Critical analysis of Microfinance

with reference to Gramin bank and MFIs

Introduction
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”.

"The poor stay poor, not because they are lazy but because they have no access to capital."

Microfinance is often considered one of the most effective and flexible strategies in the fight
against global poverty. It is sustainable and can be implemented on the massive scale
necessary to respond to the urgent needs of those living on less than $1 a day, the World’s
poorest.
The last twenty years have shown that microfinance is a proven development tool capable of
providing vast numbers of the poor, particularly women, with sustainable financial services to
support their livelihoods. The 2005 State of the Micro credit Summit Campaign reports that
microfinance institutions reached over ninety-two million clients and benefited 333 million
family members.

The success of microfinance represents a paradigm shift in the development industry: poor
people are no longer recipients of charity, but customers to be served. Women make up
approximately eighty-three percent, or sixty-six million, of reported microfinance clients.
They not only make good clients — women have proven better at paying on time than men
— but are also key drivers of development. Investing in women, literally, has proven the
most effective way to increase individual family expenditures on health and education,
improve nutrition and food security, protect against emergencies, and begin the slow process
of tackling the gender inequalities that hinder development in so many countries around the
world.

Funding for micro-finance programs is set to increase further in the years to come, also with
the intention to promote gender policies. The access to micro-finance services (credit,
savings, insurance and pensions) is still highly unequal between men and women.
Considerable advances were made in the 1990s in the design of NGO-managed programs and
poverty-targeted banks to increase women’s access to small loans and savings facilities.
Microfinance is being promoted as a key poverty alleviation strategy to enable poor women
and men to cope with the adverse economic and social impacts of structural adjustment
policies and globalization.

Review of literature
The interest in providing credit to micro-entrepreneurs, especially women emerged as a major
area of interest for researchers mainly during the nineties. The success of the Grameen Bank
in Bangladesh and consequent emergence of micro-credit systems in many developing
countries have opened up accesses for productive research.

A large body of literature has been produced on Grameen Bank as the successful provider of
micro-credit/finance. Samson (1997) found that 98% of the 4.5 million borrowers of
Grameen Bank, who are among Bangladesh’s poorest, have repaid their loan on time and at
commercial interest rate. 94% of the Grameen’s loan recipients are women, who according to
Mr. Yunus (Prof. Mohamed Yunus is the founder and Managing Director of Grameen Bank)
are the best managers in adversity. The World Bank and the Asian Development Bank have
both started to support micro-finance in many developing countries and the Grameen
experience has been tapped.

Samson also found that micro-credit was not a Charity money but a new way of doing
business. Grameen banking was reversal to traditional banking: the poorer the borrower, the
higher the priority. Borrowers form groups of five. They pay a weekly installment and if they
fail, 2% default charge is levied. As condemning a defaulter of loan does not solve the
problem, a new loan structure is worked out and the person is allowed to borrow further to
overcome his/her financial problem and a longer repayment period is allowed. The Economic
Times (3/1999) notes that Grameen charges 15% to 20% interest and is given to a member in
a typical group of five, the recovery rates are noted to be above 95%. SIX (1999) in an
analysis report writes that Integrated Rural Development Programme in India started in mid
70s and is the biggest micro-finance programme in the world. it is almost at an unviable
position due to substantial leakage to non-targeted non-poor; the real poor find it difficult to
access the scheme, borrowers view it as a subsidy (credit not repaid); became supply driven
(unwilling defaulters), and the paradigm was directed towards welfare rather than a bankable
proposition.

Liedhoim and Mead (1987) found that through savings the most important investment in
enterprises are made and conclude that through saving, investment are paid for in advance
and through credit, they are paid after the fact. They make clear that savings are as important
as micro-enterprise finance programme.

Robinson (1994) examined the role of savings in developing sustainable commercial

financing of small or micro-enterprises. The study shows that poor save in different forms
(cattle, grains, gold, silver etc.) to address their future needs. The study also shows that
subsidised loans through cheap, scare and desirable tend to be allocated to rural elite who has
access and influence. Evidence in developing countries of the world shows that subsidised
credit has high default repayment and high cost to financial institutes. Chetri (1998)
investigated during his study tour in 1997 to India how poor could save and access formal
financial institutes through self-help groups (SHGs) system. The myth that poor cannot save
stands no longer true. He suggests, how financial institutes could improve their micro-finance
services through TQM approach. Mishra, Ashok K. (1999) recounts that SHGs have widened
the scope for institutional credit and takes care of social coherence. He finds that SHGs are
powerful means of financial intermediation.

