INTRODUCTION

Micro-finance refers to ―small savings, credit and insurance services extended to

socially and economically disadvantaged segments of society, for enabling them to raise their
income levels and improve living standards. India‘s population is more than 1000 million,
and it‘s the second largest in term of population after China. India's GDP ranks among the top
15 economies of the world. However, around 300 million people or about 80 million
households are living below the poverty line, i.e. less than $2 per day according to the World
Bank and the poorest are which earns $1 per day. It is further estimated that of these
households, only about 20% have access to credit from the formal sector. Out of these 80
million household, 80% takes credit from the informal sources i.e. local Zamindars, Chit
Funds etc. With about 80 million households below poverty line and 80% out of this is access
from informal sector, such a problem gave birth to Micro Finance Institutions (MFI‘s). MFIs
include non-governmental organizations (NGOs), credit unions, non-bank financial
intermediaries, and even a few commercial banks.

India has about 153,000 retail outlets of the formal banking infrastructure—
commercial banks. There are about 33,000 banks in rural areas, and also have special
category of banks called Regional Rural Banks (RRB). There are about 14,500 branches and
the cooperatives, the cooperatives—about 100,000 retail outlets, the population for the
regional outlet comes down to as low as 4,700. Annual credit demand by the poor in the
country is estimated to be about Rs 60,000 crores.

In the Indian context terms like "small and marginal farmers", " rural artisans" and
"economically weaker sections" have been used to broadly define micro-finance customers.
Women constitute a vast majority of users of micro-credit and savings services. In short,
Micro Finance means providing very poor families with very small loans to help them engage
in productive activities or grow their very small businesses.
Micro financing is not a new concept. Small microcredit operations have existed since the
mid 1700s. Although most modern microfinance institutions operate in developing countries,
the rate of payment default for loans is surprisingly low - more than 90% of loans are repaid.
It is not just a financing system, but a tool for social change, specially for women - it does not
spring from market forces alone - it is potentially welfare enhancing - there is a public

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interest in promoting the growth of micro finance - this is what makes it acceptable as a valid
goal for public policy. Ultimately, the goal of microfinance is to give low income people an
opportunity to become self-sufficient by providing a means of saving money, borrowing
money and insurance.

The main aim of Micro-Finance is too provide loan to the poor people or to below
poverty line, who are not able borrow from other sources and to make their living standard
better. Micro- finance‘s concept was first given by the Nobel laureate Prof. Mohammad
Yunus in 1976 and started Grameen Bank in that year and from then many countries has
followed Grameen Bank Model. Microfinance evolved in India in the early 1980s with the
formation of informal Self Help Group (SHG) for providing access to financial services to the
needy people. The MFIs are organized under three models: SHGs, Grameen model/Joint
liability groups and Individual banking groups as in cooperatives.

Micro financing is not a new concept. Small microcredit operations have existed since
the mid 1700s. Although most modern microfinance institutions operate in developing
countries, the rate of payment default for loans is surprisingly low - more than 90% of loans
are repaid. It is not just a financing system, but a tool for social change, specially for women -
it does not spring from market forces alone - it is potentially welfare enhancing - there is a
public interest in promoting the growth of micro finance - this is what makes it acceptable as
a valid goal for public policy. Over the past few decades, this innovative scheme has
attracted a range of non-governmental and State-sponsored institutions. Leading financial
institutions are the Small Industries Development
Bank of India (SIDBI), the National Bank for Agriculture and Rural Development
(NABARD) and the Rashtriya Mahila Kosh (RMK).

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 Microcredit and Microfinance

Microcredit refers specifically to loans and the credit needs of clients, while
Microfinance covers a broader range of financial services that create a wider range of
opportunities for success. Examples of these additional financial services include savings,
insurance, housing loans and remittance transfers. The local MFI might also offer
Microfinance plus activities such as entrepreneurial and life skills training, and advice on
topics such as health and nutrition, sanitation, improving living conditions, and the
importance of educating children.

Microcredit is the extension of very small loans (microloans) to those in poverty

designed to spur entrepreneurship. These individuals lack collateral, steady employment and
a verifiable credit history and therefore cannot meet even the most minimal qualifications to
gain access to traditional credit. Microcredit is a part of microfinance, which is the provision
of a wider range of financial services to the very poor.

Microcredit is a financial innovation that is generally considered to have originated with the
Grameen Bank in Bangladesh. In that country, it has successfully enabled extremely
impoverished people to engage in self-employment projects that allow them to generate an
income and, in many cases, begin to build wealth and exit poverty. Due to the success of
microcredit, many in the traditional banking industry have begun to realize that these
microcredit borrowers should more correctly be categorized as pre-bankable; thus,
microcredit is increasingly gaining credibility in the mainstream finance industry, and many
traditional large finance organizations are contemplating microcredit projects as a source of
future growth, even though almost everyone in larger development organizations discounted
the likelihood of success of microcredit when it was begun.

The concept of micro credit is known more by its approach than by monetary limits to the
amount of loans. Of course, the target segment is the poorest, but Mohammed Yunus tried the
concept of joint-liability or peer-pressure. Most micro credit loans are dispensed through
village or community-level self-help groups (SHGs) who agree to create a pressure on the
individual borrower to perform as per contract.

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Difference between microcredit and microfinance:
The term Micro Finance is much broader than micro credit. The main components of micro
finance are:

• Deposits
• Loans
• Payment services
• Money transfers
• Insurance to poor and low-income households and their microenterprises

Thus, micro credit is only a component of the broad spectrum of micro financing.

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Legal and Regulatory Framework for the Microfinance Institutions in
India:
1. SOCIETIES REGISTRATION ACT, 1860:

NGOs are mostly registered under the Societies Registration Act, 1860. Since these entities
were established as voluntary, not-for-profit development organizations, their microfinance
activities were also established under the same legal umbrella. This act is applicable to the
NGO‘s and the main purpose is:
 Relief of poverty

 Advancement of education

 Advancement of religion

 Purposes beneficial to the community or a section of the community.

2. INDIAN TRUSTS ACT, 1882:

Some MFIs are registered under the Indian Trust Act, 1882 either as public charitable trusts
or as private, determinable trusts with specified beneficiaries/members.
3. NOT-FOR-PROFIT COMPANIES REGISTERED UNDER SECTION 25 OF
COMPANIES ACT, 1956:

An organization given a license under Section 25 of the Companies Act 1956 is allowed to be
registered as a company with limited liability without the addition of the words “Limited” or
“Private Limited” to its name. It is also eligible for exemption from some of the provisions of
the Companies Act, 1956. For companies that are already registered under the Companies
Act, 1956, if the central government is satisfied that the objects of that company are restricted
to the promotion of commerce, science, art, religion, charity or any other useful purpose; and
the constitution of such company provides for the application of funds or other income in
promoting these objects and prohibits payment of any dividend to its members, then it may
allow such a company to register under Section 25 of the Companies Act.

Types of Micro-credit providers in India

1) Domestic Commercial Banks

 Public Sector Banks;

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  Private Sector Banks & Local Area Banks

2) Regional Rural Banks

3) Co-operative Banks

4) Unregistered Non Banking Financial Corporations

5) Registered Non Banking Financial Corporations, Co-operative Societies.

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 Boundaries and principles of micro finance

Poor people borrow from informal moneylenders and save with informal collectors.
They receive loans and grants from charities. They buy insurance from state-owned
companies. They receive funds transfers through formal or informal remittance networks. It is
not easy to distinguish microfinance from similar activities. It could be claimed that a
government that orders state banks to open deposit accounts for poor consumers, or a
moneylender that engages in usury, or a charity that runs a heifer pool are engaged in
microfinance. Ensuring financial services to poor people is best done by expanding the
number of financial institutions available to them, as well as by strengthening the capacity of
those institutions. In recent years there has also been increasing emphasis on expanding the
diversity of institutions, since different institutions serve different needs.

Some principles that summarize a century and a half of development practice were
encapsulated in 2004 by Consultative Group to Assist the Poor (CGAP) and endorsed
by the Group of Eight leaders at the G8 Summit on June 10, 2004:

 Poor people need not just loans but also savings, insurance and money transfer
services.
 Microfinance must be useful to poor households: helping them raise income, build
up assets and/or cushion themselves against external shocks.
 "Microfinance can pay for itself." Subsidies from donors and government are
scarce and uncertain, and so to reach large numbers of poor people, microfinance
must pay for itself.
 Microfinance means building permanent local institutions.
 Microfinance also means integrating the financial needs of poor people into a
country's mainstream financial system.
 "The job of government is to enable financial services, not to provide them."
 "Donor funds should complement private capital, not compete with it." "The key
bottleneck is the shortage of strong institutions and managers." Donors should
focus on capacity building.
 Interest rate ceilings hurt poor people by preventing microfinance institutions
from covering their costs, which chokes off the supply of credit.

