans.
Management tends to be based on the idea that management concerns the acquisition
of the female participants, and senior management personnel of the micro credit
institutions were interviewed.The cluster and simple random sampling were used to
select the participants for the study the poor services and attitude of officials of micro

finance institutions and other Problems like the regressive tax regimes, harsh
economic climate and patriarchy are negatively affecting the business ventures of the
loan beneficiaries and by implication the goals of poverty reduction via micro credit
scheme. The leaders of registered unions were the informants. The study focuses on
only The result reveals that the poor services and attitude of officials of micro finance
institutions and other problems like the regressive tax regimes, harsh economic
climate and patriarchy are negatively affecting the business ventures of the loan
beneficiaries and by implication the goals of poverty reduction via micro credit
scheme.finally the study puts emphasis on the role of management women
beneficiaries areGroaning under the burden of loan repayment and meeting other
obligations as mothers and wives. This study is applicable in the Context of social
policy development at this time when social services delivery is not only poor but at
dismal level. The need for Gender sensitive and social development becomes
imperative. It is critical to social work practice in the context of advocacy,
Empowerment programs, facilitating and initiating service delivery and Community
organizing by social workers that will enhance The war against Poverty and other
social impediments against women empowerment in Nigeria.

Mafukata Mavhungu Abel, Kancheya Grace, Dhlandhara Willie in the year

(2014)

Factors

Influencing

Poverty

Alleviation

amongst

Microfinance

Adopting

Households in Zambia this paper is to investigate the factors having the most
influence on the alleviation of poverty amongst the households adopting microfinance
in Zambia. Ninety nine (n=99) respondents were randomly and purposively selected
from amongst 340 microfinance adopters of the so-called Micro Bankers Trust
programme operating a microfinance business in the Makululu Compound of Kabwe,
Zambia.

Socio-demographic primary data were collected through face-to-face interviews based

on a semi-structured questionnaire instrument. Majority of the respondents thought
microfinance had improved their well-being in some crucial areas. The results of the
empirical model found that some respondents were indeed alleviated from poverty
through microfinance.
Conclusion drawn in this paper is that microfinance does alleviate poverty of the poor.
Tadele Haileslasie Rao P. Madhu Sudana (2014)
has done his research in the topicCorporate governance and Ethical issues in
Microfinance Institutions (MFIs) - A study of Microfinance crises in Andhra Pradesh,
Indiaand he has analyzed that Ethical behavior in business practices determines
success or failure of an organization and it is not an exception to MFIs.it was unique
and significant in terms of the severity of the crisis. The industry hasnt taken any
lesson from Microfinance crisis happened in other countries in previous years.
Finally, this paper offers concluding comments regarding effective finally; this paper
offers concluding comments regarding effective Microfinance crisis practices that
have emerged in the literature.
Imoisi, Anthony Ilegbinosa, Godstime Ikechukwu Opara (2014)
Microfinance and its Impact on Poverty Alleviation A Case Study of some
Microfinance Banks in Edo State, NigeriaMicrofinance and its Impact on Poverty
Alleviation: A Case Study of some Microfinance Banks in Edo State, Nigeria the
relationship microfinance and poverty alleviation in Nigeria, to understand th
effectiveness of micro credit within the context of its current practice in Edo State in
particular, and the nation as a whole as a tool for wealth creation and capital
accumulation among the poverty stricken populace and low income earners.
Microfinance has the potential of alleviating poverty by ensuring wealth creation and
its attendant self-sufficiency. From our result, about 70% of the sampled population
agreed that there is a positive relationship between microfinance and improved
standard of living of the recipients of these micro credits; 78% attested that they
obtained some sort of credit from microfinance banks to set up their small scale

businesses, without which it would be impossible to do so; about 67% said they have
used loan collected to expand their business while 24% said they used the loan
collected to invest on new technology for their business and the remaining 9% of the
respondents obtained loans to facilitate the export of their products. It identifies the
presence of dominant groups in society leading to the Microfinance has helped in
alleviating poverty in the country by helping individuals to start up their business,
expand their existing business, increase the level of employment and raise the
standard of living in the country Focus of microfinance programmes in poor
communities for it to be meaningful; a massive Educational drive on the importance
of microfinance in fighting widespread poverty should be launched in the country; etc
were some of the recommendations made in this study.
Oluwasanya Adewale Tony
has done his research in the topic The Role of MicroFinance Bank in Poverty
Alleviation in Nigeria (2014) has done the strategic intent of the federal
government for pursuing the microfinance policy through the central bank of Nigeria
(CBN) with a renewed vigour is excellent.The strategic intent of the federal
government for pursuing the microfinance policy through the Central Bank of Nigeria
with a renewed vigour is excellent.the imperatives of the policy is that about 65% of
the people who were not covered by the banking system will have access to modern
financial services without tears. The ultimate objective is to reduce drastically the
poverty level in our country.this paper highlights the challenges inherent in pursuing
the microfinance policy and suggest ways by which they can be managed.

The strategic intent of the Federal Government for pursuing the Microfinance policy
through the Central Bank of Nigeria.Implications for future research as well as
framing training to enhance microfinance policy are discussed.

Oguejiofor, Awele DPA Unachukwu Uzoamaka(2014)

has done his research in the topicAchieving Poverty Reduction Through
Microfinance: Evidences from the Philippinesand he has reviewed that in This

research work sets out to evaluate and compare the effectiveness of two microfinance
interventions implemented in the Philippines. To achieve this goal, the study examines
two microfinance programs one implemented by the state (Self Employment
Assistance Kaunlaran) and the other by a non-profit UPLIFT (Urban Program for
Livelihood Finance Training). The analysis focuses mainly on ascertaining which of
the two programs that has contributed most to the improvement of the lot of its
clients. The paper also compares clients across three groups: new, mature and exit
clients in other to ascertain how the programs affect clients at different stages of the
program. Furthermore, this work lays emphasis on governance and empowerment as
the two key factors that contribute to a more effective and efficient delivery of
microfinance services. The study which was conducted in Caloocan City and Navotas
City reveals that most microfinance clients are females. It further shows that most of
the microfinance clients in the SEA-K and UPLIFT programs use their loans for
either smoothing consumption or reinvestment in their businesses. The findings of this
research work also identifies interest rates, small size of loans, short loan repayment
cycles, and very frequent group meeting as the enabling and disabling factors that
affect successful graduation of microfinance clients from microfinance programs.

Kaboski Joseph P. and Townsend Robert M. (2010)

A Structural Evaluation of a Large-Scale Quasi-Experimental Microfinance
Initiative a structural model to understand, predict, and evaluate the impact of an
exogenous microcredit intervention program, the Thai Million Baht Village Fund
program. We model household decisions in the face of borrowing constraints, income
uncertainty, and high-yield indivisible investment opportunities. After estimation of
parameters using pre-program data, we evaluate the models ability to predict and
interpret the impact of the village fund intervention. Simulations from the model

mirror the data in yielding a greater increase in consumption than credit, which is
interpreted as evidence of credit constraints. A cost-benefit analysis using the model
indicates that some households value the program much more than its per household
cost, but overall the program costs 20 percent more than the sum of these
benefits.results showed a This paper uses a structural model to understand, predict,
and evaluate the impact of an exogenous microcredit intervention program, the Thai
Million Baht Village Fund program Understanding and evaluating microfinance
interventions, especially such a large scale government program, is a matter of great
importance.

Mayowa Agboola G. (2012)

has done his research in the topicMICROFINANCE and Entrepreneurial
Development in Nigeria and has reviewed that this research study investigates the
impact of microfinance on entrepreneurial development of small scale enterprises in
Nigeria and its global significance. Microfinance institutions world over and
especially in Nigeria are identified to be one of the key players in the financial
industry that have positively affected individuals, business organizations, other
financial institutions, the government and the economy at large through the services
they offer and the functions they perform in the economy.

The Needs for a Review in this Field

Need of Present Study:

Developed an understanding of Current & Correct problems in Microfinance

Developed an understanding of the utility of microfinance in poverty Developed skills

in relating the theoretical perspectives and debates about microfinance to situations
delivery mechanism of microfinance.

Scope of The Research

The overall objective of this research is to examine the importance of
microfinancing ;that microfinance creates job and add value to the economic growth
of a country.this article discusses the role of government in microfinance development
in india and other developing countries through various agencies like CARE, NGOs,
RRBs, FARMERS CLUBS, IRVs ACCESS.Additionally ,the article outlines the
characteristics and traits of an microfinance and how microfinance can convert
business development from incubation stage to the establishment of the
business.also,the article defines various terminologies which include innovation
concept, microfinance and development.

CHAPTER-3
CONCEPTUAL FRAMEWORK OF MICROFINANCE IN INDIA

3.1 Microfinance Structure in India

The Indian state put stress on providing financial services to the poor and under
privileged since independence. The commercial banks were nationalized in 1969 and
were directed to lend 40% of their lonable funds, ata concessional rate, to the priority
sector. The priority sector included agriculture and other rural activities and the
weaker strata of society in general. The aim was to provide resource to help the poor
to attain self sufficiency. They had neither resources nor employment opportunities to
be financially independent let alone meet the worker consumption needs.

To supplement these efforts, the credit scheme integrated rural development program
was launched in 1980. But these supply side programs aided by computer and
leakages, achieved little further, the snare of the formula financial sector in total rural
credit was 56.6% compared to the informal finance art 39.6% and unspecified source
at 3.8%. Not only had formula credit flow been less but also uneven. The collection
and paperwork based system shield away from the poor, the vacuum continued to be
filled by the village money lender who charged interest rates of 2 to 3% per month.
Seventy percent of land less farmers did not have a bank account and 87%had no
access to credit from a formal source. It was in this cheerless background that the
M.F. revolution occurred worldwide. In India began in the 1980s with the formation
of pockets of informal self-help groups (SHGs) engaging in micro activities financed
by M.F. But Indias first microfinance institution Shri Mahila Sewa Shahkari Bank
was set up as an urban co-operative bank by the self-employed womans association
(SEWA) soon after the group (founder Ms Ela Bhatt)was formed in 1974.The first
official effort materialized under the direction of NABARD. TheMysore resettlement
and development agency sponsored project on saving and credit management of
SHGs was partially financed by NABARD 1986-87.

