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Problems faced by Borrowers

1. Coercion
One of the most important moral issues being raised in relation to microfinance is that of coercion. After 54 people killed themselves in the state of Andhra Pradesh in October 2010, Indian authorities placed microfinance institutions (MFI) under a microscope, and drafted new rules the MFI companies must follow. The farmers were reportedly deep in debt to microfinance institutions (MFIs). "Microfinance institutions charge exorbitant interest rates. The poor are driven to take their own lives because of their burden of debt and the brutal methods used to call in the loans".

2. Brutal and Aggressive Debt-Collection Tactics
The people calling in the loans are often not aware of the code of conduct of the MFIs. Many of the MFIs have been resort to brutal methods for collection of debt from these borrowers. News items like the one below are quite common in India. Unable to repay Rs. 235, Farmer kills self MFI Loan Suicide, Hyderabad News A farmer committed suicide by consuming pesticides, allegedly after being harassed by the collection agents of a microfinance institution at in Nalgonda district, Andhra Pradesh.

3. Joint Microfinance
Joint microloans are granted to a group of people who are jointly responsible for repaying the loan. Individual failures to pay (due to illness or a “bad week”) are avoided and group pressure serves as a strong incentive in ensuring responsible behavior by making loans to individuals within a lending circle. The individuals meet regularly, ostensibly creating a self-help group. In reality, all the borrowers in the group are responsible for making the loan repayment if a member defaults, so peer pressure is a very strong factor. However, in case of default either due to business failures, unproductive expenditure or greed to consume more, all members are troubled.

For instance: Recently a mobile phone manufacturer offered a micro financing scheme on a pilot basis in Andhra Pradesh and Karnataka. assist those near or slightly above the poverty line. Poverty alleviation mission has now been reduced to a Money making tactic of MNCs Micro finance has now. MFIs have expanded at phenomenal rates largely because they lend without loan scrutiny to groups of women. Money is given to those people who have a possibility of returning the principle amount. Even at 8. the company was offering an easy payment scheme of Rs 100 per week over a period of time. is destroying the spirit of micro credit. Whatever the justification for charging 24 per cent rate of interest. become a weapon for multinational companies to sell their products. charging interest rates of around 30% to cover high operational costs. those who have drawn housing loans. This leads to the fact that lending money to these people is feasible and sustainable. to sell their handset to the poorest. Imagine the stress and threat under which the poor in the rural areas are being made to borrow at 24 per cent rate of interest. in effect. 6. by collaborating with such institutions. The state should not throw out the baby with the bathwater: it should check malpractices without checking MFI growth. benevolent moneylenders. Andhra Pradesh has promulgated an ordinance to check malpractices in microfinance institutions (MFIs). the AP media accuse some MFIs of using force too. while lending to the poorest of the poor is not. how can human beings exploit a hungry stomach in the name of a successful business model? 5. High Interest Rates Many in the urban centres would commit suicide if the banks start charging us 24 per cent rate of interest.5 per cent rate of interest. find it difficult to make monthly EMI payments.4. Under this project.  Globally. This in turn. MFIs are. and claim that some .  They are a great improvement on moneylenders charging 60% and using force to seize assets. Not aimed at lifting people out of poverty Micro finance serves not to lift people out of poverty but. However. and peer pressure of the group keeps defaults below 2% despite the absence of any collateral or legal procedures for loan recovery.

But care should be taken to give MFIs. ranging from psychological to financial issues. Some MFIs have become large institutions.  MFIs have reached 20 million people in a few years. a success owing something to light regulation that facilitated much innovation and experimentation. care must be taken not to create new regulations that encourage corruption or crimp legitimate and desirable MFI lending. Proving the connection is difficult: Persons commit suicide for several reasons. and will penalise poor borrowers and hit financial inclusion. But rules should certainly be framed to stop forcible loan recovery. No rules or regulations can end suicides. People should be free to borrow from all sources.  The top MFIs agree on the need to ensure there is no coercion.  The global suicide rate is 14 per lakh persons.  Proposals to prevent members of self-help groups from borrowing from MFIs are terribly wrong. The use of force is an issue that must not be mixed up with the separate question of how the RBI should regulate MFIs. and have adopted a code of conduct on this. . especially smaller ones. and large ones need tougher regulation. it is even higher in rich countries like Finland and Japan which have no MFIs. and members of self help groups should not require a noobjection certificate before applying for an MFI loan — it will be one more avenue for corruption and harassment.suicides have been caused by such coercion. continued scope for innovation and experimentation. But while bad apples among MFIs must be dealt with firmly.