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  Microfinance institutions should measure and disclose their performance – both
financially and socially.

Microfinance is considered as a tool for socio-economic development and can be clearly

distinguished from charity. Families who are destitute, or so poor they are unlikely to be able
to generate the cash flow required to repay a loan, should be recipients of charity. Others are
best served by financial institutions.

Financial needs of poor people

Financial needs and financial services.

In developing economies and particularly in the rural areas, many activities that would be
classified in the developed world as financial are not monetized: that is, money is not used to
carry them out. Almost by definition, poor people have very little money. But circumstances
often arise in their lives in which they need money or the things money can buy.

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

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

widowhood, old age.
 Personal Emergencies: such as sickness, injury, unemployment, theft, harassment or
death.

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  Disasters: such as fires, floods, cyclones and man-made events like war or bulldozing
of dwellings.
 Investment Opportunities: expanding a business, buying land or equipment,
improving housing, securing a job (which often requires paying a large bribe), etc.

Ways in which poor people manage their money

Rutherford argues that the basic problem poor people as money managers face are to gather a
'usefully large' amount of money. 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. Most
needs are met through mix of saving and credit. A benchmark impact assessment of Grameen
Bank and two other large microfinance institutions in Bangladesh found that for every $1
they were lending to clients to finance rural non-farm micro-enterprise, about $2.50 came
from other sources, mostly their clients' savings.

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.

Strengths of micro finance

In the past few years, savings-led microfinance has gained recognition as an effective way to
bring very poor families low-cost financial services. For example, in India, the National Bank
for Agriculture and Rural Development (NABARD) finances more than 500 banks that on-
lend funds to self-help groups (SHGs). SHGs comprise twenty or fewer members, of whom
the majorities are women from the poorest castes and tribes. Members save small amounts of
money, as little as a few rupees a month in a group fund. Members may borrow from the
group fund for a variety of purposes ranging from household emergencies to school fees. As
SHGs prove capable of managing their funds well, they may borrow from a local bank to
invest in small business or farm activities. Banks typically lend up to four rupees for every

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rupee in the group fund. Groups generally pay interest rates that range from 30% to 70%
APR, or 12% to 24% a year, based on the flat calculation method. Nearly 1.4 million SHGs
comprising approximately 20 million women now borrow from banks, which make the
Indian SHG-Bank Linkage model the largest microfinance program in the world. Similar
programs are evolving in Africa and Southeast Asia with the assistance of organizations like
Opportunity International, Catholic Relief Services, CARE, APMAS and Oxfam. Micro
financing also helps in the development of an economy by giving everyday people the chance
to establish a sustainable means of income. Eventual increases in disposable income will lead
to economic development and growth.

Challenges or obstacles to micro finance

The obstacles or challenges to building a sound commercial microfinance industry include:

 Inappropriate donor subsidies

 Poor regulation and supervision of deposit-taking MFIs
 Few MFIs that meet the needs for savings, remittances or insurance
 Limited management capacity in MFIs
 Institutional inefficiencies
 Need for more dissemination and adoption of rural, agricultural microfinance
methodologies.

THE MICRO CREDIT MODEL

• The model is fairly straightforward and simple.

• Focus on jump-starting self-employment, providing the capital for poor women to use their
innate "survival skills" to pull themselves out of poverty.

• Lend to women in small groups (credit circles), say of five or seven.

• Make loans of small amounts to two out of five.

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• The three who have not received loans will be eligible only when this first round of loans
has been repaid.

• Draw up a weekly or bi-weekly repayment schedule.

• In case any member defaults the entire circle is denied access to credit.

• Banks have been given freedom to formulate their own lending norms keeping in view
ground realities. They have been asked to devise appropriate loan and savings products and
the related terms and conditions including size of the loan, unit cost, unit size, maturity
period, grace period, margins, etc.

CURRENT SCALE OF MICRO FINANCE OPERATIONS

No systematic effort to map the distribution of microfinance has yet been undertaken. A
useful recent benchmark was established by an analysis of 'alternative financial institutions'
in the developing world. The authors counted approximately 665 million client accounts at
over 3,000 institutions that are serving people who are poorer than those served by the
commercial banks. Of these accounts, 120 million were with institutions normally understood
to practice microfinance. Reflecting the diverse historical roots of the movement, however,
they also included postal savings banks (318 million accounts), state agricultural and
development banks (172 million accounts), financial cooperatives and credit unions (35
million accounts) and specialized rural banks (19 million accounts).

MICRO FINANCE AND SOCIAL INTERVENTIONS

There are currently a few social interventions that have been combined with micro financing
to increase awareness of HIV/AIDS. Such interventions like the "Intervention with
Microfinance for AIDS and Gender Equity" (IMAGE) which incorporates micro financing
with "The Sisters-for-Life" program a participatory program that educates on different gender
roles, gender-based violence, and HIV/AIDS infections to strengthen the communication
skills and leadership of women. Microfinance has also been combined with business
education and with other packages of health interventions.

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Comparative Analysis of Microfinance Services Offered To The Poor

PARAMETER Money Lenders Commercial Govt.Sponsored Financial

banks Programs Program of
MFIS’
Ease of Access High Low Low High

Lead time for Low Very high Very High Low-Medium

loans

Repayment Very Short Extreme Long Extreme Long Short

terms

Interest Rates Fixed and Rigid Fixed and easy Fixed and easy Flexible

Incentives None None None Repeat and larger

loan
Possible but likely Possible but likely
Repeat Possible Stream credit is
Borrowing assured
Extreme time Extreme time
Loan Access Very quick consuming consuming Simple and quick
Procedure

Collateral and Mandatory Required but Not required Not required

Demand hypothecation of although a charge social collateral is
Promissory Note asset may suffice on the assets used for physical
become collateral
automatic

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 SWOT Analysis of micro finance

SWOT stands for Strength, Weakness, Opportunity, and Threat.

Strength
• Helped in reducing the poverty: The main aim of Micro Finance is to provide the loan to
the individuals who are below the poverty line and cannot able to access from the commercial
banks. As we know that Indian, more than 350 million people in India are below the poverty
and for them the Micro Finance is more than the life. By providing small loans to this people
Micro finance helps in reducing the poverty.

• Huge networking available: For MFIs and for borrower, both the huge network is there. In
India there are many more than 350 million who are below the poverty line, so for MFIs there
is a huge demand and network of people. And for borrower there are many small and medium
size MFIs are available in even remote areas.

Weakness
• Not properly regulated: In India the Rules and Regulation of Micro Finance Institutions
are not regulated properly. In the absent of the rules and regulation there would be high case
of credit risk and defaults. In the shed of the proper rules and regulation the Micro finance
can function properly and efficiently.

• High number of people access to informal sources: According to the World Bank report
80% of the Indian poor can‘t access to formal source and therefore they depend on the
informal sources for their borrowing and that informal charges 40 to 120% p.a.

• Concentrating on few people only: India is considered as the second fastest developing
country after China, with GDP over 8.5% from the past 5 years. But this all interesting
figures are just because of few people. India‘s 70% of the population lives in rural area, and
that portion is not fully touched.

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Opportunity
• Huge demand and supply gap: There is a huge demand and supply gap among the
borrowers and issuers. In India around 350 million of the people are poor and only few MFIs
there to serving them. There is huge opportunity for the MFIs to serve the poor people and
increase their living standard. The annual demand of Micro loans is nearly Rs 60,000 crore
and only 5456 crore are disbursed to the borrower.

• Employment Opportunity: Micro Finance helps the poor people by not only providing
them with loan but also helps them in their business, educate them and their children etc. So
in this way Micro Finance is helping to increase the employment opportunity for them and
for the society.

• Huge Untapped Market: India‘s total population is more than 1000 million and out of 350
million is living below poverty line. So there is a huge opportunity for the MFIs to meet the
demand of that unserved customers and Micro Finance should not leave any stones unturned
to grab the untapped market.

• Opportunity for Pvt. Banks: Many Pvt. Banks are shying away from to serve the people
are unable to access big loans, because of the high intervention of the Govt. but the door open
for the Pvt. Players to get entry and with flexible rules Pvt. Banks are attracting towards this
segment.

Threat
• High Competition: This is a serious threat for the Micro Finance industry, because as the
more players will come in the market, their competition will rise , and we know that the MFIs
has the high transaction cost and after entrant of the new players there transaction cost will
rise further, so this would be serious threat.

• Neophyte Industry: Basically Micro Finance is not a new concept in India, but that was all
by informal sources. But the formal source of finance through Micro Finance is novice, and
the rules are also not properly placed for it.