Basically the MFIs in India of three categories

(i) Next for profile MFIs, which include the WGO,

(ii) Mutual benefit MFIs, which include mutually aided co-operative

credit and ;
(iii) For profit MFIs which include the non banking financial companies. NABARD
refinances the financial institution engaged in M.F. to the extent of actual
disbursement. NABARD, SIDBI are bulk financiers who cleverly leverage
resources obtained from a variety of sources
3.2 Outreach and sustainability of Micro Finance
In spite of the optimism generated by the expansion of SHGs credit and the high
recovery rate (According to NABARD 2003-04 report on SHGs credit and the high
recovery rate (according to NABARD 2003-04 report on SHGs bank linkage it was
more than 95%) there is a gap between actual per capitacredit provided to the poor
and the demand the outstanding of the SHGs programme in March 2003 were around
`10 billion which met only 2.2.percent to 6.6 percent of the projected demand
[Mahajan Vijay and BhartiGupta Ramola (2003) Microfinance in India Baniyan
Tree and Bonsoi]the total disbursement of bank loans to SHGs were ` 2049 crore as
on 31stMarch 2003 with an average loan of ` 1766 per family [RBI (2003): report on
trend and progress of banking in India 2002-03]. The share of Microcredit in Total
Credit of the Indian Banking System was less than 1 percent. The transforming world
of Indian of Indian microfinance taras Nair, 2005)further, the distribution of micro
finance in India was highly skewed, with65 percent of the SHGs being is southern
India and these SHGs were enjoying 75% of the credit disbursed.
3.3 Global Acceptance of Microfinance
It is claimed that this new paradigm of unsecured small scale financialservice
provision helps poor people take advantage of economic opportunities, expand their
income, smoothen their consumption requirement, reduce vulnerability and also
empowers them. Former World Bank President James Wolfensohn said Microfinance
fits squarely into the Banks overall strategy. As you know, the Bank's mission is to
reduce
poverty and improve living standards by promoting sustainable growth and
investment in people through loans, technical assistance, and policy guidance.

Microfinance contributes directly to this objective. The emphasis on microfinance is

reflected in microfinance being a key feature in Poverty Reduction Strategy Papers
(PRSPs).
Realising the importance of microfinance, World Bank has also taken major steps in
developing the sector. Formation of Consultative Group to Assist the Poor (CGAP) in
1995 as a consortium of 33 Public and private development agencies and
establishment of Microfinance Management Institute in 2003 are significant
landmarks. CGAP acts as a resource center for the entire microfinance industry,
where it incubates and supports new ideas, innovative products, cutting-edge
technology, novel mechanisms for delivering financial services, and concrete
solutions to the challenges of expanding microfinance. MAFMI was established with
support of CGAPand Open Society Institute for meeting the technical and managerial
skills required for microfinance sector. CGAP has been instrumental in shaping the
dominant theoretical orientation of microfinance. The guiding philosophy behind
diverse sphere of CGAP activities by way of insemination of microfinance best
practice, grant-making to Microfinance Institutions, and fostering national-level
policy on microfinance has been Commercial microfinance. The CGAP dossier on
Best Practices and brochure on Key principles of microfinance succinctly capture
the philosophy of insistence on full cost recovery through market based interstates and
higher recovery rate of micro loans. The influence of CGAP philosophy has also
shaped World Banks thinking on microfinance. Current World Bank President in his
message to CGAP annual meeting in 2005acknowledged his by saying CGAP has
helped build consensus around the
Fundamentals of an inclusive financial system. The CGAP Key Principles of
Microfinance, endorsed last year by the G8, have this year been championed by
Worldwide, as a result of the CGAP system, good practice is increasingly becoming
standard practice. Other Regional multilateral development banks like Asian
Development Bank also champion the cause of commercial microfinance. 17outlining
its policy for microfinance lends support to the logic by saying to the poor, access to

service is more important than the cost of services and the key to sustainable results
seems to be the adoption of a financial-system development approach. The
underlying logic offered in support of this is universally based on twin arguments i.e.,
a) subsidized funds are limited and cannot meet the vast unmet demand, hence private
capital must flow to the sector and b) the ability of the poor to afford market rates.
Though, various scholars like Morduch (2000) have brought out the flaws of this WinWin proposition like belief in congruence between commercial microfinance and
poverty outreach, this paper will limit itself to analyzing as to how the focus on
commercialization has relegated impact assessment to backstage.

3.4 Assessment of Microfinance

Assuming that a need assessment process concludes that there is excess demand for
microfinance products and services, and that the situation is such that setting up a
microfinance institution is adequate, what are the main steps forward?
Considering the fact that a wrong set up might do more harm than good there are
several considerations to be done.
1 Market Analysis, competition and products
2 Institutional capacity and competence
3 Plan for reaching financial sustainability
4 Funding
5 Monitoring system
6 Reporting, audit and rating
7 Structure and ownership
1) Market Analysis
Various tools for market analysis have been developed; for different methods and
experience in the field. The main challenge is to capture the demand from potential
clients and address actual and potential competition.
2) Institutional capacity
Seen from a donors point of view, the first step would be to consider the potential in
working with already existing organizations. Do they have the capacity of providing

what the market asks for in a professional way, or is setting up a new institution a
better way As indicated above, most of the organizations involved in microfinance are
multipurpose, and have microfinance as one of their activities, We then need to verify
how they are organized, and if necessary challenge them to separate microfinance
from
other activities. It is of crucial importance to identify real costs and income on
microfinance activities, regardless of the leve of financial sustainability. Some argue
that due to the nature of target groups, local economics etc. financial sustainability is
merely a dream, indicating the need for subsidizing operations also in the longer run.
Regardless of this argument, it is necessary to separate flow of capital due to loan
activities from other transactions. Inany case, if sustainability is not perceived as a
possible end goal, reengineering of the institution and/ or abandoning microfinance
activities should be considered. It is worthwhile underlining that what matters is the
provision of accessible financial services at reasonable costs rather than who is
providing it. As adonor it is easy to fall in love with some partners, but this feeling
for a partner should be dealt with a very objective and professional way when it
comes to microfinance. Former good partners from other projects can end up being
bad partners if they get into microfinance without having the skills and the internal
culture it takes to handle the challenges involved.
3) Financial Sustainability
Financial sustainability is/must be a long term goal for a MFL. In order to address this
issue, a checklist for budget for microfinance activities is useful.

Identify operational costs.

Projection on financial cross (Interests losses)
Projections on income (donor funding operations)
Define horizon for back even.

 Calculate interest rate.

Professional partners must be willing to charge interests rates that in the long run can
make the institution sustainable. Micro credit services are expensive because of the
costs involved of handling a large amount of small clients. Sustainable interest level is
therefore likely to be above the local interest level in the formal market.

4) Funding
In the initial face, most MFI have received donor funding for setting up the
organisation. The long run goal must be financial self sufficiency, but in order to reach
a large number of clients it would generally be necessary to access loans from capital
providers on commercial terms. Thus the analysis of funding includes both potential
donors as well as financing partners.

5) Monitoring System
In Norway, in a joint effort by the Norxegian Development Network(Bistandsorget)
NORAD and the Ministry of Foreign Affairs (MFA)guideline for appraisal and
monitoring of microfinance projects have been elaborated (Clausen 2002) These build
among other on the more elaborate GAP tools, and aim at combining the need for
specific information with the necessity of a tool that is not too complicated nor costly
to use. The development was based on their basic criteria; we quote.

The formers should be simple with information strictly on a need to know

basis

The information required should be easily available by microfinance projects

to limit the transaction cost for them in meeting donor appraisal and
monitoring requirements.

 The performance indicators should be simple and easy to interpret but atthe
same time provide comprehensive overviews of overall performance of the
microfinance project. Three sets of indicators must be considered.

Outreach indicators efficiency number of clients and poverty bracket(using

average loan in percent of GDP per capita). Savings can be added when
pertinent.

Institutional indicators focus on effectiveness; defined as productivity of staff

(loans per staff) financial productivity (Administrative costs per loan) and
efficiency (administrative costs over portfolio)

Financial

performance portfolio risk, that is sustainability books at

operational sustainability (income versus expenditures) portfolio yield and

portfolio quality (arrears)
All of the above indicators do provide important information regarding thedifferent
aspects of an MFI.Due to the variety of contexts in which MFI operate, there are no
glob alstandards for most of the indicators compare whether a microfinance projectis
performing well or not. However, the micro Banking presents at regularintervals some
of these indicators for a samples of MFI When it comes tooutreach, a project with a
strong poverty focus should have a low number foraverage loan in percent of GDP per
capita. Regarding financial sustainabilitybased on many empirical studies, it is
becoming a common understandingthat an arrear, default rate above 5% will make
along run sustainability ofthe MFI very unlikely.

6) Reporting and Audit Procedures

Proper reporting is an intrinsic part of a well designed monitoring system. In addition
to this external audits are necessary to establish institutional credibility.. In many
cases this will be a legal requirement; it is also becoming more and more a pre
condition for potentially new financing partners. Due to the nature of microfinance,

the audit procedures required are different from those of a regular NGFO
Handbooks for these purposes are elaborated by a.o. CGAP. Credit rating is gradually
becoming a part also of the microfinance industry. A proper rating, carried out by
professional rating institutions. Is likely to become a prerequisite in order for a MFI to
attract professional investors inthe future. A list of qualified rates by IABD and CGAP
is found atwww.mfrating org./ mft_institutions/qualified _raters, html Electronic
Information Systems and internal control routines are two crucial points
inprofessional microfinance and should therefore be included in all kinds of business
planning for MFI.

7) Structure and Ownership

When a MFI grow, the question of structure and ownership becomes more important.
As in any business or organisation, the main stakeholders will determine the long rut.
Strategy and the way the organisation is structured and managed will be determinate
for the long run performance. Thus these are key factor in assuring the permanent
provision of financial services.

3.5 Role of MFIs and Commercial Banks

Micro entrepreneurs (the self employed poor) have little access to the formal financial
system in developing economies. At best, formal financial institutions reach the top 25
percent of the economically active population, which leaves the bottom 75 percent
without access to formal financial services. Asia pacific region has six micro finance
giants. Out of which only Reserve Bank of India is a commercial bank. There are
other regulated institutions, which provide financial services to micro entrepreneurs
such as rural banks and credit union. The commercial banks undertook microfinance
lending
only because their governments required it. These commercial banks can be classified
as Government subsidized lending programs, government mandated lending targets.

The analysis done on the basis of high portfolio quality and significant scale of
outreach to the poor showed that government mandated lending commercial banks
were failures. They must have well designed products for micro enterprises, which
can be encouraging and profitable. An appropriate regulatory and prudential frame
work by the government may encourage the commercial banks to become involved in
microfinance.

Some of the key differentiating points of this model from other are:

Intermediary assumes fraction of the credit risk (to the extent of risk sharing),
leading to reduction in capital required.

Bank prices on basis of underlying asset rather than rating of intermediary.

Transition from lending to organization to asset based lending.

ROE of intermediary significantly improves with portfolio quality remaining

unchanged.

Scope for leverage of 10-12 times compared to 2-3 times previously.

