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The banking sector intervention in

the microfinance world: a study of
bankers' perception and outreach to
rural microfinance in India with special
reference to the state of Punjab
Sangeeta Arora & Meenu
Published online: 08 Aug 2012.

To cite this article: Sangeeta Arora & Meenu (2012) The banking sector intervention in the
microfinance world: a study of bankers' perception and outreach to rural microfinance in India
with special reference to the state of Punjab, Development in Practice, 22:7, 991-1005, DOI:
10.1080/09614524.2012.696092

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 Development in Practice, Volume 22, Number 7, September 2012

The banking sector intervention in the

microfinance world: a study of bankers’
perception and outreach to rural
microfinance in India with special
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reference to the state of Punjab

Sangeeta Arora and Meenu

Microfinance has been evolving as an indispensable tool of poverty eradication and rural
improvement. At present, almost all the commercial banks have delved into the microfinance
foray and offer various lucrative schemes designed for the rural poor, specifically, to carry
out their own small economic activities. This paper attempts to study the extent to which the
commercial banks are participating in the microfinance business. An empirical study has
been carried out in the state of Punjab. The objective is to analyse the nature and extent of
microfinance services provided by the banks in the rural areas of Punjab. The study also high-
lights the bankers’ perceptions of microfinance.

L’intervention du secteur des banques dans le monde de la microfinance : une étude de la

perception et du travail de proximité des banquiers dans le domaine de la microfinance en
Inde, concernant plus particulièrement l’État du Punjab
La microfinance a connu une évolution comme outil indispensable de l’éradication de la
pauvreté et de l’amélioration de la situation en milieu rural. À l’heure actuelle, presque
toutes les banques commerciales se sont lancées dans la microfinance et proposent divers
programmes lucratifs conçus spécifiquement pour les pauvres ruraux afin de les aider à
mener leurs propres activités économiques à petite échelle. Cet article cherche à étudier la
mesure dans laquelle les banques commerciales participent au secteur de la microfinance.
Une étude empirique a été effectuée dans l’État du Punjab. Son objectif est d’analyser la
nature et la mesure des services de microfinance fournis par les banques dans les zones
rurales du Punjab. Cette étude mettrait aussi en relief les perceptions de la microfinance
parmi les banquiers.

A intervenção do setor bancário nas microfinanças mundiais: um estudo da percepção dos

banqueiros e o acesso a microfinanças rurais na Índia, com referência especial ao estado de
Punjab
As microfinanças têm evoluı́do como uma ferramenta indispensável na erradicação da
pobreza e melhorias na área rural. No momento, quase todos os bancos comerciais têm

ISSN 0961-4524 Print/ISSN 1364-9213 Online 070991-15 # 2012 Taylor & Francis 991
Routledge Publishing http://dx.doi.org/10.1080/09614524.2012.696092
 Sangeeta Arora and Meenu

investido na área de microfinanças e oferecem vários esquemas lucrativos destinados aos

pobres da zona rural, especificamente para realizarem suas próprias atividades econômicas
de pequeno porte. Este artigo visa analisar até que ponto os bancos comerciais estão parti-
cipando dos negócios de microfinanças. Um estudo empı́rico foi realizado no estado de
Punjab. O objetivo é analisar a natureza e extensão dos serviços de microfinanças oferecidos
pelos bancos nas áreas rurais de Punjab. O estudo visa também destacar as percepções dos
banqueiros a respeito das microfinanças.

La intervención de la banca en las microfinanzas: un estudio de cómo los banqueros per-

ciben y participan en las microfinanzas en el sector rural de India con especial referencia al
estado de Punjab
Las microfinanzas se han convertido en una herramienta imprescindible para la erradicación
de la pobreza y la mejora de los niveles de vida en el sector rural. Actualmente, casi todos los
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bancos comerciales han incursionado en el mundo de las microfinanzas y ofrecen a personas

de escasos recursos del sector rural varios tipos de ventajosos programas, especialmente
para que inicien pequeñas actividades económicas. Este ensayo analiza el grado de partici-
pación de la banca comercial en las microfinanzas. Se realizó un estudio empı́rico en el
estado de Punjab con el objetivo de analizar el tipo de servicios microfinancieros que
ofrece la banca y su alcance en el área rural de Punjab. El estudio también destaca las opi-
niones de los banqueros respecto a las microfinanzas.