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• Over involvement of Govt.: This is the biggest that threat that many MFIs are facing.
Because the excess of anything is injurious, so in the same way the excess involvement of
Govt. is a serious threat for the MFIs. Excess involvement definition is like waive of loans,
make new rules for their personal benefit etc.

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HOW THE RECENT SLOWDOWN AFFECTS THE MICRO
FINANCE INSTITUTIONS

Microfinance institutions have weathered the global financial storm remarkably well, but in
2009 the credit crunch and global recession could hit the sector hard. The micro finance
sector is not fully integrated into mainstream banking and so MFIs are partially insulated
from financial markets contagion. The industry has consequently attracted mainstream banks
like Citigroup, Standard Chartered, and BNP Paribas. SKS Microfinance, India's largest MFI,
recently raised about 75 million dollars from private equity sources. The most immediate
worry is that the global credit crunch will affect the cost and availability of funding. The most
vulnerable MFIs will be those that get their money from foreign banks. Credit is now tighter,
slower, and more costly. As financial institutions are struggling with their liquidity, they have
less money to lend to microfinance institutions, which in turn means less to lend to the poor,
and lending happens then at the higher rate. Current slowdown also increases the rate of
interest on borrowed sum, this further increases the funding loan of the MFI‘s and the poor
people who takes loan from the MFI‘s, would find it difficult to borrow and this further
increases the more people Below Poverty Line (BPL)

Many microfinance banks are not disturbed by the global happenings due to, the fact that they
all have high savings- and deposit this leads to less dependence on government, bank and
external funding. But even savings-led institutions are not immune to a global economic
crisis. MFI managers now report that high prices for food and fuel, a lack of demand for
microenterprise products and decrease in the incomes of the earning members are hurting
their clients. More and more clients withdraw their savings or have trouble repaying their
loans.

Future of Micro Finance

Microfinance expansion over the next decade can be expected to be an extension of what has
been achieved so far while overcoming the hurdles that have been posing difficulty in
effective microfinance operation and its expansion. There may be several participants in this
process and their participation may be seen in the following forms.

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Existing microfinance institutions can expand their operations to areas where there are no
microfinance programs.

 More NGOs can incorporate microfinance as one of their programs.

 In places where there are less micro finance institutions, the government channels at
the grassroots level may be used to serve the poor with microfinance.

 Postal savings banks may participate more not only in mobilizing deposits but also in
providing loans to the poor and on lending funds to the MFIs.

 More commercial banks may participate both in microfinance wholesale and retailing.
They many have separate staff and windows to serve the poor without collateral.

 International NGOs and agencies may develop or may help develop microfinance
programs in areas or countries where micro financing is not a very familiar concept in
reducing poverty.

Considering that the majority of the 360 million poor households (urban and rural) lack
access to formal financial services, the numbers of customers to be reached, and the variety
and quantum of services to be provided are really large. It is estimated that 90 million farm
holdings, 30 million non-agricultural enterprises and 50 million landless households in India
collectively need approx US$30 billion credit annually. This is about 5% of India's GDP and
does not seem an unreasonable estimate.

However, 80% of the financial sector is still controlled by public sector institutions.
Competition, consolidation and convergence are all being discussed to improve efficiency
and outreach but significant opposition remains.
Many private and foreign banks have unveiled their plans to enter the Indian microfinance
sector because of its very low NPAs and high repayment rate of more than 95% in spite of
offering loans without any collateral security.

Microfinance is not yet at the centre stage of the Indian financial sector. The knowledge,
capital and technology to address these challenges however now exist in India, although they
are not yet fully aligned. With a more enabling environment and surge in economic growth,
the next few years promise to be exciting for the delivery of financial services to poor people
in India

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Development of Small-Scale Enterprises through microfinance will not only increase the
outreach but will also help the generation of more employment and income for the poor. It is
expected that in the following years there will be considerable deepening of microfinance in
this direction along with simultaneous drives to reach and serve the poorest of the poor.

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 BUSINESS MODEL OF GRAMEEN BANK

About GRAMEEN BANK

The Grameen Bank is a Microfinance Organization and community development bank

started in 1976 by the Nobel Laureate, Professor Muhammad Yunus in Bangladesh that
makes small loans (known as microcredit) to the weaker sections, without requiring collateral
or any deposit. The word "Grameen", derived from the word "gram" or "village", means "of
the village. In October 1983, the Grameen Bank Project was transformed into an independent
bank by government legislation. Grameen today has some 2,468 branches in Bangladesh,
with a staff of 24,703 people serving 7.34 million borrowers from 80,257 villages. Grameen‘s
methods are applied in 58 countries — including the United States. Grameen Bank borrowers
own 94% of the Bank. The remaining 6% are owned by the government.

In October 1983 Yunus formed the Grameen (―village‖) Bank, based on principles of trust
and solidarity. There is no legal instrument (no written contract) between Grameen Bank and
its borrowers, the system works based on trust. In a country in which few women may take
out loans from large commercial banks, Grameen has focused on women borrowers as 97%
of its members are women. [Because women (far more than men) could be counted on to
invest the loans in business and repay them on schedule, they became the overwhelming
participants in Grameen Bank, where they receive 97 percent of all credit. Grameen bank
follows the one principle that ―the more you have, the more you can get. In other words, if
you have little or nothing, you get nothing. According to a World Bank study of Grameen, 5
percent of Grameen borrowers get out of poverty every year., according to Grameen‘s
figures, nearly two-thirds [64 percent] of borrowers who have been with Grameen for five
years are now out of poverty. And Grameen‘s indicators of poverty are much more stringent
than those of the World Bank, which defines poverty as earning less than a dollar per day.
Grameen‘s definition of poverty alleviate is not only based on financially sound of the
family, but they notice the 10 indicators and all must be met before they say that family is no
longer poor.. Indicators include such things as housing quality, adequate nutrition, and access
to safe water, school attendance by children, certain minimal savings, etc.

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Working model of Grameen bank:
The manager first makes a round to the appointed area to introduce Grameen policies and
programs. When one approaches with genuine interests Bank manager asks her to gather 4
more members to form a group. Every group has 5 members, one as its head. Only two
members can obtain loan at first. After 6 weeks of successful repayment another two can
apply for loan. The leader can only receive loan at last. 8 groups make a Center. And a center
elects its leader for one year, after one term the leader resigns and never be elected again.

Each borrower must belong to a five-member group. These groups do not provide any
guarantee for a loan to one of their members; repayment responsibility solely rests on the
individual borrower. However if one member of a group defaults, that group will never
receive a loan from Grameen. So it‘s a kind of social pressure exerted by the group members.
Grameen enjoys very high payback rates—over 98 percent.

Grameen bank is not only a Micro financing institution but it is Micro financing plus, which
means they not only provide credit to the borrowers this type of MFI believes that the poor
need more than just money to transform their lives. Typical services to supplement the credit
include discounted health care services, preventative health care education, literacy courses,
vocational training courses, technology courses, youth programs for children of borrowers,
life/disability insurance, and savings programs.

Grameen Bank is owned by the borrowers themselves — it is owned by the poor women who
rely on the microcredit loans for income generation. It is therefore tied to local money; each
branch has to be self-sustaining. Local branches get no money from outside — there is no
borrowing from the head office. The profit all goes back to the borrowers.
Grameen bank has 21,000 students with student loans, studying in medical schools and
elsewhere. They have also provided some 30,000 scholarships to the children of our
borrowers each year. They even give loans to beggars — poor people who go door-to-door,
who we call ―struggling members— so they can stop begging and generate income through
selling such things as food, toys, or household items. They currently have 100,000
―struggling members‖ in the program.

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Loan Insurance

How loan insurance would be beneficiary for the borrowers? Borrowers always worry what
will happen to their debt if they die. Will the family members pay off their debt? They
believe that if their debt is not repaid after their death.

The insurance program is very simple. Once a year, on the last day of the year, the borrower
is required to put in a small amount of money in a loan insurance savings account. It is
calculated on the basis of the outstanding loan and interest of the borrower on that day. Let’s
say, if a borrower dies any time during the next year, her entire outstanding amount is paid up
by the insurance fund which is created by the interest income of the loan insurance savings
account. In addition, her family receives back the amount she saved in the loan insurance
savings account. Borrowers find it unbelievably generous.

If the outstanding amount remains the same on two successive year-ends, the borrower does
not have to put in any extra money in the loan insurance savings account in the second year.
Only if the balance is more she has to put in money for the extra amount. Even if the
outstanding amount happens to be several times more at the time of her death than what it
was on the preceding year-end, under the rules of this program, the entire amount will still be
paid off from the insurance fund.