3.6 Impact of SHG- Bank linkage

SHG bank linkage program is effective in targeting poorest households as majority of
beneficiaries are from among the poorer groups landless and marginal farmers. But
there has been little robust evidence available on the impact of the program on
reducing poverty. There are shortcomings in methodology, insufficient time period to
assess some of the impacts on poverty alleviation etc. A study of SHGs having
completed at least one year of bank linkage was conducted by NABARD in eastern
areas (Orissa, Jharkhand andChattisgarh) and the following observations were made.

Employment, average net income and value of assets increased in theperiod

after SHGs bank linkage program was implemented.

 Average savings as well as loan repayment rates increased.

Empowerment of women, greater assertiveness and participation indecision
making.

3.7 Financial System Approach

The growth of microfinance in India has also to be seen in the light of financial sector
reforms in India starting from 1991 and the global emphasis on commercialization of
the sector. The financial sector reforms in India have focused on fostering a market
based financial system by increasing competition and improving the quality of
financial services. The new approach has been deeply influenced by the reorientation
among international rural financial policy makers cantering on concepts such as selfhelp, self sustained growth and institutional viability. Under the new approach,
institutional viability is of prime concern and instruments of directed credit and
interest rate directives have been totally diluted or been done away with. As a
consequence, banks are increasingly shying away from rural lending as well as
rationalizing their branch network in rurala reas. Burgess & Pande (ibid) have brought
out this fact in their study by stating that while between 1977 and 1990 (pre reform
period) more bank branches were opened in financially less developed states, the
pattern was reversed ipost reform period. Thus while, the access of the rural poor to
credit through traditional bank lending has reduced in post reform period, the policy
recommendation is to fill this gap through microfinance. Flowing out of negative
experiences of the earlier state intervention, institutional viability has become the
focal point for evaluation of success of credit interventions. The philosophy and
design of SHG-Bank linkage programme reflects this new concern vividly by
emphasizing on full cost recovery in order to become an attractive proposition for

banks. Siebel & Dave (ibid) in their study on commercial aspects of SHG programme
succinctly state the new
paradigm with focus on institutional sustainability by saying that as against the long
standing tradition of government owned banks undermining rural finance with cheap
credit NABARD belongs to the new world of rural finance: it is profit making and it
actively promotes the viability of rural banks under its supervision. The design
features of the programme emphasize that it does not envisage any subsidy support
from the
Government in the matter of credit and charges market related interest rates based on
the premise that submarket interest rates could spell doom; distort the use and
direction of credit (Kropp & Suran, 2002). High recovery rates under the programme
are used to justify the dictum that poor need timely and adequate credit rather than
cheap credit. With this shift to parameters of institutional success, the issue of impact
assessment has been relegated to the background. Impact assessment is either left for
inference through proxy measures like volume of credit, repayment rates and outreach
or one-off sample impact assessment exercises. The field research was undertaken to
understand the clients perspective and analyse the factors behind repayment rates as
well as impact of credit on socio economic well being of clients. The research covered
93 client households from 5 Self Help Groups from three different locations in
Western and Central part of India. While statistically the number may look
insignificant considering the size of the Programme, use of participatory methods of
research adds to its depth and value. Only groups which have been in the programme
for at least two years were
studied as groups of less than 2 years of formation may not be best suited to capture
impact. As the size limitations of paper constrain a detailed enumeration of field
research findings, only the key findings of the field research having a bearing on the
central aspect of the paper are listed.
All clients were saving regular amounts of money at monthly/bimonthly
interval building up the group savings

 Internal loaning of group funds was very high resulting in significant waiting
time for members interested in borrowing
Social awareness index of group members as measured on Likert Scale
showed a definite positive trend after joining the group
Reliance on moneylenders for credit eliminated or decreased in case of
approx 2/3rd of clients
No specific benchmarks for group membership leading to inadequate poverty
targeting
Only 6% clients had taken up any economic activity post group formation
Marginal increase in real term income level after joining the group
Bank credit to group often a result of bankers zeal to achieve targets rather
than based on group demand
Bank credit as well as loans used overwhelmingly for consumption purpose
Group members not willing to borrow to take up economic activity on
account of credit risk and absence of skills
Prompt Repayment a factor of group pressure and sourced out of reduced
consumption, extra work and borrowing from other sources
High rates of interest in internal lending among group members (2-3%)was
seen by members as prescribed by the group forming agency and accepted as
being better than even higher rates of informal sector.

Further summarizing the findings at the cost of over simplification, it can be said that
while the programme had definite impact on building of social capital, it had marginal
impact on income levels. At this point it is useful to clarify that positive contribution
on social sphere is by itself a significant achievement, however the problem lies with
extension of positive impact to economic activities. The findings sit uneasily with
earlier evaluations of the programme in respect of economic impact, while being in
consonance with social impact.Puhazhendhi & Staysail (2000)31 in their study
commissioned by NABARD covered 223 SHGs spread over 11 states across India.
The study found that 58.6% of sample households registered an increase in assets

from pre to post SHG situation, an additional 200 economic activities taken up by
sample households and decrease in the percentage of sample households with annual
income levels of `22500 from 73.9% to 57%. 35covered 60SHGs in Eastern India.
The findings of this study also corroborate the findings of earlier evaluation with 23%
rise in annual income and 30%increase in asset ownership among 52% of sample
households. World Bank policy research paper (ibid) 2005 details the findings of
Rural Finance Access Survey (RFAS) done by World Bank in association with
NCAER36.The RFAS covered 736 SHGs in the states of Andhra Pradesh and Uttar
Pradesh and also points to positive economic impact. The findings indicate72%
average increase in real terms in household assets, shift in borrowing pattern from
consumption loans to productive activities and 33% increase in income levels. The
divergence of field research findings demands situational analysis of the field study
findings. The study sites exhibited certain common features, which can be said to be
true of most of Indian rural landscape. The major occupation of group members was
agriculture supplemented by other activities such as farm labour, factory labour and
poultry. Being rain fed area, lack of irrigation facilities, declining terms of trade in
agriculture and fragmentation of land have accentuated their vulnerabilities over a
period of time. The group members lacked any specific handicraft skills and had not
received any skills training for undertaking any other non farm activity. In this
scenario, post SHG, the group members have been content with using the group
savings and bank loan asreplacement/reduction of costly borrowings from informal
sources. The high rate of internal lending reflected in bank and group records was
used bythem for meeting their consumption and emergency requirements. Detailed
interaction revealed that group members do not have the confidence to use credit for
productive purposes in view of lack of opportunities and partly also ingrained through
their past borrowing experience. Irrigation and depressed commodity prices act as
deterrent in farm sector investments, while lack of skills and invasion of rural markets
by big consumer goods

companies reduce the scope for rural micro enterprises. It is striking that while
globalization is exerting pressure on national level companies, their penetration into
rural markets is reducing the market sphere for rural enterprises. In this scenario, it
seems rather nave to visualize flourishing of micro enterprises through provision of
micro credit. Dichter (2006) in his paper drawing on African experience rightly draws
attention to both these aspects by pointing to the infertile context of rural settings
and says if the large majority of us in the advanced economies are not entrepreneurs,
and have had in our past little sophisticated contact with financial services, and if
most of us use credit, when we do, for consumption, why do we make the assumption
that in the developing countries, the poor are budding entrepreneurs..

Besides acknowledging the positive social outcomes, the field study findings also
point to smoothing of consumption needs and marked reduction independence of
exploitative informal sources of credit. These aspects are in itself a significant welfare
gain; however the paper questions the extension of this to economic development
which is altogether a different domain from short term crisis management. The focus
on financial sustainability has meant that much of the evaluation criteria for
microfinance interventions are based on institutional performance. Weber (2006) 41
says that while the virtuous impact of microfinance is used to justify its expansion,
much of this assessment is based on institutional success and avoidance of engaging
with impacts. Very significantly he points out this focus by observing Thus, along as
institutional sustainability obtains, it has been fairly common practice among the
policy makers-and their commissioned researchers-to interpret financial viability as
indicative of the social, political and economic success of microfinance programmes
(ibid,). He also argues that such an approach constitutes the ideology and practice of
neoliberals as it is based on the ontological premise that competitive financial
institutions provide the
foundation for entrepreneurial success and are best suited to reduce poverty.
Simanowitz & Walter (2002) correctly observe that Microfinance is a

compromise between social and financial objectives. To date most emphasis

has been on financial and institutional performance. In order to bring the social
aspect back into microfinance, Imp-Act43 based on three years of action research
covering 30 organisations in 20 countries has been advocating mainstreaming of
Social Performance Management (SPM) to improve the effectiveness of microfinance
in reducing financial exclusion and poverty. While microfinance may be a winning
proposition for banks, the winning evidence on clients side seems doubtful. The
institutional approach flowing out of past negative experiences has shifted the
goalpost to financial solvency but in the process missed the vital link of credit usage.
In this scenario, it can be said with certainty that potential of microfinance to
contribute to achievement of MDGs in India, especially reduction of poverty remains
suspect. Greeley (2005) rightly notes that in absence of specific poverty targeting and
mainstreaming of impact assessment, the claims about the impact of microfinance on
the achievement of MDG lacks credibility. Mainstreaming of impact assessment in the
SHG-Bank linkage programme will call for extra efforts and resources as also create
conflict with the present focus on numerical growth. Realisation of a substantial trade
off between sustainable economic impact and exponential growth, calls for
courageous public policy decisions. World Bank policy research working paper(ibid)
also points that ensuring preoccupation with achievement of numeric targets does not
override attention to group quality will be a key future concern for SHG-Bank linkage
programme. Though, the focused on pointing the missing link of impact in the current
paradigm of rural finance focusing mainly on institutional viability, other critical
issues having a bearing on impact also merit attention. The SHG Bank linkage
programme at present has no explicit social or economic benchmarks for inclusion of
members into groups to be credit linked in line with the flexible approach of the
programme. However, as seen above the extension of credit in infertile local context
has negligible chances of leading to productive investment. Similarly inclusion of
core poor in the programme, who had little experience of economic activities, also
limits productive use of capital. Segmentation of credit demand based on economic

and social status is key to optimum utilization of scarce resources. Robinson (2001) is
probably right in observing that commercial microfinance is not meant for core poor
or destitute but is rather aimed at economically active poor. She opines that providing
credit to people who are too poor to use it effectively helps neither the borrower nor
the lender and would only lead to increasing of debt burden and erosion of self
confidence and suggests that this segment should not bathe target market for financial
sector but of state poverty and welfare programmes. In addition to this, irrespective of
socio economic status, credit can be put to little productive use in resource deficient
and isolated areas. In such areas, credit flow has to follow public investments in
infrastructure and provision of forward and backward linkages for economic
activities. Homogenization of service delivery without fully taking into account
situational context and client needs will continue to have limited impact.