KEY WORDS : Labour and livelihoods – Microfinance; Globalisation; South Asia

Introduction
Poverty eradication and rural development have always been of great concern for the Govern-
ment and non-government organisations (NGOs) in India. However, to work towards both
targets it is vital to achieve 100 per cent financial inclusion. The task seems insurmountable
in a developing country like India where a large proportion of the population is financially
underprivileged. These are the people who have entrepreneurial talent and expertise, but
for lack of financial resources, they continue to remain at the “bottom of the pyramid”. Tra-
ditionally, commercial banks used to hesitate to provide finance to the poor because of their
low level of income and savings and their consequent doubt concerning the repayment
capacity of poor borrowers. But with the passage of time and by learning from the good
experiences in the microfinance businesses in countries like Bangladesh and those in Latin
America, Indian commercial banks have realised what they were losing out by neglecting
this strata of society. The Government of India is also encouraging commercial banks to
provide financial services to excluded populations in order to achieve financial inclusion,
in the form of subsidised credit. Some of the other government initiatives in this area
include allowing the banks to use correspondence banking models to make their services
accessible to distant locations without opening new branches, and the establishment of finan-
cial literacy cum credit counselling centres across the nation to make people aware of the
availability of microfinance services.
This paper analyses the participation of the commercial banks in the microfinance move in
Punjab. The study has been organised into three parts. The first deals with the objectives,
scope, data sources and research methodology. The data analysis and findings have been
covered in the second part. The third part contains the conclusion and suggestions.

992 Development in Practice, Volume 22, Number 7, September 2012

 The banking sector intervention in the microfinance world

The study
Objectives
Specifically, the objectives of the study are: to analyse the nature and extent of the microfinance
services provided by banks; to analyse the bankers’ attitudes towards microfinance intervention;
and to give some suitable suggestions for the bankers.

Scope and data source

This is an exploratory study focusing on primary data. A sample of 100 commercial bank
branches were selected from the rural areas of the districts of Amritsar, Jalandhar, and Ludhi-
ana. The sample consisted of only public sector banks, as private sector banks are rarely found
in the rural areas (except a few branches of ICICI and HDFC bank). These banks were also
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visited but they reported their non-involvement in microfinance ventures, so they were not
included in this study. The sample was selected block-wise in each district. Table 1 gives the
details of the sample selected. The information has been collected through structured question-
naires which were completed by the bank officials by visits to bank premises.

Research methodology
In the present study two main statistical techniques have been applied – factor analysis and
weighted average scores – along with averages, percentages, and ranking of the variables/factors.

Data analysis and findings

General profile
In total, various numbers of branches of 15 different banks were visited, based upon their avail-
ability in the respective blocks. These banks and the number of branches visited for each are
listed in Table 2.

Table 1: Sample distribution

Districts Blocks Amritsar (26) Jalandhar (36) Ludhiana (38)

1 Jandiala Guru (4) Adampur (3) Dehlon (3)
2 Ajnala (4) Bhogpur (5) Jagraon (4)
3 Verka (5) Nurmahal (6) Ludhiana I (2)
4 Rayya (3) Nakodar (4) Ludhiana II (2)
5 Harshachhina (3) Rurakakalan (3) Samrala (4)
6 Chogawan (3) Phillaur (4) Machhiwara (4)
7 Bhikhiwind (2) Jalandhar East (2) Mangat (2)
8 Majitha (2) Jalandhar West (2) Khanna (5)
9 - Lohian (3) Doraha (4)
10 - Shahkot (4) Sidhwan Bet (2)
11 - - Pakhowal (3)
12 - - Sudhar (3)
Total sample size ¼ 100; figures in parentheses represent number of banks selected from each district and
their respective blocks.