THE REPAYMENT MECHANISM:

Following method is followed by Grameen for loan and repayment. - One year loan - Equal
weekly installments - Repayment starts one week after the loan - Interest rate of 20% -
Repayment amounts to 2% per week for fifty weeks - Interest payment amounts to 2 taka per
week for a 1000 taka loan

CRITICISM OF GRAMEEN BANK

As the Grameen model was ‗exported‘ overseas during the 1990‘s, the Bank continued to
grow in Bangladesh. Client numbers grew steadily, but the portfolio grew more quickly as
clients took bigger loans and new types of loans (especially housing). Those of working in
Bangladesh increasingly heard that repayment rates were falling, but that branch managers

21
were massaging their performance figures by issuing new loans to defaulters. These were
immediately used to pay off the outstanding loan and hide the problem of non-repayment.

There were also criticisms of the gender achievements of the Bank: did it merely get women
to take loans that they gave straight to their husbands?

Then, there were criticisms of the idea by Yunus that, of every Grameen Bank loan being
used for microenterprise, and every microenterprise being successful. Independent fieldwork
showed that Grameen Bank clients used their loans for many different purposes – business,
food consumption, health, education and even dowry.

Grameen Bank clients paid the kisti (weekly repayments) on their loans not from a single
microenterprise, but from patching together earnings from casual employment, self-
employment, remittances and a variety of loans from other sources. But, as clients stayed
with Grameen Bank, they were under pressure to take bigger, ordinary loans alongside new
housing loans. As a result, they took on levels of debt they could not service from their
income. To stop them from defaulting, they were issued with larger loans by Grameen branch
managers to repay earlier loans.

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SELF-HELP GROUP (SHG):
“A Self-Help Group (SHG) is a registered or unregistered group of micro entrepreneurs
having homogenous social and economic background voluntarily, coming together to save
small amounts regularly, to mutually agree to contribute to a common fund and to meet their
emergency needs on mutual help basis:” In short, SHG is a small group of rural poor, who
have voluntarily come forward to form a group for improvement of the social and economic
status of the members.

Concept of SHGs:
 It can be formal (registered) or informal.
 The concept underlines the principle of, Credit and Self Help.
 Members of SHG agree to save regularly and contribute to a common fund.
 The members agree to use this common fund and such other funds (like grants and
loans from banks), which they may receive as a group, to give small loans to needy
members as per the decision of the group.
 The group members use wisdom and peer pressure use of credit and timely repayment
thereof. In fact, peer pressure has been recognized as an effective substitute for
collaterals.

Need of SHG’s: The rural poor are incapacitated due to various reasons, such as; most of
them are socially backward, illiterate, with low motivation and poor economic base.
Individually, a poor is not only weak in socio-economic term but also lacks access to the
knowledge and information, which are the most important components of today‘s
development process. However, in a group, they are empowered to overcome many of these
weaknesses. Hence, there are needs for SHGs, which in specific terms are as under:-
 To mobilize the resources of the individual members for their collective economic
development.
 To uplift the living conditions of the poor.
 To create a habit of savings.
 Utilization of local resources.
 To mobilize individual skills for group‘s interest.
 To create awareness about rights.

23
  To assist the members financially at the time of need.
 To identify problems, analyzing and finding solutions in the group.
 To act as a media for socio-economic development of the village.
 To develop linkages with institutions of NGOs.
 To organize training for skill development.
 To help in recovery of loans.
 To gain mutual understanding, develop trust and self-confidence.
 To build up teamwork.
 To develop leadership qualities.

Structure of SHGs: Size of SHG

The ideal size of an SHG is 10 to 20 members. The disadvantage of having high number is
that, members cannot actively participate. Also, legally it is required that an informal group
should not be of more than 20 people.
The group need not be registered.

Condition required for membership for SHG’s

Members should be between the age group of 21-60 years.
From one family, only one person can become a member of an SHG. (More families can join
SHGs this way).
The group normally consists of either only men or only women. Because mixed group it
would hindered or obstruct free and frank discussions, or opening of the personal problem.
Women‘s groups are generally found to perform better. (They are better in savings and they
usually ensure better end use of loans).
Members should be homogenous i.e. should have the same social and financial background.
(Advantage: This makes it easier for the members to interact freely with each other, if
members are both from rich as well as poor class, the poor may hardly get an opportunity to
express themselves).
Members should be rural poor (By poor one should be guided by the living conditions).

24
JOINT-LIABILITY GROUP
“Joint Liability Group (JLG) is a group of individuals coming together to borrow from the
financial institution. They share responsibility and stand as guarantee for each other.”

FEATURES
• 3-5 members per group
• Either all male or female only in exception cases can there be a mixed group.
• Group should be economically homogeneous.
• Members of the group should be well known to each other.
• Group members should have their own business.
• Lending may start from group size of not less than three members.

DISTINGUISH BETWEEN

MICROFINANCE FINANCIAL INCLUSION

Financial Inclusion is a process by which mainstream financial services are made accessible
to all sections of the population. It is a conscious attempt at trying to bring the un-banked
people into banking. Financial Inclusion does not merely mean access to credit for the poor,
but also other financial services such as Insurance. Financial Inclusion allows the state to

25
have an easier access to its citizens. With an inclusive population, for e.g.: the government
could reduce the transaction cost of payments like pensions, or unemployment benefits. It
could prove to be a boon in a situation like a natural disaster, a financially included
population means the government will have much less headaches in ensuring that all the
people get the benefits. It allows for more transparency leading to curtailing corruption and
bureaucratic barriers in reaching out to the poor and weaker sections. An intelligent banking
population could go a long way by effectively securing themselves a safer future. More
importantly Financial Inclusion is imperative for creating an inclusive economy at all fronts.

Benefits of Financial Inclusion

 Financial inclusion provides vast business opportunities to banks and other financial
institutions of the country. There is a huge untapped market in the interiors of India. Thus,
the people in the rural areas act as potential customers for firms in banking, insurance,
telecom and micro-finance industry to name a few. Quoting Management Guru, Mr. C.K.
Prahalad, “The future lies with those companies who see the poor as their customers.”
 It helps in attaining an inclusive growth. Inclusive growth by its very definition implies
an equitable allocation of resources with benefits accruing to every section of society.
 It is important simply because it is a necessary condition for sustaining equitable
growth. There are few, if any, instances of an economy transiting from an agrarian
system to a post-industrial modern society without broad-based financial inclusion. As
people having comfortable access to financial services, we all know from personal
experience that economic opportunity is strongly intertwined with financial access. Such
access is especially powerful for the poor as it provides them opportunities to build
savings, make investments and avail credit. Importantly, access to financial services also
helps the poor insure themselves against income shocks and equips them to meet
emergencies such as illness, death in the family or loss of employment. Needless to add,
financial inclusion protects the poor from the clutches of the usurious money lenders.
 There is another benefit of financial inclusion which we have yet to fully appreciate let
alone exploit. Financial inclusion will make it possible for governments to make
payment such as social security transfers, National Rural Employment Guarantee
Programme (NREGA) wages into the bank accounts of beneficiaries through the ‘Electric
Benefit Transfer’ (EBT) method. This will minimize transaction costs including leakages.

26
 In parts of the country where such EBT has already taken off, the results are impressive
and the experience of both payers and recipients extremely satisfying.
 There are enormous benefits at the aggregate level too. The first and more obvious benefit
is that financial inclusion provides an avenue for bringing the savings of the poor into the
formal financial intermediation system and channels them into investment. Second, the
large number of low cost deposits will offer banks an opportunity to reduce their
dependence on bulk deposits and help them to better manage both liquidity risks and
asset-liability mismatches.

27
 MEASURES FOR PROMOTING FINANCIAL INCLUSION – PRODUCTS
INTRODUCED
i. Kisan Credit Card
ii. No Frills Account
iii. Unique Identification Authority of India (UIDAI)
-UIDAI and NREGA
- UIDAI and PDS

i. Kisan Credit Card

KCC is an activity-specific scheme targeted at the credit needs of a functional group i.e.
the farmers. It is because provision of timely and adequate credit has been one of the
major challenges for banks in India in dispensation of agricultural and rural credit to the
farmers. This scheme is the result of innovation by GOI i.e. by merging the benefits
arising from agricultural credit cards and cash credit facilities and doing away with their
dis-advantages.
The KCC scheme was started by the Government of India (GOI) in consultation with the
RBI (Reserve Bank of India) and NABARD (National Bank for Agricultural and Rural
Development) in 1998-99.

The features of the scheme are:

 Type of revolving cash credit facility with unlimited withdrawals and repayments.
 Meet the production credit need, cultivation expenses, and contingency expenses of the
farmers.
 Limits based on the basis of operational land holding, cropping pattern and scale of
finance. This limit is inclusive of 20% of production credit.
 Each withdrawal to be paid within 12 months.
 Card valid for 3 years subject to annual renewals.
 Credit limits can be enhanced depending on performance and needs.
 Rescheduling is also possible depending upon the situation. If for example the crops fail
due to a natural calamity and the farmer is not able to repay his loan, then he could get an
extension of upto four years.
 Cash withdrawals through slips accompanied by card and passbook.
 A credit cum passbook would be issued.