3.8 Microfinance Model of the Grameen Bank

The origin of Grameen Bank can be traced back to 1976 when Professor Muhammad
Yunus, Head of the Rural Economics Program at the University of Chittagong,
launched an action research project to examine the possibility of designing a credit
delivery system to provide banking services targeted at the rural poor. The Grameen
Bank Project (Grameen means "rural" or village" in Bangle language) came into
operation with the following objectives:
- extend banking facilities to poor men and women;
- eliminate the exploitation of the poor by money lenders;
- create opportunities for self-employment for the vast multitude of unemployed
people in rural Bangladesh;

- bring the disadvantaged, mostly the women from the poorest households, within the
fold of an organizational format which they can understand and manage by
themselves; and
- reverse the age-old vicious circle of "low income, low saving & low investment",
into virtuous circle of "low income, injection of credit, investment, more income,
more savings, more investment, more income".

The action research demonstrated its strength in Jobra (a village adjacent to

Chittagong University) and some of the neighboring villages during 1976-1979. With
the sponsorship of the central bank of the country and support of the nationalized
commercial banks, the project was extended to Tangaildistrict (a district north of
Dhaka, the capital city of Bangladesh) in 1979.With the success in Tangail, the project
was extended to several other districts in the country. In October 1983, the Grameen
Bank Project was transformed into an independent bank by government legislation.
Today Grameen Bank is owned by the rural poor whom it serves. Borrowers of the
Bank own 90% of its shares, while the remaining 10% is owned by the government.
The concept is the brainchild of Dr. Muhammad Yunus of Chittagong University who
felt concern at the pittance earned by landless women after along arduous day's work
labouring for other people. He reasoned that if these women could work for
themselves instead of working for others they could retain much of the surplus
generated by their labours, currently enjoyed by others. Established in 1976, the
Grameen Bank (GB) has over1000 branches (a branch covers 25-30 villages, around
240 groups and 1200borrowers) in every province of Bangladesh, borrowing groups
in 28,000villages, 12 lakh borrowers with over 90% being women. It has an annual
growth rate of 20% in terms of its borrowers. The most important feature is the
recovery rate of loans, which is as high as 98%. A still more interesting feature is the
ingenious manner of advancing credit without any "collateral security". The Grameen
Bank lending system is simple but effective. To obtain loans, potential borrowers must
form a group of five, gather once a week for loan repayment meetings, and to start

with, learn the bond rulesand "16 Decisions" which they chant at the start of their
weekly session. These decisions incorporate a code of conduct that members are
encouraged to follow in their daily life e.g. production of fruits and vegetables in
kitchen gardens, investment for improvement of housing and education for children,
use of latrines and safe drinking water for better health, rejection of dowry in
marriages etc. Physical training and parades are held at weekly meetings for both men
and women and the "16 Decisions" are chanted as slogans. Though according to the
Grameen Bank management, observance of these decisions is not mandatory, in actual
practice it has become a requirement for receiving a loan. Numbers of groups in the
same village are federated into a Centre. The organisation of members in groups and
centers serves a number of purposes. It gives individuals a measure of personal
security and confidence to take risks and launch new initiatives. The formation of the
groups - the key unit in the credit programme - is the first necessary step to receive
credit. Loans are initially made to two individuals in the group, who are then under
pressure from the rest of the members to repay in good time.
If the borrowers default, the other members of the group may forfeit their chance of a
loan. The loan repayment is in weekly instalments spread over a year and simple
interest of 20% is charged once at the year end. The groups perform as an institution
to ensure mutual accountability. The individual borrowing member is kept in line by
considerable pressure from other group members. Credibility of the entire group and
future benefits in terms of new loans are in jeopardy if any one of the group members
defaults on repayment. There have been occasions when the group has decided to fine
or expel a member who has failed to attend weekly meetings or willfullydefaulted on
repayment of a loan. The members are free to leave the group before the loan is fully
repaid; however, the responsibility to pay the balance falls on the remaining group
members. In the event of default by the entire group, the responsibility for repayment
falls on the centre. The GrameenBank has provided an inbuilt incentive for prompt
and timely repayment by the borrower i.e. gradual increase in the borrowing
eligibility of subsequent loans. A survey has shown that about 42% of the members

had no income earning occupation (though some may have been unpaid family
workers in household enterprises) at the time of application of the first loan. Thus,
theGrameen Bank has helped to generate new jobs for a large proportion of the
members. Only insignificant portion of the loans (6 per cent) was diverted for
consumption and other household needs. About 50 per cent of the loans taken by male
members were for the purpose of trading and shop keeping.75 per cent of loans given
to female members were utilized for livestock, poultry raising, processing and
manufacturing activity. It is compulsory for every member to save one Taka per week
which is accumulated in the Group Fund. This account is managed by the group on a
consensual basis, thus providing the members with an essential experience in the
collective management of finances. Amounts collected from fines imposed on
members for breach of discipline is also put into this account. The amount in the Fund
is deposited with Grameen Bank and earns interest. A member can borrow from this
fund for consumption, sickness, social ceremony or even for investment (if allowed
by all group members). Terms and conditions of such loans, which are normally
granted interest free, are decided by the group. Factors behind success of the Grameen
Bank are :participatory process in every aspect of lending mechanism, peer pressure
of group members on each other, lending for activities which generate regular income,
weekly collection of loans in small amount, intense interaction with borrowers
through weekly meetings, strong central management, dedicated field staff, extensive
staff training willingness to innovate, committed pragmatic leadership and
decentralized as well as participatory style of working. The Grameen Bank experience
indicates the vital importance of credit as an entry point for upliftment programme for
rural poor. If a programme is to have an appeal for people living in abject poverty, it
must offer them clear and immediate prospects for economic improvement.
Thereafter, it is easier to sell other interventions of social development, however
unconventional they may appear, once improvements in standard of living are
demonstrated. The Grameen Bank clearly shows that lack of

collateral security should not stand in the way of providing credit to the poor. The
poor can utilize loans and pay them if effective procedures for bank transactions with
them can be established. In case of the Grameen Bank, formation of groups with a
small group of likeminded rural poor has worked well, and group solidarity and peer
pressure have substituted for collateral security.

Introduction
Microfinance is defined as any activity that includes the provision of financial
services such as credit, savings, and insurance to low income individuals which fall

just above the nationally defined poverty line, and poor individuals which fall below
that poverty line, with the goal of creating social value. The creation of social value
includes poverty alleviation and the broader impact of improving livelihood
opportunities through the provision of capital for micro enterprise, and insurance and
savings for risk mitigation and consumption smoothing. A large variety of actors
provide microfinance in India, using a range of microfinance delivery methods. Since
the founding of the Grameen Bank in Bangladesh, various actors have endeavored to
provide access to financial services to the poor in creative ways. Governments have
piloted national programs, NGOs have undertaken the activity of raising donor funds
for on-lending, and some banks have partnered with public organizations or made
small inroads themselves in providing such services. This has resulted in a rather
broad definition of microfinance as any activity that targets poor and low-income
individuals for the provision of financial services. The range of activities undertaken
in microfinance include group lending, individual lending, the provision of savings
and insurance, capacity building, and agricultural business development services.
Whatever the form of activity however, the overarching goal that unifies all actors in
the provision of microfinance is the creation of social value.

Microfinance Definition
According to International Labor Organization (ILO), Microfinance is an economic
development approach that involves providing financial services through institutions
to low income clients.

In India, Microfinance has been defined by The National Microfinance Taskforce,

1999 as provision of thrift, credit and other financial services and products of very
small amounts to the poor in rural, semi-urban or urban areas for enabling them to
raise their income levels and improve living standards.

Strategic Policy Initiatives

Some of the most recent strategic policy initiatives in the area of Microfinance taken
by the government and regulatory bodies in India are:

Working group on credit to the poor through SHGs, NGOs, NABARD, 1995

The National Microfinance Taskforce, 1999

Working Group on Financial Flows to the Informal Sector (set up by PMO),

2002

Microfinance Development and Equity Fund, NABARD, 2005

Working group on Financing NBFCs by Banks- RBI

Activities in Microfinance
Microcredit: It is a small amount of money loaned to a client by a bank or other
institution. Microcredit can be offered, often without collateral, to an individual or
through group lending.
Micro savings: These are deposit services that allow one to save small amounts of
money for future use. Often without minimum balance requirements, these savings
accounts allow households to save in order to meet unexpected expenses and plan for
future expenses.
Micro insurance: It is a system by which people, businesses and other organizations
make a payment to share risk. Access to insurance enables entrepreneurs to
concentrate more on developing their businesses while mitigating other risks affecting
property, health or the ability to work.

Remittances: These are transfer of funds from people in one place to people in
another, usually across borders to family and friends. Compared with other sources of
capital that can fluctuate depending on the political or economic climate, remittances
are a relatively steady source of funds.

Legal Regulations
Banks in India are regulated and supervised by the Reserve Bank of India (RBI) under
the RBI Act of 1934, Banking Regulation Act, Regional Rural Banks Act, and the
Cooperative Societies Acts of the respective state governments for cooperative banks.
NBFCs are registered under the Companies Act, 1956 and are governed under the RBI
Act. There is no specific law catering to NGOs although they can be registered under
the Societies Registration Act, 1860, the Indian Trust Act, 1882, or the relevant state
acts. There has been a strong reliance on self-regulation for NGO MFIs and as this
applies to NGO MFIs mobilizing deposits from clients who also borrow. This
tendency is a concern due to enforcement problems that tend to arise with selfregulatory organizations. In January 2000, the RBI essentially created a new legal
form for providing microfinance services for NBFCs registered under the Companies
Act so that they are not subject to any capital or liquidity requirements if they do not
go into the deposit taking business. Absence of liquidity requirements is concern to
the safety of the sector.

Microfinance in India
At present lending to the economically active poor both rural and urban is pegged at

around Rs 7000 crores in the Indian banks credit outstanding. As against this,
according to even the most conservative estimates, the total demand for credit
requirements for this part of Indian society is somewhere around Rs 2,00,000 crores.
Deprived of the basic banking facilities, the rural and semi urban Indian masses are
still relying on informal financing intermediaries like money lenders, family
members, friends etc.

Distribution of Indebted Rural Households: Agency wise

Credit Agency

Percentage
Households

of

Rural

Government
Cooperative Societies
Commercial banks and RRBs
Insurance
Provident Fund
Other Institutional Sources
All Institutional Agencies
Landlord
Agricultural Moneylenders
Professional Moneylenders
Relatives and Friends
Others
All Non Institutional Agencies
All Agencies

6.1
21.6
33.7
0.3
0.7
1.6
64.0
4.0
7.0
10.5
5.5
9.0
36.0
100.0

Seeing the figures from the above table, it is evident that the share of institutional
credit is much more now.
The above survey result shows that till 1991, institutional credit accounted for around
two-thirds of the credit requirement of rural households. This shows a comparatively
better penetration of the banking and financial institutions in rural India.