which are on the growth path.Problems faced by Lenders 1. Presently. necessary for MFIs to develop strategies for increasing the range and volume of their financial services. 2. Lack of Capital The second area of concern for MFIs. . Sustainability The first challenge relates to sustainability. would be keen on directing microfinance to such opportunities. Many of the MFIs are socially oriented institutions and do not have adequate access to financial capital.  The latter players who bring with them an understanding of similar client segments. MFI model is comparatively costlier in terms of delivery of financial services. This challenge can be overcome by exploring synergies between microfinance institutions with expertise in credit delivery and community mobilization and businesses operating with production supply chains such as agriculture. ability to create microenterprise opportunities and willingness to nurture them. therefore. The IPO also brought forth the issue of valuation of an MFI 3. The IPO issue by Mexico based ‘Compartamos’ was not accepted by purists as they thought it defied the mission of an MFI. It has also been commented that MFIs pass on the higher cost of credit to their clients who are ‘interest insensitive’ for small loans but may not be so as loan sizes increase. As a result they have high debt equity ratios. there is no reliable mechanism in the country for meeting the equity requirements of MFIs. It is. This is a critical constraint in their being able to scale up. the loan volumes and loan size is low. is that they face a paucity of owned funds. An analysis of 36 leading MFIs by Jindal & Sharma shows that 89% MFIs sample were subsidy dependent and only 9 were able to cover more than 80% of their costs. Financial service delivery Another challenge faced by MFIs is the inability to access supply chain. This is partly explained by the fact that while the cost of supervision of credit is high.

10. BASIX extends working capital loans of Rs. ITC has initiated a pilot project called ‘pushcarts scheme’ along with BASIX (a microfinance organization). . Under this pilot. capacity building and business development support to the women. ITC provides support through supply chain innovations by: 1. Making the Choupal Fresh stores available to the vendors. with its strong supply chain logistics. large FIs such as Spandana foresee a larger role for themselves in the rural economy ably supported by value creating partnerships with players such as Mahindra and Western Union Money Transfer.15 kgs per day.  Such businesses may find complementarities between an MFI’s skills in manag ement of credit processes and their own strengths in supply chain management.000/. Similarly. Those businesses that procure from rural India such as agriculture and dairy often identify finance as a constraint to value creation. this avoids the hassle of bargaining and unreliability at the traditional mandis (local vegetable markets). E-CHOUPAL MODEL OF ITC: ITC Limited. This enables MFIs to increase their client base at no additional costs. it works with twenty women head load vendors selling vegetables of around 10.. rural presence and an innovative transaction platform. has started exploring synergies with financial service providers including MFIs through pilots with vegetable vendors and farmers. the e-choupal.

. From an environmental point of view.150 per day. A self help group. 3. a pioneer in the field of design education and research. Members of the group meet on a monthly basis to conduct transactions and group leaders are responsible for maintaining their own records. often with the help of NGOs or government agency staff. only one member. From one family. or SHG. Models of Microfinance in India 1. members cannot actively participate). push carts are much more energy efficient as opposed to fixed format retail outlets . Self Help Group (SHG) Bank Linkage Model: The microfinance movement started in India with the introduction of the SHG-Bank Linkage Programme in the 1980s by NGOs that was later formalized by the Government of India in the early 1990s.2.30-40 per day to an average of Rs. Taking lessons from the pharmaceutical and telecom sector to identify technologies that can save energy and ensure temperature control in push carts in order to maintain quality of the vegetables throughout the day. (More families can join SHGs this way). banks. Continuously experimenting to increase efficiency. augmenting incomes and reducing energy usage across the value chain. which is often subsidized. The main characteristics of SHGs are as follows:   The ideal size of an SHG is 10 to 20 members. (In a bigger group. to design user-friendly pushcarts that can reduce the physical burden. which are primarily public sector regional rural banks. are encouraged to partner with SHGs to provide them with funding support. For instance. The group has collective decision making power and obtains loans from the partner bank. Pursuant to the programme. is a group of 10 to 20 poor women in a village who come together to contribute regular savings to a common fund to deposit with a bank as collateral for future loans. The model augments the incomes of the vendors from around Rs. The SHG then loans these funds to its members at terms decided by the group. it has forged a partnership with National Institute of Design (NID).