Development in Practice, Volume 22, Number 7, September 2012 993

 Sangeeta Arora and Meenu

Table 2: Sample profile

Name of bank Branches visited

1 UCO 8
2 CANARA Bank 7
3 Punjab National Bank (PNB) 10
4 Punjab & Sind Bank 8
5 Union Bank of India (UBI) 6
6 Bank of India (BOI) 8
7 Indian Overseas Bank (IOB) 7
8 State Bank of India (SBI) 9
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9 State Bank of Patiala (SBOP) 4

10 Punjab Grameen Bank (Sponsored by PNB) 4
11 Allahabad Bank 6
12 Syndicate Bank 6
13 Oriental Bank of Commerce (OBC) 9
14 Bank of Baroda (BOB) 4
15 Central Bank of India 4
Total 100
In parentheses are the most commonly used short form of each respective bank’s name in India.

Microfinance services
The study reveals that all the public sector banks, in one way or the other, are involved in micro-
finance business, offering a wide range of services to the rural poor. The services range from
micro-savings to microcredit and micro-insurance. However, most of the microfinance services
are of the microcredit and micro-savings nature. Micro-insurance is a relatively new financial
service and its reach is rather limited and unevenly distributed across states, though with the
expansion of distribution infrastructure there has been an upward trend in the micro-insurance
sector (but it is still much smaller than the desired level) (Sahu 2010).
Table 3 shows that banks are providing a wide variety of financial and non-financial services
in the rural areas. The focus has been concentrated on the credit aspect of the microfinance, as
micro-savings schemes are of a general nature that is accessible to all rather than specifically
designed for the poor, except the zero minimum balance saving bank accounts and self-help
group (SHG) savings bank accounts. Micro-insurance is still nascent. Most interestingly,
banks have special schemes for women, which is indeed a social requirement for women’s
economic empowerment. A few of the banks reported offering finance to NGOs (29) and
MFIs (8) as most of the MFIs are set up in the southern part of the country, and are almost
non-existent in the northern part (Arun and Hulme 2008). These banks are offering finance
to those NGOs and microfinance institutions (MFIs) which are connected to some
government-sponsored schemes like the National Rural Employment Guarantee Agreement
(NREGA). As far as non-financial schemes are concerned, banks are less active in this
regard. Only 50 per cent of banks reported providing advisory services to the petty entrepre-
neurs and 48 per cent of banks are organising training campaigns for the rural youth to
develop their entrepreneurial skills. This is certainly an important area, as the rural poor

994 Development in Practice, Volume 22, Number 7, September 2012

 The banking sector intervention in the microfinance world

Table 3: Frequency distribution of the microfinance services provided by the banks

Microfinance services Frequency

Micro-credit
i. Agricultural loan 100
ii. Consumption loan 76
iii. Education loan 87
iv. Loan to take up small economic activities 92
v. Loan to buy machinery/ equipment 90
vi. Auto loans 83
vii. Medical loans 47
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Micro-savings
i. Fixed deposits 94
ii. Current deposits 76
iii. Saving account 100
iv. Zero minimum balance saving bank accounts 100
v. SHGs saving bank accounts 92
Micro-insurance
i. Life insurance 65
ii. Health insurance 51
iii. Crop insurance 61
iv. Cattle insurance 68
v. Asset insurance 54
Housing microfinance
i. For construction/ purchase of house 89
ii. For repair and renewal of house 87
Finance to SHGs 84
Finance to NGOs 29
Finance to MFIs 8
Finance to MSME 64
Finance for women
i. Women entrepreneurs 92
ii. Salaried women 91
iii. Women labour 78
iv. Housewives 75
Differential rate of interest 94
Money transfer facility 92
Payment/collection facility 95
Debit/Credit cards 80
Advisory services to NGOs/SHGs to identify viable projects 50
Training programmes for NGOs/SHGs/Entrepreneurs 48