Percentage distribution of debt among indebted Rural Labor

Households by source of debt

Sr.

Source of debt

No.
1
2

Government
Co-operative Societies

Households
With
cultivated
land
4.99
16.78

Without
cultivated
land
5.76
9.46

All
5.37
13.09

3
4
5
6
7
8

Banks
Employers
Money lenders
Shop-keepers
Relatives/Friends
Other Sources
Total

19.91
5.35
28.12
6.76
14.58
3.51
100.00

14.55
8.33
35.23
7.47
15.68
3.52
100.00

17.19
6.86
31.70
7.13
15.14
3.52
100.00

The table above reveals that most of the rural labour households prefer to raise loan
from the non-institutional sources. About 64% of the total debt requirement of these
households was met by the non-institutional sources during 1999-2000. Money
lenders alone provided debt (Rs.1918) to the tune of 32% of the total debt of these
households as against 28% during 1993-94. Relatives and friends and shopkeepers
have been two other sources which together accounted for about 22% of the total debt
at all-India level.
The institutional sources could meet only 36% of the total credit requirement
of the rural labour households during 1999-2000 with only one percent increase over
the previous survey in 1993-94. Among the institutional sources of debt, the banks
continued to be the single largest source of debt meeting about 17 percent of the total
debt requirement of these households. In comparison to the previous enquiry, the
dependence on co-operative societies has increased considerably in 1999-2000.
During 1999-2000 as much as 13% of the debt was raised from this source as against
8% in 1993-94. However, in the case of the banks and the government agencies it
decreased marginally from 18.88% and 8.27% to 17.19% and 5.37% respectively
during 1999-2000 survey.

Relative share of Borrowing of Cultivator Households (in per cent)

1951

1961

1971

1981

1991

2002*

92.7

81.3

68.3

36.8

30.6

38.9

69.7
7.3

49.2
18.7

36.1
31.7

16.1
63.2

17.5
66.3

26.8
61.1

3.3

2.6

22.0

29.8

30.0

30.2

Societies,etc
Commercial

0.9

0.6

2.4

28.8

35.2

26.3

banks
Unspecified
Total

100.0

100.0

100.0

100.0

3.1
100.0

100.0

Sources

of

Credit
Non Institutional
Of which:
Moneylenders
Institutional
Of which:
Cooperative

* All India Debt and Investment Survey, NSSO, 59th round, 2003
Table shows the increasing influence of moneylenders in the last decade. The share of
moneylenders in the total non institutional credit was declining till 1981, started
picking up from the 1990s and reached 27 per cent in 2001.
At the same time the share of commercial banks in institutional credit has come down
by almost the same percentage points during this period. Though, the share of
cooperative societies is increasing continuously, the growth has flattened during the

last three decades.

Distribution based on Asset size of Rural Households (in per cent)

Household

Institutional

Non-Institutional All

Assets (Rs 000) Agency

Agency

Less than 5
5-10
10-20
20-30
30-50
50-70
70-100
100-150
150-250
250 and above
All classes

58
53
56
32
45
47
39
39
32
19
34

42
47
44
68
55
53
61
61
68
81
66

100
100
100
100
100
100
100
100
100
100
100

The households with a lower asset size were unable to find financing options from
formal credit disbursement sources. This was due to the requirement of physical
collateral by banking and financial institutions for disbursing credit. For households
with less than Rs 20,000 worth of physical assets, the most convenient source of
credit was non institutional agencies like landlords, moneylenders, relatives, friends,
etc.
Looking at the findings of the study commissioned by Asia technical Department of
the World Bank (1995), the purpose or the reason behind taking credit by the rural
poor was consumption credit, savings, production credit and insurance.
Consumption credit constituted two-thirds of the credit usage within which almost
three-fourths of the demand was for short periods to meeting emergent needs such as
illness and household expenses during the lean season. Almost entire demand for the
consumption credit was met by informal sources at high to exploitive interest rates

that varied from 30 to 90 per cent per annum.

Almost 75 per cent of the production credit (which accounted for about one-third of
the total credit availed of by the rural masses) was met by the formal sector, mainly
banks and cooperatives.

Banking Expansion
Starting in the late 1960s, India was the home to one of the largest state interventions
in the rural credit market. This phase is known as the Social Banking phase.
It witnessed the nationalization of existing private commercial banks, massive
expansion of branch network in rural areas, mandatory directed credit to priority
sectors of the economy, subsidized rates of interest and creation of a new set of
regional rural banks (RRBs) at the district level and a specialized apex bank for
agriculture and rural development (NABARD) at the national level.
The Net State Domestic Product (NSDP) is a measure of the economic activity in the
state and comparing it with the utilization of bank credit or bank deposits indicates
how much economic activity is being financed by the banks and whether there exists
untapped potential for increasing deposits in that state.
E.g. In the year 2003-2004 the percentage of bank deposits to NSDP is pretty high at
around 75%-80% in Bihar and Jharkhand or these states are not as under banked as
thought to be.

Microfinance Social Aspects

Micro financing institutions significantly contributed to gender equality and womens
empowerment as well as pro poor development and civil society strengthening.
Contribution to womens ability to earn an income led to their economic

empowerment, increased well being of women and their families and wider social and
political empowerment.
Microfinance programs targeting women became a major plank of poverty alleviation
and gender strategies in the 1990s. Increasing evidence of the centrality of gender
equality to poverty reduction and womens higher credit repayment rates led to a
general consensus on the desirability of targeting women.

Self Help Groups (SHGs)

Self- help groups (SHGs) play today a major role in poverty alleviation in rural India.
A growing number of poor people (mostly women) in various parts of India are
members of SHGs and actively engage in savings and credit (S/C), as well as in other
activities (income generation, natural resources management, literacy, child care and

nutrition, etc.). The S/C focus in the SHG is the most prominent element and offers a
chance to create some control over capital, albeit in very small amounts. The SHG
system has proven to be very relevant and effective in offering women the possibility
to break gradually away from exploitation and isolation.

1) How self-help groups work

NABARD (1997) defines SHGs as "small, economically homogenous affinity groups
of rural poor, voluntarily formed to save and mutually contribute to a common fund to
be lent to its members as per the group members' decision".
Most SHGs in India have 10 to 25 members, who can be either only men, or only
women, or only youth, or a mix of these. As women's SHGs or sangha have been
promoted by a wide range of government and non- governmental agencies, they now
make up 90% of all SHGs.
The rules and regulations of SHGs vary according to the preferences of the members
and those facilitating their formation. A common characteristic of the groups is that
they meet regularly (typically once per week or once per fortnight) to collect the
savings from members, decide to which member to give a loan, discuss joint activities
(such as training, running of a communal business, etc.), and to mitigate any conflicts
that might arise. Most SHGs have an elected chairperson, a deputy, a treasurer, and
sometimes other office holders.
Most SHGs start without any external financial capital by saving regular contributions
by the members. These contributions can be very small (e.g. 10 Rs per week). After a
period of consistent savings (e.g. 6 months to one year) the SHGs start to give loans
from savings in the form of small internal loans for micro enterprise activities and
consumption. Only those SHGs that have utilized their own funds well are assisted
with external funds through linkages with banks and other financial intermediaries.
However, it is generally accepted that SHGs often do not include the poorest of the
poor, for reasons such as:
(a) Social factors (the poorest are often those who are socially marginalized because
of caste affiliation and those who are most skeptical of the potential benefits of

collective action).
(b) Economic factors (the poorest often do not have the financial resources to
contribute to the savings and pay membership fees; they are often the ones who
migrate during the lean season, thus making group membership difficult).
(c) Intrinsic biases of the implementing organizations (as the poorest of the poor
are the most difficult to reach and motivate, implementing agencies tend to leave them
out, preferring to focus on the next wealth category).

2). Sources of capital and links between SHGs and Banks

SHGs can only fulfill a role in the rural economy if group members have access to
financial capital and markets for their products and services. While the groups initially
generate their own savings through thrift (whereby thrift implies savings created by
postponing almost necessary consumption, while savings imply the existence of
surplus wealth), their aim is often to link up with financial institutions in order to
obtain further loans for investments in rural enterprises. NGOs and banks are giving
loans to SHGs either as "matching loans" (whereas the loan amount is proportionate
to the group's savings) or as fixed amounts, depending on the group's record of
repayment, recommendations by group facilitators, collaterals provided, etc.

3). How SHGs save

Self-help groups mobilize savings from their members, and may then on-lend these
funds to one another, usually at apparently high rates of interest which reflect the
members understanding of the high returns they can earn on the small sums invested
in their micro-enterprises, and the even higher cost of funds from money lenders. If
they do not wish to use the money, they may deposit it in a bank. If the members
need for funds exceeds the groups accumulated savings, they may borrow from a
bank or other organization, such as a micro-finance non-government organization, to
augment their own fund.
The system is very flexible. The group aggregates the small individual saving and
borrowing requirements of its members, and the bank needs only to maintain one
account for the group as a single entity. The banker must assess the competence and

integrity of the group as a micro-bank, but once he has done this he need not concern
himself with the individual loans made by the group to its members, or the uses to
which these loans are put. He can treat the group as a single customer, whose total
business and transactions are probably similar in amount to the average for his normal
customers, because they represent the combined banking business of some twenty
micro-customers. Any bank branch can have a small or a large number of such
accounts, without having to change its methods of operation.
Unlike many customers, demand from SHGs is not price-sensitive. Illiterate village
women are sometimes better bankers than some with more professional qualifications.
They know that rapid access to funds is more important than their cost, and they also
know, even though they might not be able to calculate the figures, that the typical
micro-enterprise earns well over 500% return on the small sum invested in it (Harper,
M, 1997, p. 15). The groups thus charge themselves high rates of interest; they are
happy to take advantage of the generous spread that the NABARD subsidized bank
lending rate of 12% allows them, but they are also willing to borrow from NGO/MFIs
which on-lend funds from SIDBI at 15%, or from new generation institutions such
as Basix Finance at 18.5% or 21%.