“Savings first-Credit later” should be the motto of every group member.   The group consists of either only men or of only women. (Members interact more freely this way). Most linkage experiences begin with this model with NGOs playing a major role. as some of the difficult functions of .  Every meeting. Women‟s groups are generally found to perform better. etc. While the bank provides loans to the groups directly. The purpose. (Mixed groups are generally not preferred). amount. Functions of SHGs   The amount may be small. Enabling SHG members to attain loans from banks. nurtures them over a period of time and then provides credit to them after satisfying itself about their maturity to absorb credit. The bank then provides credit directly to the SHGs. The groups are nurtured and trained by these agencies. and repaying the same. Members have the same social and financial background. rate of interest. after observing their operations and maturity to absorb credit. to be decided by the group itself. It takes initiatives in forming the groups. Model – 2: In this model. About 16% of SHGs and 13% of loan amounts are using this model (as of March 2002). This model has also been popular and more acceptable to banks. the facilitating agencies continue their interactions with the SHGs. but savings have to be a regular and Continuous habit with all the members. The savings to be used as loans to members. the group will discuss and try to find solutions to the problem faced by the members of the group. NABARD is presently operating three models of linkage of banks with SHGs and NGOs: Model – 1: In this model. groups are formed by NGOs (in most of the cases) or by government agencies. the bank itself acts as a Self Help Group Promoting Institution (SHPI).

Model – 3: Due to various reasons. nurture and train them and then approach banks for bulk loans for on-lending to the SHGs. About 75% of SHGs and 78% of loan amounts are using this model. First.socialdynamics are externalized. banks in some areas are not in a position to even finance SHGs promoted and nurtured by other agencies. they promote the groups. In such cases. About 9% of SHGs and 13% of loan amounts are using this model SHG MODEL . the NGOs act as both facilitators and microfinance intermediaries.

They secure micro finance clients with varying quality and using different operating models. typically of five women. A range of institutions in public sector as well as private sector offers the micro finance services in India. Unlike SHGs. regulated entities mostly Non-Banking Finance Companies (NBFCs). Around 10-15 institutions with high growth rate. barring a few exceptions. converted into for-profit. In contrast to an SHG. that have joint decision making responsibility for the approval of member loans. . MFIs have their own employees. The groups meet weekly to conduct transactions. cooperatives. The bulk of India‟s 1000 MFIs are NGOs struggling to achieve significant growth. MFI staff travel to the villages to attend the weekly group meetings to disburse loans and collect repayments. SHARE and Grameen Style program but after 2000. Based on asset sizes. loans are issued by MFIs without collateral or prior savings. Micro Finance Institution (MFI) Model: The MFI model has gained significant momentum in India in recent years and continues to grow as the viable alternative to SHGs. are still fledging efforts and are therefore unregulated. Some of MFIs are Grameen Koota. Private MFIs in India. Most continues to offer multiple developmental activities in addition to microfinance and have difficulty accessing growth trends. societies. including trusts. Trusts. MFIs can be divided in to three categories: 5-6 institutions which have attracted commercial capital and scaled up dramatically within last five years. or Section 25 Companies. MFIs now exist in a variety of legal forms. non-profit NBFCs registered under Section 25 of the Companies Act. and NBFCs registered with the RBI. The MFIs which include SKS. cooperatives and Section 25 companies are regulated by the specific act under which they are registered and not by the RBI. an MFI is a separate legal organization that provides financial services directly to borrowers. Bandhan and ESAF. MFIs require borrowers from a village to organize themselves in small groups. Regulatory framework should be considered only after the sustainability of MFIs Model as a banking enterprise for the poor is clearly established.2. 1956. record keeping and accounting systems and are often subject to regulatory oversight. including both News and recently form for-profit MFIs.

Adapted from www. in March 2009.Attempts have been made by some of the associations of MFIs like Sa-Dhan to capture the business volume of the MFI .nabard. which are actually undertaking lending activity. The estimated number includes only those MFIs.6 million clients with an outstanding microfinance portfolio of INR 117 billion (USD 2.5 billion). the 233 member MFIs of Sa-Dhan had an outreach of 22. As per the Bharat Micro Finance Report of Sa-Dhan.

technology. The basic objective of the SGSY is to bring the assisted poor families (Swarozgaris) above the poverty line by providing them income-generating assets through a mix of bank credit and governmental subsidy. Subsidy under SGSY is uniform at 30 percent of the project cost subject to a maximum limit of Rs. This scheme is a credit-cum-subsidy programme. credit.10. subject to per capita subsidy of Rs. The beneficiaries under this scheme are called as “Swarozgaries”.500/-. subsidy has been fixed 50 percent or maximum ceiling of Rs. In respect of SCs/STs and disabled persons. 000 or Rs.25 lakh whichever is less. 7. The program aims at establishing a large number of micro enterprises in rural areas based on the ability of the poor and potential of each area. the subsidy is 50 per cent of the project cost. infrastructure and marketing. 1. Physical progress under Swarnajayanti Gram Swarojgar Yojana (SGSY): .10000/-respectively. training. For groups of Swarozgaries (SHGs).Swarnajayanti Gram Swarozgar Yojna (SGSY) Model Swaranjayanti Gram Swarozgar Yojana was launched during the year 1999-2000. This Yojana is a holistic package covering all aspects of self employment such as organization of poor into self help groups.