Development in Practice, Volume 22, Number 7, September 2012 995

 Sangeeta Arora and Meenu

Table 4: Microfinance delivery mechanism used by banks

Method of delivery Percentage of banks

Direct lending to individuals 91%
Financing through SHGs 89%
Financing through NGOs 3%
Financing through MFIs 9%

often do have enough potential and determination to come out of the poverty trap, but capacity
building and skills-upgrading will nourish their entrepreneurial potential. Bankers may arrange
such training programmes in collaboration with the NGOs active in their areas. This is also ben-
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eficial to the bankers because the risk of non-repayment of credit is reduced if it is effectively
used by a trained entrepreneur.

Microfinance lending methodology

The study revealed that most of the banks are providing microcredit directly to the beneficiaries
(91 per cent) or through SHG linkages (89 per cent), or both. However, the use of NGOs and
MFIs as the intermediary services was almost negligible (3 per cent and 9 per cent, respect-
ively), because the MFIs and NGOs active in the microfinance sector are essentially non-exist-
ent in the northern region of the country. Moreover, bankers stated their preference for lending
directly to the individuals over financing through SHGs. The reason for this is the lack of mutual
trust among the SHG members that further breaks down the bankers’ confidence in the function-
ing of such groups.

Funds allocation and customer base

Although banks provide a good number of services in the category of microcredit, fund allo-
cation is still too small in comparison to the total lending by the banks (see Table 4). Of the
bankers, 54 per cent have been allocating less than 5 per cent of the total credit to microfinance
clients. The reason given for this is the risk involved in financing the poor, and the lack of
awareness among the poor regarding microfinance services available with the banks: 51 per
cent of bankers reported having less than 5 per cent of the microfinance customers in the
total customer base of the bank.

Table 5: Method adopted to spread awareness of microfinance services

Method % bankers using each method

Advertisement in TV/radio/newspapers 61%
Posters/Banners/Hoardings 64%
Existing customers 75%
Bank representatives 54%
Group leaders 47%
Village panchayat members 45%
Awareness campaigns 65%
Intermediaries, like NGOs 46%

996 Development in Practice, Volume 22, Number 7, September 2012

 The banking sector intervention in the microfinance world

Table 6: Average loan size and duration

Average loan size (Rs.) Number of banks Average loan duration Number of banks
, 5,000 9 , 1 year 8
5,000-10,000 15 1–3 years 23
10,000–30,000 45 3–5 years 55
. 30,000 31 . 5 years 14

Though bankers reported making efforts to spread awareness among the people (see Table 5),
mostly through existing customers (75 per cent) and village panchayat members (64 per cent),
more efforts are needed for the widespread and effective financial literacy.
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Purpose and use of microfinance

The banks provide different loans for different purposes, like agricultural loans, loans for small
economic activities, housing loans, etc. Seventy one per cent of the bankers stated that most of
the loans are for agricultural activities or starting new ventures, like dairy farming, Kirana
shops, carpenters, and tailoring, followed by the loans taken to repay old debts, often with
loans taken from private moneylenders. Consumption loans and housing finance ranked last.
According to bankers’ responses, the most common reasons that people engage with microfi-
nance are, in order of more frequent to least:
. Agricultural activities
. Starting new venture
. Repaying old debt
. Consumption loan
. Housing finance

Loan size, duration, and interest rate

The average loan sizes among the all 100 banks were reviewed, and it was found that the banks are
providing microcredit in the range of Rs. 15,000 – 30,000 (US$274– 548) with an average dur-
ation of three to five years. However, a significant number of banks (31) are providing bigger
amounts of microcredit as compared to the other banks i.e. more than Rs.30,000 (US$548).
Table 6 gives the breakdown of the microcredit portfolio of the 100 banks in this survey.
Although commercial banks offer microcredit with a minimum maturity as short as one to a
few months, still some (14 banks) allow the maximum term for these credits to extend to more
than five years. Table 6 shows that the majority of these banks (55 banks) offer loans that typi-
cally extend for periods of three to five years. The minimum rate of interest on microcredit
reported was 4 per cent, under Differential Rate of Interest (DRI) scheme, to the maximum
of 14 per cent, depending upon the nature of credit.