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  All branches engaged in agricultural lending could issue Kisan Credit Cards.

The Kisan Credit Card (KCC) scheme has been implemented through cooperative banks,
RRBs and public sector commercial banks to provide an easy access to adequate, timely and
cost effective credit to farmers. In addition to meeting the term credit and working capital
requirements of agriculture, KCC also covers consumption credit needs of farmers. The
endeavour of NABARD has been to bring all farmers including inter alia oral lessees, tenant
farmers, and share croppers into the ambit of KCC.

ii. No-Frills' Account

Keeping in view the need for the banking system to take urgent steps to bring about
financial inclusion in the country, the Reserve Bank of India, in the Mid- Term Review of
the Annual Policy for the year 2005-06, exhorted banks to make available a basic banking
‘no frills’ account either with nil or very low balances as well as charges that would make
such accounts accessible to vast sections of the population. Normally, the savings account
requires people to maintain a minimum balance and most banks even offer various
facilities with the same. But no frills’ account is without any other facilities leading to
lower costs both for the bank and the individual. Another feature is that the nature and
number of transactions would be restricted and be made known to customers in advance
in a transparent manner. Also, banks are required to make available all printed material
used by retail customers in the regional language concerned. All banks are urged to give
wide publicity to the facility of such 'no frills' account, so as to ensure greater financial
inclusion.

Several banks, both in the public and private sectors, have responded positively to this
measure and devised no frills accounts for the lower income groups. Although such basic
bank accounts are generally considered unprofitable, provision of such deposit accounts
has been accepted the world over as a stepping stone to financial inclusion. In a somewhat
different way, this requires bank branches to be aware of the surrounding areas in which
they work and promotes a more outward-looking, customer-centric model to work
alongside their usual profit-driven model. A basic 'no frill' account is just the beginning of
a relationship and can pave the way to the customer availing of a variety of savings

29
 products and loan products for consumption, housing etc. The account can be used for
sanctioning small overdraft facilities and making small value remittances at low cost. The
same banking account can also be used by State Governments to provide social security
services like health and calamity insurance under various schemes for the disadvantaged.
Having such social security cover makes the financing of such persons less risky from the
bank’s point of view and they can be financed for various purposes.

Further, holders of the no-frills accounts who would be beneficiaries of the Employment
Guarantee Scheme of the Government of India, can also be customers of banks over a
longer time horizon.
iii. Unique Identification Authority of India (UIDAI)
The inability to prove identity is one of the biggest barriers preventing the poor from
accessing benefits and subsidies. Thus, the benefits of various schemes by the
government are not enjoyed by the target groups. It was with this limitation in mind that
UIDAI was constituted. The singular problem that the UIDAI will seek to solve is that of
“identity”. Once a person has a UID number, their basic identity linked to their biometrics
is established and can be used to uniquely identify the individual. It is expected to become
the fundamental link for the widespread financial inclusion in the country. The Authority
is committed to inclusion and ensuring that woman, children, differently-abled persons,
the poor and marginalized are able to secure a unique id.

The (UIDAI) was constituted as an attached office under the Planning Commission, to
develop and implement the necessary legal, technical and institutional infrastructure to
issue unique identity to residents of India. On June 25th 2009, the Cabinet approved the
creation of the position of the Chairperson of the UIDAI, and appointed Mr. Nandan
Nilekani as the first Chairperson with the rank of the Cabinet Minister. On August 3rd
2009, the Prime Minister constituted a Council under his chairmanship to advise the
UIDAI and ensure coordination between the Ministries, Departments, stakeholders and
partners. The Council will advise the UIDAI on the program, methodology and
implementation to ensure this coordination. The Council will also identify specific
milestones for the early completion of the project.

Cabinet Committee on UID Authority – The Government of India issued orders

constituting the Cabinet Committee on UID Authority on October 22nd, 2009. It is

30
 headed by the Honourable Prime Minister and consists of the Minister of Finance,
Minister of Agriculture and Minister of Consumer Affairs, Food and Public Distribution,
Minister of Home Affairs, Minister of External Affairs, Minister of Law and Justice,
Minister of Communications and Information Technology, Minister of Labour and
Employment, Minister of Human Resource Development, Minister of Rural Development
and Panchayati Raj, Minister of Housing and Urban Poverty Alleviation and Minister of
Tourism. The Deputy Chairman Planning Commission and Chairman UIDAI are special
invitees. The functions of the Committee, which is headed by the Honourable Prime
Minister would be as under:

All issues relating to the Unique identification Authority of India including its
organization, plans, policies, programmes, schemes, funding and methodology to be
adopted for achieving the objectives of that Authority.

At The Economic Times Financial Inclusion Summit 2009, Mr. Nandan Nilekani,
Chairman UIDAI said, “We believe financial inclusion is at the tipping point in the
country. Not only there is a huge stress and will in the government to reach out to every
individual but also public spending is beneficiary-oriented like the NREGA or old age
pension schemes among others. Crores are spent on financial inclusion every year and
each of these schemes involves delivery of some money to an individual. UID is the
building block by which one can identify the beneficiary. When this is associated with
some kind of account like a no-frills account, it can act as a delivery pipe in the system. In
addition, it authenticates that only the deserving person gets the money.”

UIDAI is to be created as a statutory body under a separate legislation to fulfill its

objectives. Some of the key features of UIDAI model are as follows:
 UID number will only provide identity not the rights, benefits or entitlements.
 UID will only be proof of identity and does not confer citizenship.
 UID is pro-poor in its approach; it will help bring in large number of the poor and
underprivileged into the UID system by partnering with the NREGA, RSBY, and PDS.
 UID will enroll residents after proper verification, demographic and biometric
information, to avoid problems of fraud and duplicate or ghost identity.
 UIDAI will be the regulatory authority managing a Central ID Data Repository (CIDR),
which will issue UID numbers, update resident information, and authenticate the identity

31
 of residents as required. The Authority will also partner with agencies such as central and
state departments and private sector agencies who will be 'Registrars' for the UIDAI.
 UIDAI will emphasize a flexible model for Registrars in their processes but Authority
will b providing standards to enable Registrars maintain uniformity in collecting certain
demographic and biometric information and in basic KYR (Know Your Resident).
 UIDAI approach will be demand driven and enrolment will not be mandated.
 UIDAI role is limited issuing the number (UID) that can be printed on the document or a
card.
 UID number will not contain intelligence; it will be a random number.
 UIDAI will only collect the basic demographic and biometric information of the resident
in order to issue UID number.
 UIDAI will set up a process to ensure that there are no duplicates. Applicant's data will
be passed to the CIDR for de-duplication.
 UIDAI will offer strong from of online authentication, where agencies can compare
demographic and biometric information with the record stored in the central database.
 UIDAI will not share the resident data to strike a balance between 'privacy and purpose'.

UIDAI and NREGA

Launched in 2006, the National Rural Employment Guarantee Scheme (NREGS) or the
Mahatma Gandhi National Rural Employment Guarantee Scheme (MGNREGS) is an attempt
to transform the rural economy through legally guaranteed employment for up to 100 days
per household. The scheme completed four years of implementation during which it has been
extended to all districts covering more than 4.5 crore households. In the Union Budget 2010-
11, the allocation for NREGA has been stepped up to Rs.40,100 crore in 2010-11. The
NREGS has reached several milestones towards its goal, but suffers from the same challenges
like most other public projects — corruption and diversion of funds.

UID program may be merged with the NREGS to exploit the benefits to the fullest. The UID
number may be incorporated during beneficiary interactions of the scheme.

32
UID will ensure that misuse by claiming benefits under multiple job cards is avoided. The
UID de-duplication process which will assure a positive identification of every resident in the
country, can overcome the challenge of uniquely identifying every worker.

UIDAI and PDS

The UID program will create a database of all unique residents in the country. The PDS
system currently serves the largest number of residents in India and efforts are underway to
improve the efficiency of the system. There are several benefits that will accrue to the PDS
system and the UID program if an alignment and synergy as described above can be
established.

Benefits to UIDAI
There are several benefits to the UID program if this is adopted by the PDS system. The key
ones are explained below:
 Improved Coverage - The ration card is today the most prevalent form of identity in the
rural areas. If the UID enrollment is integrated into the process of the creation of a
beneficiary database for PDS, the coverage of UID improves significantly.
 Data Updating – Ration cards are a persistent source of citizen transactions with a
monthly frequency. If there is a change in the family structure, or the family moves, the
ration card is sure to be updated. At this time the data can also be updated to the UID
database.