Financial progress under Swarnajayanti Gram Swarojgar Yojana (SGSY): SGSY MODEL .

Electronic Net-working to strengthen community organizations by boosting its knowledge base and its ability to share information and experiences with strategic allies and other partners in relevant field. In the cases in which NGOs are funded totally or partially by governments. Objectives are as follows:     To promote Information collaborations and Constructive communication between NGOs. . In many jurisdictions. these types of organization are defined as "civil society organizations" or referred to by other names.     Capacity building of grass root level NGOs. social workers through free online resources and information on a single platform. charities. easy and instant access to information. Networking for the access. Sharing of ideas among NGOs and development agents.Non Government Organizations (NGO) Model: A non-governmental organization (NGO) is a legally constituted. educational and research institutions. to develop effective partnership with each other. sharing and dissemination of information. "non- governmental organization" is a term in general use but is not a legal definition. Collaboration and Partnerships between NGOs themselves and with other organizations.Unlike the term "intergovernmental organization". grassroots and community groups. To serve non-profit organizations. the NGO maintains its non-governmental status by excluding government representatives from membership in the organization. non-governmental organization created by natural or legal persons with no participation or representation of any government. Avail free.

The Non Government Organizations involved in promoting SHGs and linking them with the Formal Financial Agencies (FFAs) perform the following functions:       Organizing the poor people into groups. NGO MODEL . Helping them access more credit and linkage with formal financial agencies. widening the options available for economic development. Helping them in sustaining the group effort independently even after withdrawal of the NGO. Channelizing the group effort for various development activities. Training and helping them in the organizational. managerial and financial matters. Helping them in availing opportunities.

Such refinancing through securitization enables the MFI enlarged funding access.A sub . In other words. as an NBFC. from first contact to final repayment.variation of this model is where the MFI. the MFI acts as an agent and takes care of all relationships with the client. the exposure of the bank is treated as being to the individual borrower and the prudential exposure norms do not then inhibit such funding of MFIs by commercial banks through the securitization structure.Bank Partnership Model This model is an innovative way of financing MFIs. holds the individual loans on its books for a while before securitizing them and selling them to the bank. . The model has the potential to significantly increase the amount of funding that MFIs can leverage on a relatively small equity base. If the MFI fulfils the ³true sale´ criteria. supervision and recovery. The bank is the lender and the MFI acts as an agent for handling items of work relating to credit monitoring.

8000/-. Shri Gulwant Singh was honoured by Deputy Commissioner. Meantime. After getting experience. 15000. she joined one beauty parlour shop in for On-the-Job training in her village for about three months. she became a member of a Self Help Group i. Therefore. Punjab ================================================================ Miss Jaswinder Kaur after completion of 8th standard could not continued her studies as her father was not able to continue her study due to family problems. Moga. He inspired other women in the village to from Self Help Groups and he formed more than 20 SHGs in the village. she decided to start her own unit as 6000/. Now Jaswinder Kaur is very happy. she is earning approx Rs. Moga on the recommendation of PSB RSETI. Now. She had visited DRDA office and under the guidance of DRDA she formed a Self Help Group named Bibi Nanaki. Miss Jaswinder Kaur as youngest daughter of Shri Gulwant Singh took initiatives to fulfill her dream to create an another source of income. . She started her own unit of beauty parlour in her house with an investment of Rs. her father Shri Gulwant Singh. To have more experience in the line. Presently.e. she decided to start her own venture but simultaneously she was losing the confidence to start her own unit. Gulwant Singh. she joined the MEDP. 3000/. the income raised to Rs. VPO Mehna. 25000 (Rupees twenty five thousand only) out of which Punjab & Sind Bank has sanctioned Rs.per month. His monthly income is only Rs.per month and it was not possible to sustain with four daughters (including Jaswinder Kaur) and one son. She had detailed discussion with PSBRSET Director & after selection.00 as DRI loan. 4000/. During festival months. Bibi Nanaki Self Help Group. who is working as chowkidar in the village is very much aware of the importance and concept of Self Help Groups. She attended the programme very sincerely and after completing of MEDP.CASE STUDIES Jaswinder Kaur D/o Sh. Her father is a chowkidar in their village. there was an urgent need to create another source of income.