Hook (1995) discovered from borrowers in Indonesia that alternative source of credit comes
from suppliers at an interest rate of 6% p.m., co-operative and loan groups at 2.5% per
month, buyers of finished products at 14.8% p.m. and moneylenders at 13.4% p.m. In
Bangladesh, Hossain (1998) estimated the average annual rate of informal commercial
interest to be 125%. Das (1999) suggested that institutional lending must take a greater role to
release microentrepreneurs from moneylenders. Karmakar (1999) estimated that informal
finance market provided almost haif the credit needs of the enterprises.

Amin (1998) found out the mean annual rate of interest charged by moneylenders to be
78.6% in Bangladesh and Sarman (1999) found from an Indian study that moneylenders
charge an interest rate as high as 10% per day. The National Report (1994) on the Rural Non-
Farm Sector in India investigated the rural credit market and found that interest rates charged
by traditional moneylenders exceeds 75% per annum and even then, credit is not available in
some periods. In spite of, the government’s intervention to drive moneylenders out of the
credit market through IRDP for many years, thus remain strongly imbedded. Nearness of the
banks does not help borrowers because of time consuming and harassing exercises. Hook
(1995) discovered from borrowers in Indonesia that alternative source of credit comes from
suppliers at an interest rate of 6% p.m., co-operative and loan groups at 2.5% per month,
buyers of finished products at 14.8% p.m. and moneylenders at 13.4% p.m. In Bangladesh,
Hossain (1998) estimated the average annual rate of informal commercial interest to be
125%. Das (1999) suggested that institutional lending must take a greater role to release
micro entrepreneurs from moneylenders. Karmakar (1999) estimated that informal finance
market provided almost haif the credit needs of the enterprises.

Objective of the Study

The main objective of pursuing this project is virtually well spelled out in the title of the
project. This means the aim is to find out what facilitating role the bank and MFIs in
extending Micro-finance programmes for rural and semi-urban women.
Specifically, the objectives can be spelled out as:

(a) To deliberate on the concepts and working of Self-Help Groups and the benefits that
women micro-entrepreneurs reap from such groups

(b) To highlight the system of bank savings and credit linkage with SHGs and find out
features of new micro-credit schemes for groups.

(c) To find out what role Gramin Bank plays in developing, providing and credit linking
SHGs.
 (d) To find out what women micro-entrepreneurs really do in SHGs, i.e., what they
discuss in meetings and finally what activities they undertake.

(e) To find out the perceptions of the women micro-entrepreneurs towards micro-finance
programmes and SHG activities.

(j) To find out the role, activities and perception of the bank manager and official towards
the micro-finance schemes for women.

(h) To find out what role MFIs plays in developing and providing micro loans to low
income group.

Research Methodology
There are a number of methods that might be applied to investigate the activities, financing
needs, perception towards micro-credit programmes and groups of women micro-
entrepreneurs and also activities and perceptions of bank officials. These methods include
questionnaire surveys, structured and unstructured interviews, structured and unstructured
observations. Each has its own strengths and weaknesses and no single method is likely to be
completely unsuccessful. Therefore, a combination of techniques provide useful results,
enabling reasonable coverage to be achieved whilst at the same time allowing some in-depth
understanding to be obtained.

In this study, there was a mix of observations by visiting banks during linkage, unstructured
interviews with women micro- entrepreneurs, bank officials, block officials, and personal
administration of questionnaires to women respondents and bank officials.

The SHGs chosen for the study were linked to Garthma branch, Kashi Gomti Samyut Granin
Bank (Varanasi). This was done so as to avail a good size of the sample and increase the
reliability of the study. The choices of the branches were made purely on the basis of
convinience. Garthma branch commanded the area of Garthma Gram Panchayat.

Lists of Self-Help Groups, schemes linked to this branch were obtained from the bank
officials and block officials. Women and men mixed SHGs were chosen.

Other than this, there were frequent discussions with bank officials who were involved in
process of linking and grading the SHGs.

The data thus generated is primary as well as secondary in nature. The study is mainly based
on data collected in the year 2010. However, for MFIs data secondary sources had been used
for the purpose of this study.

Sample Description
We describe the sample women and men entrepreneurs in terms of their age and educational
profile, occupation etc. On the basis of the data generated from the survey sheets, the table
will be prepared. Age were documented as reported by the respondents. Literacy was
segmented in four parts, illiterate, i.e., those who could not write their names, 1-5 years, 5-10
years and above 10 years of formal and/or non-formal education. The information given by
the respondents were treated as final. The sample size would be of 150 members.

Sample Description on the Basis of Age and Literacy Level

Education Education
Educatio
Age Illiterat Tota
n
Education e 5-10 10 years l
1-5 years
years +

Upto 25 years

25-35 years

35-45 years

Above 45
years

Total