Collaterals, guarantees, and repayment

The banks do take securities against such credit in the form of collaterals (46 per cent) and
guarantees (68 per cent). However, 40 per cent of the bankers reported offering microcredit
without any security, which is in line with the intention of the microfinance concept but may
add to the financial risk of the bankers. Interestingly, 62 per cent of bankers have experienced

Development in Practice, Volume 22, Number 7, September 2012 997

 Sangeeta Arora and Meenu

above 90 per cent recovery rates to date, while the rest reported a recovery rate of 60– 90 per
cent. This proves that poor are a worthwhile investment; they just need an adequate amount of
funds at the appropriate times. They do have entrepreneurial skills, they just need the timely
support of the finance providers. In cases of unintentional non-repayment, bankers do have a
provision for debt waivers, otherwise the other persons (in case of guarantee) or the group
members (where credit goes through SHGs) are liable for the payment. As far as interest on
savings are concerned, there is no differentiation between poor and well-off clients. Both
receive the same interest i.e. minimum 3.5 per cent (savings account) and maximum 8 per
cent (fixed deposits). There is nothing discouraging saving if such differentiations are not
present, though a little product differentiation might be very helpful to inculcate regular
saving habits among the poor. The relaxation in the minimum balance requirement, and offering
a more lucrative rate of interests on savings, may encourage greater use of banking services by
the poor.
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Attitudes of bankers towards microfinance

In the present study, factor analysis technique was used to analyse the perception of the bankers
regarding microfinance services. For this purpose they were given a list of 25 variables to rank
on a five-point scale ranging from strongly agree to strongly disagree. These are listed below:

Variables measuring bankers’ attitudes to microfinance (agree to strongly disagree)

1. Microfinance is an effective tool of poverty alleviation

2. It contributes to the economic and social welfare of society
3. The benefit does not reach the people it is supposed to reach
4. It’s a new concept so involves high risk
5. It’s not very profitable for the bank
6. Customer base is very small
7. Involves high transaction costs
8. Default risk is very high
9. It increases work load
10. It requires availability of trained staff
11. Bank has to face competition from the unorganised sector
12. Ensures higher revenues for the banks
13. Repayment rate is quite high
14. Increases bank’s outreach
15. Improves bank’s image in the society
16. Provides easy availability of credit
17. Loans are used for the purpose for which they are taken out
18. It reduces the use of informal finance
19. It provides cheaper finance at affordable terms
20. Microfinance is better than priority lending
21. Microfinance encourages entrepreneurship among the rural poor
22. It enhances confidence and self-respect among the poor
23. Most of the microfinance clients are women
24. It leads to women’s empowerment
25. It’s better to lend through some intermediaries like NGOs/SHGs instead of direct finan-
cing

998 Development in Practice, Volume 22, Number 7, September 2012

 The banking sector intervention in the microfinance world

Table 7: Eigen values, variance, and cumulative variance

Variables Eigen values % variance Cumulative % variance

01 5.834 23.337 23.337
02 3.088 12.352 35.689
03 2.462 9.847 45.535
04 2.230 8.919 54.455
05 2.130 8.518 62.973
06 1.492 5.966 68.939
07 1.166 4.663 73.603
08 1.072 4.289 77.892
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09 0.879 3.516 81.408

10 0.791 3.163 84.571
11 0.661 2.644 87.215
12 0.570 2.280 89.494
13 0.501 2.005 91.499
14 0.387 1.548 93.047
15 0.304 1.215 94.262
16 0.279 1.115 95.376
17 0.256 1.024 96.400
18 0.213 0.853 97.253
19 0.182 0.728 97.981
20 0.158 0.633 98.614
21 0.122 0.487 99.101
22 0.080 0.319 99.420
23 0.065 0.260 99.680
24 0.047 0.189 99.869
25 0.033 0.131 100.000