She and her family was thankful to NABARD and RESTI for their right support to import her practical training in Diary Farming under the guidance of experienced and qualified trainer. This was the reason that she was suffering from depression. And with a small family income of Rs. Manjit Kaur W/o Sh. Her daughters joined the school in the village.00 lakhs out of which Rs. Now her mother-in-law also helped her to take care of buffalo. Manjit Kaur. 50000/. Manjit Kaur. RSETI has also arranged several motivational session for trainees. she heard about Self Help Groups concept from one of her relatives. R/O VPO Bilaspur ================================================================ Mrs. Even Karyana shop keepers stopped to give grocery items to Mrs. Branch Manager has requested to RSETI. 5000/. Rs. has studied up to 6th standard.per month. Manjit Kaur realized the important of self employment and she was very much motivated to start something of his own. Manjit Kaur has purchased a buffalo. Her relative told to enquire from the Bank Branch of her village regarding whole procedure to form SHG. Smt. There were always need of medicines for old aged parents in law. Accordingly she visited the Bank Branch of Punjab and Sind Bank. DRDA. 6000/. Presently she is earning approx. Manjit Kaur being a president of SHG approached Branch Manager to impart training to the members of SHG. Staff of Animal Husbandry also helped her time to 7000/ was not possible to fulfill basic needs of entire family. Dairy Development Department and Animal Husbandry Department helped to provide the training. Her husband named Shri Sewak Singh is a laborer at Bricklin. . Sewak Singh. 6000/. This Self Help Group was sanctioned Rs.per month. Manjit Kaur is having two daughters. Father-in-law and Mother-in-law are also dependant. Mrs. 5. Manjit Kaur on credit. This has totally changed her life and way of living in her village. Now she is planning to purchase two more buffalos in near future. During the training programe Smt. The Branch Manager helped her in formation of Self Help group. Finally she formed a SHG named Ekta Self Help Group. Meantime. His monthly income is only Rs.was sanctioned to Smt. Smt. Manjit Kaur is very much happy by selling milk to some of the customers in the village. Director RSETI discussed the issue with the undersigned (DDM) and finally MEDP on Dairy farming was sanctioned by NABARD.

Her huband is a laborer in a workshop in the village. Finally. Deputy Commissioner visited and interacted the participants. Manjit Kaur also 4000/per month.Mrs. Accordingly. Most of women in her friend circle in the village were convinced. He arrange various awareness camps in the village regarding SHG’s/Farmer’s clubs in which DDM-NABARD. Himmatpura branch discussed the training needs of Bibi Nanaki Self Help Group before credit linkage of SHG. Manjit Kaur started her own work. APO-DRDA were also invited to explain the concepts. Manjit Kaur was very much motivated and after reaching in the village she started efforts to form a SHG. Director-RSETI. It is also mentioned her that during the training Shri Arshdeep Singh Thind. Now she is very happy and started earning of Rs. Harjit Kaur W/o Shri Jaswinder Singh R/O VPO Chotian Khurd ================================================================ Mrs. Mrs. Mrs. Manager of Punjab and Sind Bank is very kind hearted person. Meantime. Mrs. During the workshop. RSETI submitted a proposal of MEDP of tie/dye. This Self Help Group was selected to import training. After completion of training she started the work of stitching in her house. It was not possible to meet out basic needs of family. she came to know about the concept of Self Help Group. Her husband is earning only Rs. Manjit Kaur is having two daughters and one son. Father and Mother –in-law are also dependant on her husband. Harjit Kaur has studied upto matric. 3500/.per month. . Manager of Punjab & Sind Bank. Presently she is earning approx Rs. but she was not aware of procedure to from SHG. APO-DRDA and representatives of NGOs highlighted the all the formalities of formation of SHGs. He has credit linked near about 30 SHGs with his branch office. 2000/. Her parents-in-law were thankful to NABARD and RSETI for their right support to their daughter-in-law by imparting practical training in tailoring and stitching. Manjit Kaur wanted to start a separate independent work to earn additional income. she was succeeded to form a Self Help Group name Mata Ganga Self Help Group and get it credit linked from Punjab & Sing Bank. 3000/.per month. Meantime on the request of Branch Manager of Punjab & Sind Bank a training programme of “Tailoring and Stitching” was arranged under MEDP scheme of NABARD by PSBRSETI. DDM NABARD with the help of NGOs conducted a workshop for women awareness camp during 2009-10 in which Mrs. After completion of training Smt.

She is able earn Rs. . She got all the family support. Her eldest daughter got-readmission in Rs.per month. Mandeep Kaur is very happy now a day. 4000/. 5000/.Mandeep Kaur started the work in her own house.