Benefits to PDS System

 Better Identification – Integration with the UID program will lead to better identification
of individuals and families leading to better targeting and increased transparency and
therefore better functioning of the system and increased public approval.
 Offtake Authentication – The UID database will maintain details of the beneficiary that
can be updated from multiple sources. The PDS system can use this database for
authentication of beneficiaries during the offtake recording process. A mechanism of
verifying the ID of the person at the time of delivery of grains will help in improving the
targeting of the grains.
 Technology Support – The UID program is putting together technology specifications
and infrastructure to handle enrollment, storage and identity confirmation of all Indian

33
 residents. The PDS system can leverage this and rapidly move ahead with the enrollment
process.
 Support for PDS reform – The UID will become an important identifier in banking
services and day-to-day needs of the resident. This can support the PDS reform by as an
example providing the banking account number for a family to affect direct cash transfer.

Thus, if the synergy between UID program and PDS system is realized then both stand to
gain. Together, it would lead to a win-win for residents and the Government.

MEASURES FOR PROMOTING FINANCIAL INCLUSION - USE OF

INTERMEDIARIES

1. Business Facilitator and Business Correspondent Model

2. SHG Bank-linkage programme
3. Lead Bank Scheme (LBS)

i. Business Facilitator and Business Correspondent Model

With the objective of ensuring greater financial inclusion and increasing outreach of the
banking sector, Reserve Bank, in January 2006 permitted banks to use intermediaries as
Business Facilitators (BF) or Business Correspondents (BC) (as per the recommendations of
Internal Group to Examine Issues Relating to Rural Credit and Microfinance headed by Shri
H. R. Khan) for providing financial and banking services. The BCs were allowed to conduct
banking business as agents of the banks at places other than the bank premises. The
categories of entities that could act as BCs were also specified. There had been demands from
various sectors that the eligible entities to act as BCs be enlarged, with a view to facilitating
increased outreach for the banking system.

In the Annual Policy Statement of the Reserve Bank for the year 2009-10, it was proposed
“to constitute a Working Group to examine the experience to date of the business
correspondent (BC) model and suggest measures, to enlarge the category of persons that can
act as BCs, keeping in view the regulatory and supervisory framework and consumer
protection issues”. Accordingly, a Working Group was constituted under the chairmanship of

34
Shri P. Vijaya Bhaskar, Chief General Manager in-Charge, Department of Banking
Operations and Development, Reserve Bank of India.

Role of Business Facilitators

The BFs were allowed to undertake facilitation services like identification of borrowers and
fitment of activities; collection and preliminary processing of loan applications including
verification of primary information/data; creating awareness about savings and other products
and education and advice on managing money and debt counseling; processing and
submission of applications to banks; promoting and nurturing Self Help Groups/ Joint
Liability Groups; post-sanction monitoring; monitoring and handholding of Self Help
Groups/ Joint Liability Groups/ Credit Groups/ others; and follow-up for recovery.

Intermediaries Permitted as Business Facilitators

Under the BF model, banks were permitted to use intermediaries such as, NGOs/ Farmers'
Clubs, cooperatives, community based organisations, IT enabled rural outlets of corporate
entities, Post Offices, insurance agents, well functioning Panchayats, Village Knowledge
Centres, Agri Clinics/ Agri Business Centers, Krishi Vigyan Kendras and KVIC/ KVIB units,
depending on the comfort level of the bank, for providing facilitation services. As these
services were not intended to involve the conduct of banking business by BFs, no approval
was required by banks from Reserve Bank for using the above intermediaries for facilitation
of the services.

Role of Business Correspondents

As regards the BCs, in addition to activities listed under the BF model, the scope of activities
that could be undertaken included (i) disbursal of small value credit, (ii) recovery of principal
/ collection of interest (iii) collection of small value deposits (iv) sale of micro insurance/
mutual fund products/ pension products/ other third party products and (v) receipt and
delivery of small value remittances/ other payment instruments. The activities to be
undertaken by the BCs were to be within the normal course of the bank's banking business,
but conducted through the permitted entities at places other than the bank premises.

Intermediaries Permitted as Business Correspondents

35
The following entities can act as BCs of banks:

The categories of entities that could act as BCs as specified by Shri H. R. Khan Committee:

i. NGOs/ MFIs set up under Societies/ Trust Acts;

ii. Societies registered under Mutually Aided Cooperative Societies Acts or the
Cooperative Societies Acts of States;

iii. Section 25 companies that are stand alone entities or in which NBFCs, banks,
telecom companies and other corporate entities or their holding companies do
not have equity holdings in excess of 10%;

iv. Post Offices; and

v. Retired bank employees, ex-servicemen and retired government employees.

There had been demands from various sectors that the eligible entities to act as BCs be
enlarged, with a view to facilitating increased outreach for the banking system.

In the Annual Policy Statement of the Reserve Bank for the year 2009-10, it was proposed
“to constitute a Working Group to examine the experience to date of the business
correspondent (BC) model and suggest measures, to enlarge the category of persons that can
act as BCs, keeping in view the regulatory and supervisory framework and consumer
protection issues”. Accordingly, a Working Group was constituted under the chairmanship of
Shri P. Vijaya Bhaskar, Chief General Manager in-Charge, Department of Banking
Operations and Development, Reserve Bank of India.

As per the recommendations of this group and its further acceptance by RBI, banks were
permitted to appoint the following entities as BCs, in addition to the above mentioned
entities:

i. Individual kirana/medical/fair price shop owners

ii. Individual Public Call Office (PCO) operators
iii. Agents of Small Savings schemes of Government of India/Insurance
Companies
iv. Individuals who own Petrol Pumps
v. Retired teachers and

36
 vi. Authorized functionaries of well run Self Help Groups (SHGs) linked to
banks.

While appointing individuals as BCs, banks have to ensure that these individuals are
permanent residents of the area in which they propose to operate as BCs and also institute
additional safeguards as appropriate to minimize agency risk.
Keeping in view the operational and other risks implied, the committee advised banks to
ensure that they carry out suitable due diligence in respect of the entities proposed to be
appointed as BCs and also institute additional safeguards as may be considered appropriate to
minimize the agency risks. Information and Communication Technology (ICT) solutions that
ensure proper authentication and other security measures may be adopted to minimize the
risk. Further, banks have to ensure that while appointing the above entities as BCs, the
fundamental principle that the individuals are residents of the area in which they propose to
operate as BCs, stands fulfilled.

With a view to ensuring adequate supervision over the operations and activities of the BCs,
the Reserve Bank advised banks that every BC should be attached to and be under the
oversight of a specific bank branch to be designated as the base branch. The distance between
the place of business of a BC and the base branch, ordinarily, should not exceed 15 kms.
(further extended to 30 kms. from April 2009) in rural, semi-urban and urban areas. In
metropolitan centres, the distance could be up to 5 kms. However, in case a need is felt to
relax the distance criterion, the matter can be referred to the District Consultative Committee
(DCC) of the district concerned for approval.
SHG Bank-linkage programme

First official interest in informal group lending in India took shape during 1986-87 when
NABARD supported and funded an action research project on 'Savings and Credit
Management of Self Help Groups' of Mysore Resettlement and Development Agency
(MYRADA). In 1988-89 NABARD undertook a survey of 43 non-governmental
organizations (NGOs) spread over 11 states in India to study the functioning of SHGs and
possibilities of collaboration between the banks and SHGs in the mobilization of rural
savings and improving the delivery of credit to the poor.

37
Micro financing by 'non-formal' financial organizations had already started. Self Employed
Women's Association (SEWA) owned by women of petty trade groups was established on
co-operative principle in 1974 in Gujarat. Working Women's Form (WWF) started promoting
working women's co-operative societies in Tamil Nadu since 1980. Shreyas in Kerala
actively got involved in micro finance operations since 1988 with the objective of promoting
people's co-operatives, habits of thrift and self managing people's bank.

Encouraged by the survey results, NABARD impressed upon RBI to come out with a circular
on July 24, 1991 advising the Commercial Banks (later on Regional Rural Banks (RRBs) and
Co-operatives also) to extend credit to the SHGs under the pilot project of NABARD -500
SHGs to be covered during 1991-92.

To formalize the mechanism further, RBI constituted a working group in November 1994 to
review the functioning of NGOs and SHGs and make suitable recommendations for
expanding their activities and deepening their role in the rural sector. Accepting the
recommendation, in April 1996, RBI advised the banks that lending to the SHGs should be
considered as an additional segment under priority sector advances and integrated with the
mainstream credit operation.