These variables have been derived from various earlier studies both in India and abroad (like
Agricultural Finance Corporation Limited 2008; Arun Hulme 2008; Bedoya 2006; Chavan
and Ramkumar 2002; Field and Pandey 2006; Galab and Rao 2003; Jones et al. 2004; Leach
and Sitaram 2002; Lokhande 2008; Oke et al. 2007; Puhazhendhi and Satyasai 2002; Rao
2002; Rutherfort 2003; Shanker 2006; Sinha 2005).
In the present study factor analysis technique was used to determine the factors representing
the banks’ perceptions of microfinance. Factor analysis is a technique of multivariate data
analysis that aims at reduction and summarisation of a large number of variables in order to
identify some common dimensions (i.e. factors). Before applying factor analysis, the sampling
adequacy has been checked through Kaiser-Meyer-Olkin test (KMO) (0.510) and Barlett test of
sphericity (sig 0.000). Since the value of KMO test is greater than 0.5 and the Barlett test is sig-
nificant, the sample is adequate. To further check the reliability of data the Cronbach’s Alpha
has been calculated; at 0.658 it is greater than 0.5 and therefore confirms the reliability of the
sample data.

Development in Practice, Volume 22, Number 7, September 2012 999

 Sangeeta Arora and Meenu

Table 8: Rotated factor matrix

Factors
Variable 1 2 3 4 5 6 7 8
01 20.069 0.864 20.047 0.008 0.327 0.080 0.218 20.051
02 20.094 0.634 20.071 0.139 0.485 0.101 0.349 20.008
03 0.807 0.124 0.151 20.050 20.069 20.175 0.195 20.210
04 0.813 20.034 20.220 0.030 20.221 20.047 20.110 20.165
05 0.048 20.205 20.123 20.162 20.728 20.088 0.129 20.052
06 0.694 20.209 20.037 0.000 20.072 0.078 20.352 0.339
07 0.870 20.149 20.110 20.035 0.009 0.125 20.034 0.098
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08 0.692 20.183 0.025 20.047 0.150 20.108 20.430 0.350

09 0.369 20.072 20.255 20.159 20.063 0.526 20.018 0.386
10 0.551 0.207 20.469 20.130 0.127 0.257 20.228 0.226
11 0.035 0.142 0.072 20.070 0.221 0.108 0.176 0.788
12 20.224 0.179 0.010 0.146 0.250 0.126 0.761 0.166
13 20.066 20.076 0.075 20.106 0.787 20.128 0.314 0.174
14 20.038 0.008 0.612 20.071 0.513 0.269 0.268 20.060
15 20.175 0.219 0.745 0.122 0.205 20.079 20.087 0.233
16 20.276 0.314 20.623 0.300 20.039 0.137 0.133 20.161
17 0.125 20.072 0.274 0.726 20.123 0.370 0.029 20.132
18 20.092 0.234 0.121 0.503 0.300 0.446 20.209 20.417
19 20.013 0.022 0.894 0.085 0.017 0.057 20.021 20.115
20 0.089 0.055 0.046 0.837 0.270 20.255 0.058 0.159
21 20.037 0.798 0.185 0.219 20.146 0.096 0.032 0.065
22 20.096 0.635 0.550 0.112 20.052 20.273 20.118 0.196
23 20.078 0.130 20.012 0.174 0.005 20.451 0.744 0.125
24 20.170 0.302 0.194 0.175 20.008 20.340 0.624 20.170
25 0.089 20.108 20.045 20.004 20.031 20.828 0.030 20.060

Results of factor analysis

Within factor analysis, principal component analysis has been used to summarise the original
variables into the fewest possible number of factors, to draw some meaningful inferences out
of the data. Table 7 presents the results of factor analysis applied to the five-point scale
responses of the bankers to the 25 aforementioned variables.
An important step in the process of factor analysis is to decide the number of factors to be
extracted. In principle component analysis the most commonly used criteria is the latent root
criteria, and variables considered were those whose Eigen values are greater than one. An
Eigen value represents the amount of variance in data. As Table 7 shows, eight factors could
be extracted (eight variables had an Eigen value greater than one). The total variance for
these eight factors is 77.892 and the remaining variance is explained by the other factors.
Additionally, the factors were rotated using Varimax rotation which is the popular method of
orthogonal rotation. Rotation is generally used because the unrotated factor solution may or