4). SHGs-Bank Linkage Model

NABARD is presently operating three models of linkage of banks with SHGs and
NGOs:
Model 1: In this model, the bank itself acts as a Self Help Group Promoting
Institution (SHPI). It takes initiatives in forming the groups, nurtures them over a
period of time and then provides credit to them after satisfying itself about their
maturity to absorb credit. About 16% of SHGs and 13% of loan amounts are using
this model (as of March 2002).
Model 2: In this model, groups are formed by NGOs (in most of the cases) or by
government agencies. The groups are nurtured and trained by these agencies. The
bank then provides credit directly to the SHGs, after observing their operations and
maturity to absorb credit. While the bank provides loans to the groups directly, the

facilitating agencies continue their interactions with the SHGs. Most linkage
experiences begin with this model with NGOs playing a major role. This model has
also been popular and more acceptable to banks, as some of the difficult functions of
social dynamics are externalized. About 75% of SHGs and 78% of loan amounts are
using this model.
Model 3: Due to various reasons, banks in some areas are not in a position to even
finance SHGs promoted and nurtured by other agencies. In such cases, the NGOs act
as both facilitators and micro- finance intermediaries. First, they promote the groups,
nurture and train them and then approach banks for bulk loans for on-lending to the
SHGs. About 9% of SHGs and 13% of loan amounts are using this model.

Comparative Analysis of Micro-finance Services offered to the poor

5). Life insurances for self-help group members

The United India Insurance Company has designed two PLLIs (personal line life

insurances) for women in rural areas. The company will be targeting self-help groups,
of which there are around 200,000 in the country, with 15-20 women in a group. The
two policies are
(1) the Mother Teresa Women & Children Policy, with the aim of giving to the woman
in the event of accidental death of her husband and to support her minor children in
the event of her death, and
(2) The Unimicro Health Scheme, giving personal accident and hospitalization covers
besides cover for damage to dwelling due to fire and allied perils.

Micro Finance Models

1. Micro Finance Institutions (MFIs):

MFIs are an extremely heterogeneous group comprising NBFCs, societies, trusts and
cooperatives. They are provided financial support from external donors and apex
institutions including the Rashtriya Mahila Kosh (RMK), SIDBI Foundation for
micro-credit and NABARD and employ a variety of ways for credit delivery.

Since 2000, commercial banks including Regional Rural Banks have been providing
funds to MFIs for on lending to poor clients. Though initially, only a handful of NGOs
were into financial intermediation using a variety of delivery methods, their
numbers have increased considerably today. While there is no published data on
private MFIs operating in the country, the number of MFIs is estimated to be around
800.

Legal Forms of MFIs in India

Types of MFIs

Estimate
d
Number*

Legal Acts under which Registered

1. Not for Profit MFIs

a.) NGO - MFIs

400 to 500 Societies Registration Act, 1860 or

similar Provincial Acts
Indian Trust Act, 1882

b.) Non-profit Companies

10

Section 25 of the Companies Act,

1956

2. Mutual Benefit MFIs

200 to 250 Mutually Aided Cooperative Societies
a.) Mutually Aided Cooperative
Act enacted by State Government
Societies (MACS) and similarly
set up institutions
3. For Profit MFIs
a.)
Non-Banking
Companies (NBFCs)
Total

6
Financial
700 - 800

2. Bank Partnership Model

Indian Companies Act, 1956

Reserve Bank of India Act, 1934

This model is an innovative way of financing MFIs. The bank is the lender and the
MFI acts as an agent for handling items of work relating to credit monitoring,
supervision and recovery. In other words, the MFI acts as an agent and takes care of
all relationships with the client, from first contact to final repayment. The model has
the potential to significantly increase the amount of funding that MFIs can leverage
on a relatively small equity base.

A sub - variation of this model is where the MFI, as an NBFC, holds the individual
loans on its books for a while before securitizing them and selling them to the bank.
Such refinancing through securitization enables the MFI enlarged funding access. If
the MFI fulfils the true sale criteria, the exposure of the bank is treated as being to
the individual borrower and the prudential exposure norms do not then inhibit such
funding of MFIs by commercial banks through the securitization structure.

3. Banking Correspondents
The proposal of banking correspondents could take this model a step further
extending it to savings. It would allow MFIs to collect savings deposits from the poor
on behalf of the bank. It would use the ability of the MFI to get close to poor clients
while relying on the financial strength of the bank to safeguard the deposits. This
regulation evolved at a time when there were genuine fears that fly-by-night agents
purporting to act on behalf of banks in which the people have confidence could
mobilize savings of gullible public and then vanish with them. It remains to be seen
whether the mechanics of such relationships can be worked out in a way that
minimizes the risk of misuse.

4. Service Company Model

Under this model, the bank forms its own MFI, perhaps as an NBFC, and then works
hand in hand with that MFI to extend loans and other services. On paper, the model is

similar to the partnership model: the MFI originates the loans and the bank books
them. But in fact, this model has two very different and interesting operational
features:

(a) The MFI uses the branch network of the bank as its outlets to reach clients. This
allows the client to be reached at lower cost than in the case of a standalone MFI. In
case of banks which have large branch networks, it also allows rapid scale up. In the
partnership model, MFIs may contract with many banks in an arms length
relationship. In the service company model, the MFI works specifically for the bank
and develops an intensive operational cooperation between them to their mutual
advantage.

(b) The Partnership model uses both the financial and infrastructure strength of the
bank to create lower cost and faster growth. The Service Company Model has the
potential to take the burden of overseeing microfinance operations off the
management of the bank and put it in the hands of MFI managers who are focused on
microfinance to introduce additional products, such as individual loans for SHG
graduates, remittances and so on without disrupting bank operations and provide a
more advantageous cost structure for microfinance.

Role, Functions and Working Mechanism of Financial

Institutions

ICICI Bank
ICICIs microfinance portfolio has been increasing at an impressive speed. From
10,000 microfinance clients in 2001, ICICI Bank is now (2005) lending to 1.2 million
clients through its partner microfinance institutions, and its outstanding portfolio has
increased from Rs. 0.20 billion (US$4.5 million) to Rs. 9.98 billion (US$227 million).
A few years ago, these clients had never been served by a formal lending institution.

There is an increasing shift in the microfinance sector from grant-giving to investment

in the form of debt or equity, and ICICI believes grant money should be limited to the
creation of facilitative infrastructure. We need to stop sending government and
funding agencies the signal that microfinance is not a commercially viable system,
says Nachiket Mor, Executive Director of ICICI Bank.

As a result of banks entering the game, the sector has changed rapidly. There is no
dearth of funds today, as banks are looking into MFIs favorably, unlike a few years
ago, says Padmaja Reddy, the CEO of one of ICICI Banks major MFI partners,
Spandana.

Partnership Models
A model of microfinance has emerged in recent years in which a microfinance
institution (MFI) borrows from banks and on-lends to clients; few MFIs have been
able to grow beyond a certain point. Under this model, MFIs are unable to provide
risk capital in large quantities, which limits the advances from banks. In addition, the
risk is being entirely borne by the MFI, which limits its risk-taking.

The MFI as Collection Agent

To address these constraints, ICICI Bank initiated a partnership model in 2002 in
which the MFI acts as a collection agent instead of a financial intermediary. This
model is unique in that it combines debt as mezzanine finance to the MFI (Mezzanine
finance combines debt and equity financing: it is debt that can be converted by the
lender into equity in the event of a default.
This source of financing is advantageous for MFIs because it is treated like equity in
the balance-sheet and enables it to raise money without additional equity, which is an
expensive financing source.).The loans are contracted directly between the bank and
the borrower, so that the risk for the MFI is separated from the risk inherent in the
portfolio. This model is therefore likely to have very high leveraging capacity, as the
MFI has an assured source of funds for expanding and deepening credit. ICICI chose
this model because it expands the retail operations of the bank by leveraging
comparative advantages of MFIs, while avoiding costs associated with entering the
market directly.

Securitization
Another way to enter into partnership with MFIs is to securitize microfinance
portfolios. In 2004, the largest ever securitization deal in microfinance was signed
between ICICI Bank and SHARE Microfin Ltd, a large MFI operating in rural areas
of the state of Andra Pradesh. Technical assistance and the collateral deposit of
US$325,000 (93% of the guarantee required by ICICI) were supplied by Grameen
Foundation USA. Under this agreement, ICICI purchased a part of SHAREs
microfinance portfolio against a consideration calculated by computing the Net
Present Value of receivables amounting to Rs. 215 million (US$4.9 million) at an
agreed discount rate. The interest paid by SHARE is almost 4% less than the rate paid

in commercial loans. Partial credit provision was provided by SHARE in the form of
a guarantee amounting to 8% of the receivables under the portfolio, by way of a lien
on fixed deposit. This deal frees up equity capital, allowing SHARE to scale up its
lending. On the other hand, it allows ICICI Bank to reach new markets. And by
trading this high quality asset in capital markets, the bank can hedge its own risks.

Beyond Microcredit
Microfinance does not only mean microcredit, and ICICI does not limit itself to
lending. ICICIs Social Initiative Group, along with the World Bank and ICICI
Lombard, the insurance company set up by ICICI and Canada Lombard, have
developed Indias first index-based insurance product. This insurance policy
compensates the insured against the likelihood of diminished agricultural output/yield
resulting from a shortfall in the anticipated normal rainfall within the district, subject
to a maximum of the sum insured. The insurance policy is linked to a rainfall index.

Technology
One of the main challenges to the growth of the microfinance sector is accessibility.
The Indian context, in which 70% of the population lives in rural areas, requires new,
inventive channels of delivery. The use of technologies such as kiosks and smart cards
will considerably reduce transaction costs while improving access. The ICICI Bank
technology team is developing a series of innovative products that can help reduce
transaction costs considerably. For example, it is piloting the usage of smart cards
with Sewa Bank in Ahmedabad. To maximize the benefits of these innovations, the
development of a high quality shared banking technology platform which can be used
by MFIs as well as by cooperatives banks and regional rural banks is needed. ICICI is
strongly encouraging such an effort to take place. Wipro and Infosys, I-Flex,
3iInfotech, some of the best Indian information technology companies specialized in
financial services, and others, are in the process of developing exactly such a

platform. At a recent technology workshop at the Institute for Financial Management

Research in Chennai, the ICICI Bank Alternate Channels Team presented the benefits
of investing in a common technology platform similar to those used in mainstream
banking to some of the most promising MFIs.

The Centre for Microfinance Research

ICICI bank has created the Centre for Microfinance Research (CMFR) at the Institute
for
Financial Management Research (IFMR) in Chennai. Through research, researchbased advocacy, high level training and strategy building, it aims to systematically
establish the links between increased access to financial services and the participation
of poor people in the larger economy. The CMFR Research Unit supports initiatives
aimed at understanding and analyzing the following issues: impact of access to
financial services; contract and product designs; constraints to household
productivity; combination of microfinance and other development interventions;
evidence of credit constraints; costs and profitability of microfinance organizations;
impact of MFI policies and strategies; peoples behavior and psychology with respect
to financial services; economics of micro-enterprises; and the effect of regulations.