SHGs became a regular component of the Indian financial system since 1996. These SHGs
are small, informal and homogeneous groups of 10-25 members each. The groups have been
recommended to be informal to keep them away from bureaucracy and corruption,
unnecessary administrative expenditure and legal requirements. The upper size of an SHG
however has been made mandatory at 20 because any group larger than this would need to be
registered under registration Act in the Indian legal system. Secondly, groups are supposed to
foster true (direct) democratic culture where all the members participate actively in the debate
and decision-making process, which is easier only in small groups. Groups are expected to be
homogeneous so that the members do not have conflicting interest and all the members can
participate freely without any fear.

The SHGs after being formed (generally by an external agency) start collecting a fixed
amount (rarely variable amount) of thrift from each member regularly (generally monthly).
For about six months, SHG only collects thrift; no loan is given to any member. Because,
first, the working fund generated out of small thrift is negligible in the initial period; and
38
secondly, it tests the patience and tries to instill mutual trust among the members. During this
period the group opens a savings account with a bank, which would like to extend credit.
After accumulating a reasonable amount of resource, the group starts lending to its members
for petty consumption/small business needs. Claimants may be large, but resource is small.
This forces them to take appropriate decision to identify the most needy person with
reference to endowment level and the purpose of the loan. The repayment of the loan along
with interest and regular thrift enlarge the working fund and hence increase the scope of
lending. Notwithstanding this, the working fund generated by the group may not be adequate
to meet all types of credit needs of all the members. The group then approaches the bank
where it has opened the savings account. If the bank is satisfied with the group about
genuineness of demand for credit, credit handling capacity of the group members, repayment
behaviour within the group, accounting system and maintenance of the records, etc., then it
extends a term loan of small amount to the group. The group in turn continues to take
decision as in the past, the only difference being it has now a higher amount of resource.
The conceptual thinking behind the SHG philosophy and the Bank Linkage could be
summarised as under:

 Self Help supplemented with mutual help can be a powerful vehicle for the
poor’s’ effort to socio-economic upward transition
 Participative financial services’ management is more efficient and responsive.
 Poor can save and are bankable
 Poor not only need credit support but also savings and other services
 Small affinity groups of the poor, with initial outside support, can effectively
manage and supervise micro credit among their members
 Collective wisdom of the group and peer pressure are valuable collateral
substitutes
 SHGs could be a pre- microenterprise stage for a majority of rural poor
 SHG’s as client, facilitate wider outreach, lower transaction cost and much
lower risk costs and
 Empowerment and confidence building of poor, especially of poor women, is
a major outcome
 The mismatch between the expectations of the poor and capabilities of the
formal banking system needs to be minimised

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Models of SHG Bank Linkage
On the basis of the modes of formation, nurturing and credit linkage SHGs are basically
categorized into three models, mentioned as follows:

Model I: SHGs formed and financed by banks

In this model, financing banks themselves form and nurture the SHGs. They organize the
poor to form an SHG, train the members on record keeping, thrift, managing credit, etc. and
also supervise the working of the group. Up to March 2004, 20 per cent of SHGs financed
were from this category.

Model II SHGs formed by formal agencies other than banks, but directly financed by
banks
Under this model NGOs, Farmers' Clubs, Individual Volunteer (IRVs) and formal agencies
other than banks in the field of micro finance, act as facilitators. They facilitate organizing,
forming and nurturing of groups, and train them in thrift and credit management. Banks give
loans directly to these SHGs. This model continues to have the major share, with 72 per cent
of the total SHGs financed up to March 2004.

Model III: SHGs financed by banks through NGOs and other agencies as financial
intermediaries

40
 This is the model wherein the NGOs, SHG Federations, etc. take on the ad-on role of
financial intermediation. In areas where the formal banking system faces constraints, the
NGOs are encouraged to approach a suitable bank for bulk loan assistance. This, in turn, is
used by the NGO for on-lending to the SHGs. In areas where a very large number of SHGs
have been formed, intermediate agencies like federations of SHGs are coming up as link
between bank branch and member SHGs. Banks finance these federations who in turn finance
their member SHGs.

ii. Lead Bank Scheme (LBS)

Following shortfalls in agricultural output and slowing down of industrial production in
1965-67, the Reserve Bank’s credit policy for the slack season 1967 was liberalized on a
selective basis with a view, among other purposes, to enlarging the flow of credit to the
select sectors such as agriculture and small-scale industries, as also exports. The measures
for social control over banks were initiated by the Government of India in 1967-68 for
securing a better adaptation of the banking system to the needs of economic planning and
also for playing a more active and positive role in aiding sectors like agriculture and small
scale industries. The scheme of social control envisaged a purposive distribution of
available lendable resources consistent with the basic economic and social objectives as
well as a more effective mobilization of savings, besides eradication of certain
deficiencies observed in the functioning of the banking system. The origin of priority
sector prescriptions for banks in India can also be traced to the Reserve Bank’s credit
policy for the slack season of the year 1967-68, wherein it was emphasized that
commercial banks should increase their involvement in the financing of key sectors, such
as, agriculture, exports and small-scale industries, as a matter of urgency.

In pursuance of a decision of the National Credit Council, at its meeting held on July 24,
1968, a Study Group on the Organizational Framework for the Implementation of Social

41
Objectives was constituted towards the end of October 1968, with Prof. D. R. Gadgil as
Chairman. The Group was entrusted the task of identifying the major territorial and
functional credit gaps and making recommendations to fill them up so that adequate
institutional credit, at reasonable terms, could be made available to neglected sectors and
areas and weaker sections of the community. The Group noted that the Indian banking
system had made significant progress in the last 20 years by expanding its territorial and
functional coverage and yet the unevenness of spread of institutional credit facilities to
different areas of the country, the urban-oriented organization of commercial banks,
weaknesses of the co-operative system and the non-availability of institutional credit to
the weaker sections of the community, still persisted. The Group observed that the main
social objective of banking and credit was to more evenly spread institutional credit over
unbanked and under-banked areas and to ensure that neglected sectors and the small
borrowers, who had to depend on non-institutional credit, also got adequate credit at
reasonable terms from banks.
The concept of ‘Lead Bank Scheme’ was first mooted by the Gadgil Study Group, which
submitted its report in October 1969. The Group was of the view that banking was not
developed in India judging by the criterion of population served per bank office. Further,
there was an uneven spread of bank offices and banking business as between States and
population groups. Thus, commercial banks did not have adequate presence in rural areas
and also lacked the required rural orientation.

The Group, therefore, recommended the adoption of an ‘Area Approach’ to evolve plans
and programmes for the development of an appropriate banking and credit structure in the
rural areas. The Group also observed that the central idea was to assign, depending upon
their area of operations and locations, to commercial banks, particular districts in an area
where they should act as pace-setters providing integrated banking facilities and thus all
the districts in the country needed to be covered. The district was identified as the unit
under the Area Approach because the co-operative structure was organized in relation to a
district and most statistical and other data were available at the district level.

The Group, therefore, recommended the adoption of an ‘Area Approach’ to evolve plans
and programmes for the development of an appropriate banking and credit structure in the
rural areas. The Group also observed that the central idea was to assign, depending upon
their area of operations and locations, to commercial banks, particular districts in an area
42
 where they should act as pace-setters providing integrated banking facilities and thus all
the districts in the country needed to be covered. The district was identified as the unit
under the Area Approach because the co-operative structure was organized in relation to a
district and most statistical and other data were available at the district level.

Development in the districts was sought to be achieved by making banks the key
instruments for local deployment of credit, entrusting them with the responsibility of
locating growth centres, mobilizing deposits, and identifying credit gaps and evolving a
coordinated programme for credit deployment in each district, in concert with other banks
and credit agencies. In order to enable the banks to assume ‘leadership’ in an effective
and systematic manner, the various districts, except the metropolitan cities of Mumbai,
Delhi, Kolkata and Chennai and certain Union Territories in the country were allotted
among the public/select private sector banks and each such bank was designated as the
Lead Bank for the district concerned. The Lead Bank was also expected to work for
expansion of branch banking facilities and assume a major role in the development of
banking and credit in the allocated districts.

The specific functions of the Lead Bank in a district are as follows:

i. Surveying the resources and potential for banking development in its district;
ii. Surveying the number of industrial and commercial units and other establishments,
and farms, which do not have banking accounts or depend mainly on money-lenders,
and increasing their own resources through the creation of surpluses from additional
production financed from the banking system;
iii. Examining the facilities for marketing of agricultural produce and industrial
production, storage and warehousing space, and linking of credit with marketing in
the district;
iv. Surveying the facilities for stocking of fertilizers and other agricultural inputs
and repairing and servicing of equipments;
v. Recruiting and training staff, for offering advice to small borrowers and farmers, in
the priority sectors, which may be covered by the proposed credit insurance schemes
and for follow-up and inspection of end-use of loans;
vi. Assisting other primary lending agencies; and
vii. Maintaining contact and liaison with Government and quasi-Government agencies.