1000 Development in Practice, Volume 22, Number 7, September 2012

 The banking sector intervention in the microfinance world

may not give meaningful structure of the variables. Table 8 shows the rotated factor matrix,
which is the final statistics used in the analysis. All variables having factor-loading greater
than 0.5 (ignoring the sign) were considered for further analysis.
The 25 variables from the above table were loaded on eight factors and the factors have been
labelled on the basis of the size of factor loadings (see Table 9).
In order to find out which of the factors has the highest level of agreement with the
variables, the average scores (from the five-point scale data) have been calculated, and are
given in Table 10.
Table 10 shows that poverty alleviation and welfare activities have scored highest (4.54
each). A small customer base and the involvement of women as microfinance clients both
scored lowest (2.97 and 2.94 respectively). This shows that though the banks agree that the
potential microfinance customer base is large enough, they also feel that the involvement of
women as microfinance clients is low. It indicates the prevailing gender disparity in Indian
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Table 9: Factors, commercial banks

Factors Statements
1. Risk factor - The benefit does not reach the people it is supposed to reach
- It’s a new concept so involves high risk
- Customer base is very small
- Involves high transaction costs
- Default risk is very high
- It requires availability of trained bank staff
2. Welfare factor - Microfinance is an effective tool of poverty alleviation
- It contributes to the economic and social welfare of society
- Microfinance encourages entrepreneurship among rural poor
- It enhances confidence and self-respect among the poor
3. Economic factor - Increases bank’s outreach
- Improves bank’s image in the society
- Provides easy availability of credit
- Provides cheaper finance at affordable terms
4. Effective utilisation - Loans are used for the purpose for which they are received
factor - It reduces the use of informal finance
- Microfinance is better than priority lending
5. Profit factor - It’s not very profitable for the bank
- Repayment rate is quite high
6. Work pressure factor - Increased work load
- It’s better to finance through some intermediaries like NGOs/SHGs/
MFIs instead of direct financing
7. Women’s empowerment - It leads to better women’s empowerment
factor - Ensures higher revenues for the bank
- Most of the microfinance clients are women
8. Competition factor - Bank has to face competition from the unorganised sector

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 Sangeeta Arora and Meenu

Table 10: Level of bankers’ agreement and disagreement with statements about microfinance (variables)

Average
Variables scores
- Microfinance is an effective tool of poverty alleviation 4.54
- It contributes to the economic and social welfare of society 4.54
- Increases bank’s outreach 4.34
- Improves bank’s image in society 4.27
- It provides cheaper finance at affordable terms 4.21
- Repayment rate is quite high 4.19
- Microfinance encourages entrepreneurship among rural poor 4.09
- It reduces the use of informal finance 3.97
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- It enhances confidence and self-respect among the poor 3.97

- It leads to better women’s empowerment 3.86
- Provides easy availability of credit 3.76
- Default risk is very high 3.74
- Loans are used for the purpose for which they are received 3.75
- Microfinance is better than priority lending 3.73
- It’s better to finance through some intermediaries like NGOs/SHGs/MFIs instead of
direct financing 3.46
- Ensures higher revenues for the bank 3.45
- Involves high transaction costs 3.54
- It’s not very profitable for the bank 3.25
- It requires availability of trained bank staff 3.23
- The benefit does not reach the people it is supposed to reach 3.22
- It’s a new concept so involves high risk 3.21
- Increased work load 3.12
- Bank has to face competition from the unorganised sector 3.01
- Customer base is very small 2.97
- Most of the microfinance clients are women 2.94
Note: on the five-point scale, ‘strongly agree’ scored 5 and ‘strongly disagree’ scored 1.