Finally, the CMFR recognizes that while MFIs aim to meet the credit needs of poor
households, there are other missing markets and constraints facing households, such
as healthcare, infrastructure, and gaps in knowledge. These have implications in terms
of the scale and profitability of client enterprises and efficiency of household budget
allocation, which in turn impacts household well-being. The CMFR Microfinance
Strategy Unit will address these issues through a series of workshops which will bring
together MFI practitioners and sectoral experts (in energy, water, roads, health, etc).
The latter will bring to the table knowledge of best practices in their specific areas,
and each consultation workshop will result in long-term collaboration between with
MFIs for implementing specific pilots.

Marketing of Microfinance Products

1. Contract Farming and Credit Bundling

Banks and financial institutions have been partners in contract farming schemes, set
up to enhance credit. Basically, this is a doable model. Under such an arrangement,
crop loans can be extended under tie-up arrangements with corporate for production
of high quality produce with stable marketing arrangements provided and only,
provided the price setting mechanism for the farmer is appropriate and fair.

2. Agri Service Centre Rabo India

Rabo India Finance Pvt Ltd. has established agri-service centres in rural areas in
cooperation with a number of agri-input and farm services companies. The services
provided are similar to those in contract farming, but with additional flexibility and a
wider range of products including inventory finance. Besides providing storage
facilities, each centre rents out farm machinery, provides agricultural inputs and
information to farmers, arranges credit, sells other services and provides a forum for
farmers to market their products.

3. Non Traditional Markets

Similarly, Mother Dairy Foods Processing, a wholly owned subsidiary of National
Dairy Development Board (NDDB) has established auction markets for horticulture
producers in Bangalore. The operations and maintenance of the market is done by
NDDB. The project, with an outlay of Rs.15 lakh, covers 200 horticultural farmers
associations with 50,000 grower members for wholesale marketing. Their produce is
planned with production and supply assurance and provides both growers and buyers
a common platform to negotiate better rates.

4. Apni Mandi
Another innovation is that of The Punjab Mandi Board, which has experimented with
a farmers market to provide small farmers located in proximity to urban areas,
direct access to consumers by elimination of middlemen. This experiment known as
"Apni Mandi" belongs to both farmers and consumers, who mutually help each other.
Under this arrangement a sum of Rs. 5.2 lakh is spent for providing plastic crates to
1000 farmers. Each farmer gets 5 crates at a subsidized rate. At the mandi site, the
Board provides basic infrastructure facilities. At the farm level, extension services of
different agencies are pooled in. These include inputs subsidies, better quality seeds
and loans from Banks. Apni Mandi scheme provides self-employment to producers
and has eliminated social inhibitions among them regarding the retail sale of their
produce.

Success Factors of Micro-Finance in India

Over the last ten years, successful experiences in providing finance to small
entrepreneur and producers demonstrate that poor people, when given access to
responsive and timely financial services at market rates, repay their loans and use the
proceeds to increase their income and assets. This is not surprising since the only
realistic alternative for them is to borrow from informal market at an interest much
higher than market rates. Community banks, NGOs and grass root savings and credit
groups around the world have shown that these microenterprise loans can be
profitable for borrowers and for the lenders, making microfinance one of the most
effective poverty reducing strategies.

A. For NGOs
1. The field of development itself expands and shifts emphasis with the pull of
ideas, and NGOs perhaps more readily adopt new ideas, especially if the
resources required are small, entry and exit are easy, tasks are (perceived to
be) simple and peoples acceptance is high all characteristics (real or
presumed) of microfinance.

2. Canvassing by various actors, including the National Bank for Agriculture and
Rural Development (NABARD), Small Industries Development Bank of India
(SIDBI), Friends of Womens World Banking (FWWB), Rashtriya Mahila
Kosh (RMK), Council for Advancement of Peoples Action and Rural
Technologies (CAPART), Rashtriya Gramin Vikas Nidhi (RGVN), various
donor funded programmes especially by the International Fund for
Agricultural Development (IFAD), United Nations Development Programme
(UNDP), World Bank and Department for International Development, UK
(DFID)], and lately commercial banks, has greatly added to the idea pull.

Induced by the worldwide focus on microfinance, donor NGOs too have been
funding microfinance projects. One might call it the supply push.

3. All kinds of things from khadi spinning to Nadep compost to balwadis do not
produce such concrete results and sustained interest among beneficiaries as
microfinance. Most NGO-led microfinance is with poor women, for whom
access to small loans to meet dire emergencies is a valued outcome. Thus,
quick and high customer satisfaction is the USP that has attracted NGOs to
this trade.

4. The idea appears simple to implement. The most common route followed by
NGOs is promotion of SHGs. It is implicitly assumed that no technical skill
is involved. Besides, external resources are not needed as SHGs begin with
their own savings. Those NGOs that have access to revolving funds from
donors do not have to worry about financial performance any way. The
chickens will eventually come home to roost but in the first flush, it seems all
so easy.

5. For many NGOs the idea of organising forming a samuha has inherent
appeal. Groups connote empowerment and organising women is a double
bonus.

6. Finally, to many NGOs, microfinance is a way to financial sustainability.

Especially for the medium-to-large NGOs that are able to access bulk funds
for on-lending, for example from SIDBI, the interest rate spread could be an
attractive source of revenue than an uncertain, highly competitive and
increasingly difficult-to-raise donor funding.

B. For Financial Institutions and banks

Microfinance has been attractive to the lending agencies because of demonstrated
sustainability and of low costs of operation. Institutions like SIDBI and NABARD are
hard nosed bankers and would not work with the idea if they did not see a long term
engagement which only comes out of sustainability (that is economic
attractiveness).

On the supply side, it is also true that it has all the trappings of a business enterprise,
its output is tangible and it is easily understood by the mainstream. This also seems to
sound nice to the government, which in the post liberalisation era is trying to explain
the logic of every rupee spent. That is the reason why microfinance has attracted
mainstream institutions like no other developmental project.

Perhaps the most important factor that got banks involved is what one might call the
policy push.
Given that most of our banks are in the public sector, public policy does have some
influence on what they will or will not do. In this case, policy was followed by
diligent, if meandering, promotional work by NABARD. The policy change about a
decade ago by RBI to allow banks to lend to SHGs was initially followed by a sevenpage memo by NABARD to all bank chairmen, and later by sensitisation and training
programmes for bank staff across the country. Several hundred such programmes
were conducted by NGOs alone, each involving 15 to 20 bank staff, all paid for by
NABARD. The policy push was sweetened by the NABARD refinance scheme that
offers much more favourable terms (100% refinance, wider spread) than for other
rural lending by banks. NABARD also did some system setting work and banks lately
have been given targets. The canvassing, training, refinance and close follow up by
NABARD has resulted in widespread bank involvement.

Moreover, for banks the operating cost of microfinance is perhaps much less than for

pure MFIs. The banks already have a vast network of branches. To the extent that an
NGO has already promoted SHGs and the SHG portfolio is performing better than the
rest of the rural (if not the entire) portfolio, microfinance via SHGs in the worst case
would represent marginal addition to cost and would often reduce marginal cost
through better capacity utilisation. In the process the bank also earns brownie points
with policy makers and meets its priority sector targets.

It does not take much analysis to figure out that the market for financial services for
the 50-60 million poor households of India, coupled with about the same number who
are technically above the poverty line but are severely under-served by the financial
sector, is a very large one. Moreover, as in any emerging market, though the perceived
risks are higher, the spreads are much greater. The traditional commercial markets of
corporates, business, trade, and now even housing and consumer finance are being
sought by all the banks, leading to price competition and wafer thin spreads.

Further, bank-groups are motivated by a number of cross-selling opportunities in the

market, for deposits, insurance, remittances and eventually mutual funds. Since the
larger banks are offering all these services now through their group companies, it
becomes imperative for them to expand their distribution channels as far and deep as
possible, in the hope of capturing the entire financial services business of a household.

Finally, both agri-input and processing companies such as EID Parry, fast-moving
consumer goods (FMCG) companies such as Hindustan Levers, and consumer
durable companies such as Philips have realised the potential of this big market and
are actively using SHGs as entry points. Some amount of free-riding is taking place
here by companies, for they are using channels which were built at a significant cost
to NGOs, funding agencies and/or the government.

On the whole, the economic attractiveness of microfinance as a business is getting

established and this is a sure step towards mainstreaming. We know that

mainstreaming is a mixed blessing, and one tends to exchange scale at the cost of
objectives. So it needs to be watched carefully.

Issues in Microfinance
1. Sustainability
The first challenge relates to sustainability. MFI model is comparatively costlier in
terms of delivery of financial services. An analysis of 36 leading MFIs by Jindal
& Sharma shows that 89% MFIs sample were subsidy dependent and only 9 were
able to cover more than 80% of their costs. This is partly explained by the fact that
while the cost of supervision of credit is high, the loan volumes and loan size is
low. It has also been commented that MFIs pass on the higher cost of credit to
their clients who are interest insensitive for small loans but may not be so as loan
sizes increase. It is, therefore, necessary for MFIs to develop strategies for
increasing the range and volume of their financial services.

2. Lack of Capital
The second area of concern for MFIs, which are on the growth path, is that they
face a paucity of owned funds. This is a critical constraint in their being able to
scale up. Many of the MFIs are socially oriented institutions and do not have
adequate access to financial capital. As a result they have high debt equity ratios.
Presently, there is no reliable mechanism in the country for meeting the equity
requirements of MFIs.
The IPO issue by Mexico based Compartamos was not accepted by purists as
they thought it defied the mission of an MFI. The IPO also brought forth the issue
of valuation of an MFI.
The book value multiple is currently the dominant valuation methodology in
microfinance investments. In the case of start up MFIs, using a book value
multiple does not do justice to the underlying value of the business. Typically,
start ups are loss making and hence the book value continually reduces over time
until they hit break even point. A book value multiplier to value start ups would

decrease the value as the organization uses up capital to build its business, thus
accentuating the negative rather than the positive.