43
MEASURES FOR PROMOTING FINANCIAL INCLUSION – OTHER MEASURES

i. Revamping of Regional Rural Banks (RRBs)

ii. Relaxation of KYC Norms

iii. Financial Inclusion Fund and Financial Inclusion Technology Fund

iv. Special Task Force for North-Eastern Region

v. Bank Licensing

vi. Setting up of Rural Development and Self Employment Training Institute (RSETIs)

vii. Role of ICT in Enabling Financial Inclusion

viii. Mobile Banking

ix. Financial Education/Financial Literacy

x. 100% Financial Inclusion Drive

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‘Micro-Finance Development and Equity Fund’, was established at NABARD with a corpus
of Rs.200 crores. Capital support is provided in the form of soft loan at 3.5% interest rate to
Micro Finance Organisations and MFI- NBFCs

Reserve Bank of India Initiatives

The Reserve Bank of India (RBI) has initiated a number of measures in recent years to
improve the credit delivery mechanism and bring about maximum financial inclusion of the
poorer sections of the society.

The ‘Know Your Customer’ (KYC) procedure for opening accounts has been simplified so
that people from low income groups do not face problems in opening new accounts.
Banks have been asked to consider introducing a General Purpose Credit Card (GCC) facility
in the nature of revolving credit up to Rs.25000 without insisting on security or purpose at
deregulated interest rates at their rural and semi-urban branches. Fifty percent of the GCC
loans are treated as part of the banks’ priority sector lending. All State Level Bankers’
Committee (SLBC) convener banks have been advised to initiate action for identifying at
least one district in their State / Union Territory for cent per cent financial inclusion.

So far, 104 districts have been identified and cent percent financial inclusion has been
achieved in the Union Territory of Puducherry and in 24 districts in Andhra Pradesh, Gujarat,
Haryana, Himachal Pradesh, Karnataka, Kerala and Punjab. All districts of Himachal Pradesh
have achieved financial inclusion (RBI Annual Report, 2006- 07).

A special drive has been initiated for cent per cent financial inclusion in the districts with
maximum concentration of Scheduled Castes/ Scheduled Tribes and minorities. RBI has so
far identified eight such districts (4 in Maharashtra, 3 in Tamil Nadu and 1 in Haryana) for
cent per cent financial inclusion. Convenor banks of the SLBC/ UTLBCs were advised in
May 2007 to set up, on a pilot basis, a financial literacy-cum-counseling centre in any one
district in the State / Union Territory falling under their jurisdiction. Banks have been advised
to enhance their outreach by utilising business facilitators and business correspondents’
models. Banks are also entering into agreements with Indian Postal authority for using the
wide network of post offices as business correspondents.

45
Banks are encouraged to make use of Information and Communication Technology (ICT)
using bio-metric smart cards and mobile hand electronic devices for receipts and
disbursement of cash by their agents such as business facilitators /correspondents. Banks are
required to make available all printed material used by retail customers in the concerned
regional language. A multilingual website in 13 languages on all matters concerning banking
was launched by the Reserve Bank on June 18, 2007. ‘Project Financial Literacy’ has been
initiated by RBI with the objective of disseminating information regarding the central bank
and general banking concepts to various target groups including school and college going
children, women, rural and urban poor, defense personnel and senior citizens.

Three recommendations of the Working Group constituted by the Reserve Bank, viz.,
(i) Dispensing with no dues certificate (NDC) for small loans upto Rs.50000,
(ii) Considering opening of counseling centres and
(iii) Extending credit to the landless labourers, share-croppers and oral lessees based on the
certificates provided by local administration / Panchayati Raj Institutions, were accepted and
banks have been advised accordingly.

NABARD Initiatives
SHG-Bank Linkage programme
The SHG-Bank Linkage programme launched by NABARD in 1992 is an important strategy
in promoting financial inclusion and inclusive growth. The programme started as a pilot
project to finance 500 SHGs across the country has resulted in 34.77 lakh SHGs being credit
linked by March 2008. Further, the programme has enabled an estimated
409.5 lakh poor households to gain access to micro finance from the formal banking system
as on 31 March 2007. Studies conducted by various experts show that the programme has
indeed helped in the social and economic empowerment of rural folk, especially women,
causing significant up-scaling of social capital while at the same time delivering crucial
financial services. Thus, it has proved to be a successful model wherein the outreach has
expanded substantially leading to many advantages like micro savings, timely repayment of
loans, reduction in transaction costs to SHG members and banks, etc.

46
Micro Enterprise Development
There is a challenge to induce mature groups to graduate into enterprises for enhancing their
economic status. NABARD has launched the Micro Enterprise Development Programme
(MEDP) during 2005-06 for development of sustainable livelihoods of the
SHGs. Cumulatively 2,759 micro-enterprises were established under the project involving
bank credit of Rs. 237.72 lakh as on 31 March 2008.
Capacity building is vital for the groups to be sustainable. NABARD has been a facilitator in
arranging and conducting 3,494 awareness creation and capacity building programmes for
2,01,854 SHG members in association with NGOs, 70 exposure visits to banks / institutions
undertaking micro finance initiatives, 137 sensitisation programmes for government officials,
etc by extending support of Rs. 11.07 crore during 2006-07.

Farmers’ Club Programme started by NABARD, to organise farmers to enable them have
access to credit, technology and extension services. As on March 2008, there are 28,226 clubs
covering 61,789 villages in 555 districts

Credit Card Arrangements

The Swarozgar Credit Card (SCC) scheme was introduced by NABARD in 2003 for
facilitating hassle free credit for meeting investment and working capital requirements of
small borrowers and rural microentrepreneurs like small artisans, handloom weavers,
fishermen, self employed persons, rickshaw owners, SHGs, service sector, etc. As on 31
March 2008, the banking system had issued 8.34 lakh cards involving credit limits of
Rs.3,739 crore.

Rythu Mitra Groups

An approach similar to TFGs or JLGs was also adopted in Andhra Pradesh, with the initiative
of the State Government. The programme called Rythu Mitra Groups, which envisages
bringing about holistic development in the lives of small/marginal/land less farmers through
collective action. RMGs are expected to serve as a conduit for technology transfer, facilitate
access to market information and markets, assist in carrying out activities like soil testing,
training, health camps, assess input requirements, etc., for its members.

47
NABARD provides resource and grant assistance for conducting training and capacity
building initiatives to different stakeholders. During 2007, 4437 RMGs were financed by 18
commercial banks, 9 RRBs and 9 DCCBs involving ground level credit flow of Rs. 28.11
crore. About 62,000 farmers have been assisted under the project.

Initiatives of Scheduled Commercial Banks and Private Sector Banks

Scheduled Commercial Banks had initiated several innovative measures for improving
outreach and promoting financial inclusion through dissemination of information and
financial counseling. Increased manpower for marketing of loan products, technical
assistance, and recovery of loans was one of the major strategies of SCBs during the last few
years. Focus on issuing more GCCs, formation of JLGs, Farmers Clubs, Rythu Mirta groups
and increase in credit outreach through these initiatives were given priority for effective
financial inclusion, especially for the rural poor.

ICICI Bank has introduced a pilot project involving e-enabled banking correspondent (BC)
model whereby the transaction infrastructure combines a smart-chip enabled e-passbook card
which can display and store the customer KYC information along with the account details
and the transaction in each account. Each customer is identified by
a 16 digit unique reference number (URN) displayed in the e-passbook.

The e-passbook can hold upto 16 different accounts and provide a single point access to all
the records for the customer. It also has a feature of biometric authentication by way of
fingerprinting thus mitigating the risks relating to PIN (Personal Identification Number) in a
rural scenario. It also ensures that the person holding the account can only access the account.
The entire process relating to transactions would be off-line.

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 CONCLUSION

Microfinance can contribute to solving the problem of inadequate housing and urban services
as an integral part of poverty alleviation programmes. The challenge lies in finding the level
of flexibility in the credit instrument that could make it match the multiple credit
requirements of the low income borrowers without imposing unbearably high cost of
monitoring its end-use upon the lenders. The poor repay their loans and are willing to pay for
higher interest rates than commercial banks provided that access to credit is provided. The
solidarity group pressure and sequential lending provide strong repayment motivation and
produce extremely low default rates. Secondly, the poor save and hence microfinance should
provide both savings and loan facilities. These two findings imply that banking on the poor
can be a profitable business. However, attaining financial viability and sustainability is the
major institutional challenge.

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 BIBLIOGRAPHY

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

http://nabard.org/pdf/report_financial/Full%20Report.pdf

http://nabard.org/FileUpload/DataBank/OccasionalPapers/OccasionalPapersonFinanci

alInclusion_080509.pdf

www.rbi.org.in

www.nabard.org

www.inclusion.in

www.microfinanceinsight.com

www.ifmr.ac.in

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