3. Financial service delivery

Another challenge faced by MFIs is the inability to access supply chain. This
challenge can be overcome by exploring synergies between microfinance
institutions with expertise in credit delivery and community mobilization and
businesses operating with production supply chains such as agriculture. The latter
players who bring with them an understanding of similar client segments, ability
to create microenterprise opportunities and willingness to nurture them, would be
keen on directing microfinance to such opportunities. This enables MFIs to
increase their client base at no additional costs.
Those businesses that procure from rural India such as agriculture and dairy often
identify finance as a constraint to value creation. Such businesses may find
complementarities between an MFIs skills in management of credit processes and
their own strengths in supply chain management.
ITC Limited, with its strong supply chain logistics, rural presence and an
innovative transaction platform, the echoupal, has started exploring synergies with
financial service providers including MFIs through pilots with vegetable endors
and farmers. Similarly, large FIs such as Spandana foresee a larger role for
themselves in the rural economy ably supported by value creating partnerships
with players such as Mahindra and Western Union Money Transfer.
ITC has initiated a pilot project called pushcarts scheme along with BASIX (a
microfinance organization in Hyderabad). Under this pilot, it works with twenty
women head load vendors selling vegetables of around 10- 15 kgs per day. BASIX
extends working capital loans of Rs.10,000/- , capacity building and business
development support to the women. ITC provides support through supply chain
innovations by:
1. Making the Choupal Fresh stores available to the vendors, this avoids the
hassle of bargaining and unreliability at the traditional mandis (local vegetable

markets). The women are able to replenish the stock from the stores as many
times in the day as required. This has positive implications for quality of the
produce sold to the end consumer.
2. Continuously experimenting to increase efficiency, augmenting incomes and
reducing energy usage across the value chain. For instance, it has forged a
partnership with National Institute of Design (NID), a pioneer in the field of
design education and research, to design user-friendly pushcarts that can
reduce the physical burden.
3. Taking lessons from the pharmaceutical and telecom sector to identify
technologies that can save energy and ensure temperature control in push carts
in order to maintain quality of the vegetables throughout the day. The model
augments the incomes of the vendors from around Rs.30-40 per day to an
average of Rs.150 per day. From an environmental point of view, push carts
are much more energy efficient as opposed to fixed format retail outlets.

4. HR Issues
Recruitment and retention is the major challenge faced by MFIs as they strive to
reach more clients and expand their geographical scope. Attracting the right talent
proves difficult because candidates must have, as a prerequisite, a mindset that fits
with the organizations mission.
Many mainstream commercial banks are now entering microfinance, who are
poaching staff from MFIs and MFIs are unable to retain them for other job
opportunities.
85% of the poorest clients served by microfinance are women. However, women
make up less than half of all microfinance staff members, and fill even fewer of
the senior management roles. The challenge in most countries stems from cultural
notions of womens roles, for example, while women are single there might be a
greater willingness on the part of womens families to let them work as front line
staff, but as soon as they marry and certainly once they start having children, it

becomes unacceptable. Long distances and long hours away from the family are
difficult for women to accommodate and for their families to understand.

5. Micro insurance
First big issue in the micro insurance sector is developing products that really
respond to the needs of clients and in a way that is commercially viable.
Secondly, there is strong need to enhance delivery channels. These delivery
channels have been relatively weak so far. Micro insurance companies offer
minimal products and do not want to go forward and offer complex products that
may respond better. Micro insurance needs a delivery channel that has easy access
to the low-income market, and preferably one that has been engaged in financial
transactions so that they have controls for managing cash and the ability to track
different individuals.
Thirdly, there is a need for market education. People either have no information
about micro insurance or they have a negative attitude towards it. We have to counter
that. We have to somehow get people - without having to sit down at a table - to
understand what insurance is, and why it benefits them. That will help to demystify
micro insurance so that when agents come, people are willing to engage with them.

6. Adverse selection and moral hazard

The joint liability mechanism has been relied upon to overcome the twin issues of
adverse selection and moral hazard. The group lending models are contingent on
the availability of skilled resources for group promotion and entail a gestation
period of six months to one year. However, there is not sufficient understanding of
the drivers of default and credit risk at the level of the individual. This has
constrained the development of individual models of micro finance. The group
model was an innovation to overcome the specific issue of the quality of the
portfolio, given the inability of the poor to offer collateral. However, from the
perspective of scaling up micro financial services, it is important to proactively

discover models that will enable direct finance to individuals.

CHAPTER:-4
RECOMMENDATIONS AND SOLUTIONS
WAYS IN WHICH POOR PEOPLE MANAGE FOR THEIR MONEY
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. Childrens 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.
Most needs are met through a 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 moneyprobably 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 much vulnerability 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.
Suryoday Micro Finance Pvt Ltd is a registered Non-Banking Finance
Company, engaged in providing loans to women from Economically
Weaker Sections, Below Poverty Line and the Marginal Poor who do
not have access to traditional banking, with an objective to reduce
poverty in its area of operation.
Trident

Microfin

Private

Ltd.is

new

generation

microfinance

institution established in 2007 and headquartered at Hyderabad in

Andhra Pradesh, India. The Company was promoted by highly qualified
microfinance professionals with the motto 'to reach the unreached'. The
overarching goal of the company is to provide comprehensive financial
and business solutions to low income individuals and enterprises.

Examples
Microfinance is defined by the process of formulating groups within a
community to assist poverty stricken people by lending them money
without the need of credit or collateral. An example of microfinance is
the Saving Up program. In the Saving Up Program people put aside a
certain amount of money, for example $1 per week which is collected
and dispersed as a lump sum by an external agent minus a fee for
holding the funds. The Saving Up Program assists the poor in saving
their money and teaches them how to save.

Interest rates
One of the principal challenges of microfinance is providing small
loans at an affordable cost. The global average interest and fee rate is
estimated at 37%, with rates reaching as high as 70% in some markets.
The reason for the high interest rates is not primarily cost of capital.
Indeed, the local microfinance organizations that receive zero-interest
loan capital from the online micro lending platform Kiva charge
average interest and fee rates of 35.21%. Rather, the main reason for
the high cost of microfinance loans is the high transaction cost of
traditional microfinance operations relative to loan size.
Microfinance practitioners have long argued that such high interest
rates are simply unavoidable, because the cost of making each loan
cannot be reduced below a certain level while still allowing the lender
to cover costs such as offices and staff salaries. For example in SubSaharan Africa credit risk for microfinance institutes is very high,
because customers need years to improve their livelihood and face
many challenges during this time. Financial institutes often do not even
have a system to check the person's identity. Additionally they are

unable to design new products and enlarge their business to reduce the
risk. The result is that the traditional approach to microfinance has
made only limited progress in resolving the problem it purports to
address: that the world's poorest people pay the world's highest cost for
small business growth capital. The high costs of traditional
microfinance loans limit their effectiveness as a poverty-fighting tool.
Offering loans at interest and fee rates of 37% mean that borrowers
who do not manage to earn at least a 37% rate of return may actually
end up poorer as a result of accepting the loans.
Example of a loan contract, using flat rate calculation, from rural
Cambodia. Loan is for 400,000 riels at 4% flat (16,000 riels) interest
per month.
According to a recent survey of microfinance borrowers in Ghana
published by the Center for Financial Inclusion, more than one-third of
borrowers surveyed reported struggling to repay their loans. Some
resorted to measures such as reducing their food intake or taking
children out of school in order to repay microfinance debts that had not
proven sufficiently profitable.
In recent years, the microfinance industry has shifted its focus from the
objective of increasing the volume of lending capital available, to
address the challenge of providing microfinance loans more affordably.
Microfinance analyst David Roodman contends that, in mature markets,
the average interest and fee rates charged by microfinance institutions
tend to fall over time. However, global average interest rates for
microfinance loans are still well above 30%.
The answer to providing microfinance services at an affordable cost
may lie in rethinking one of the fundamental assumptions underlying
microfinance: Those microfinance borrowers need extensive monitoring
and interaction with loan officers in order to benefit from and repay
their loans. The P2P microlending service Zidisha is based on this
premise, facilitating direct interaction between individual lenders and
borrowers via an internet community rather than physical offices.
Zidisha has managed to bring the cost of microloans to below 10% for
borrowers, including interest which is paid out to lenders. However, it
remains to be seen whether such radical alternative models can reach
the scale necessary to compete with traditional microfinance programs.

Use of loans
Practitioners and donors from the charitable side of microfinance
frequently argue for restricting microcredit to loans for productive
purposessuch 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
Gender
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 lending3.1%), while 0.3%
of loans were written off (individual lending0.9%). 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 micro
entrepreneurs 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.

4.1CONCLUSION
B y the extensive spread of microfinance, there is a growing concern
about the sustainable development of microfinance institutions.
Empirical researches provide convincing evidences for this issue. This
thesis has given theoretical arguments based on information asymmetry
that may constraint MFIs to target poor section.
We construct a quality three-sided model consisting of the borrower,
the MFI, and the informal money lender. The result of the model
demonstrate how MFI reduces informal money lending and how a MFI
can design the optimal contract for attracting more clients. To realize
this, the MFI can improve its profit, and then it can achieve sustainable
development.
It is believed that the entry of MFIs would adversely impact informal
sector lenders. It is puzzling that even with enormous growth of MFIs
over the last few decades; we still see coexistence of these two forms
of lending. The simple theoretical model explores the role of
informational constraint on the optimal contract offered by MFIs.
Among other findings, we see that MFIs objective to screen good
projects from the bad projects may put additional constraint in
removing informal sector lending or in increasing borrowers payoff.
So it follows that the MFIs can ensure their profits by keeping away
risk. The MFI could provide financial service without subsidy if it
keeps its profit.
Finally, the MFI can develop a sustainable way. Sustainable
microfinance expands the service scope, scale and depth, through the
realization of financial sustainability and improves efficiency of
alleviating poverty.

CHAPTER :-5
BIBLIOGRAPHY :BOOKs.
1. Microfinance in India, SAGE Publications Pvt. Ltd., New Delhi, 2008.
2. The Economics of Microfinance, Prentice-Hall of India, New Delhi, 2007.
3. Indian Microfinance The Challenges of Rapid Growth, SAGE Publications Pvt.
Ltd., New Delhi, 2007.
4. Internet
5. Text Book of Vipul`S Prakashan (FSM & IBF)

5.2ARTICALS:

(P.Shakila, 2014) Polit and Hungler in the year (2001) stated that the term
Literature Review

Shinde keshav in the year (2014) has done their research in the topic Impact
of microfinance and self help groups (SHG) on Rural Market Development

Devi S. Kavitha (2014) has reviewed on the topicMicro Finance and Women
Empowerment

Ugiagbe Ernest Osas(2014) has done his research in the topicA Survey of
the Perception of the Services of MicroFinance Institutions by the Female
Service Users in Benin City, South-South, Nigeria

Mafukata Mavhungu Abel, Kancheya Grace, Dhlandhara Willie in the year

(2014) Factors Influencing Poverty Alleviation amongst Microfinance
Adopting Households in Zambia

Tadele Haileslasie Rao P. Madhu Sudana (2014) has done his research in the
topicCorporate governance and Ethical issues in Microfinance Institutions
(MFIs) - A study of Microfinance crises in Andhra Pradesh, India

Mayowa

Agboola

G.

(2012)

has

done

his

research

in

topicMICROFINANCE and Entrepreneurial Development in Nigeria

5.3 WEBSITES REFERED: 1. www.microfinance.india

2. www.developmentgateway.com
3. www.microfinance.com
4. www.microfinancegateway.org/content/article
5. www.nabard.org
6. www.slideshare.com
7. www.scribd.com

the