society, whereby women are least involved in the matters of financial concerns. These average
scores were then used to rank the factors (see Table 11). It reveals that the banks most strongly
agreed with microfinance for the welfare factor, with an average score of 4.28, which justifies
the rationale behind the original concept of microfinance. The economic factor ranked second
(4.14), which is true to the basic nature of microfinance as it is designed for the people who are
at the bottom of the pyramid. Effective utilisation factor ranked third (3.82), which indicates
that banks are relatively confident of the productive use of finance. The competition factor is
lowest-ranked with average score of 3.01, as banks do not assume much competition from
the other informal channels of finance on the premise that once people start using microfinance
services through banks, they rarely think of going to any other source because microfinance is
much cheaper and easily available (this is also evident in the ranking of the economic factor as
second on the list).

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 The banking sector intervention in the microfinance world

Table 11: Ranking of factors by average scores

Rank Factors Average score

1 Welfare factor 4.28
2 Economic factor 4.14
3 Effective utilisation factor 3.82
4 Profit motive factor 3.72
5 Women’s empowerment factor 3.42
6 Risk involved factor 3.32
7 Work pressure factor 3.29
8 Competition factor 3.01
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Conclusion and suggestions

This study reveals that though all the nationalised banks have delved into microfinance, a lot of
effort is still required to pave the way for microfinance in the commercial banking sector. No
doubt banks are offering a good number of microfinance services, but the question is how
many target beneficiaries are aware of this and how many make use of it. As in the present
study, most bankers reported that microfinance clients make up less than 5 per cent of their
total number of clients. Even banks’ fund allocations for microfinance are not impressive.
There is a need to find the gaps and attempt to fill them efficiently and adequately. Following
are a few suggestions based on the study that may help banks to contribute more effectively to
the financial inclusion drive.
The primary need is to spread financial literacy among the rural poor because mere avail-
ability of the services cannot suffice if the target group is unaware of these services. The
banks should establish direct communication with rural people by organising awareness cam-
paigns in the villages, sending bank representatives to the villages to let people know and under-
stand the benefits of the services available to them.
Though the SHG-bank linkage model has been successfully implemented in the southern part
of the country, it is yet to gain momentum in Punjab. Some banks are providing finance through
this model (89.2 per cent) but the number of SHGs financed is less, as reported by the bankers.
The reason is that the banks prefer to finance an individual client rather than a group, in order to
ascertain repayment responsibilities. Some of the banks reported their SHG financing was under
litigation because of the lack of cooperation and mutual trust among the group members. But the
bankers should try to resolve their conflicts and promote the environment of trust and confi-
dence. They may engage NGOs for this purpose, which would reduce the risk and burden for
the bankers.
The time has come for banks to change their attitude towards the rural poor. The study
revealed that the majority of the bankers perceive microfinance as a highly risky venture, but
they should look upon the positive side of the picture, as more than 60 per cent bankers reported
above 90 per cent repayment rates, which is even better than that of the well-off clients.
A very important area which has been rather neglected to date is the arrangement of non-finan-
cial services for the poor. The poor have talent, but they need to nourish their entrepreneurial
skills (in addition to fund requirements). Banks can play an important and exciting role in devel-
oping the business skills of the rural poor. They can provide advisory services to the small entre-
preneurs, for instance help with identifying the viable business opportunities open to them. They

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 Sangeeta Arora and Meenu

can also arrange for training camps for the rural youth, to inculcate entrepreneurial skills among
them and to train them to carry out their own ventures.
Bankers can also promote women’s empowerment by promoting business culture among
them. Though the banks do provide some special schemes for women, the number of female
clients reported has been very low, as compared to male clients. The bankers should motivate
women to avail these services too; for instance, women can be motivated to form SHGs to
access these services.
Most of time, the poor hesitate to approach the banks for their financial needs due to the cum-
bersome procedural formalities of accessing credit from the banks. They prefer to get finance
through informal routes that are costlier but easier. Moreover, the banks ask for collateral that
the poor cannot offer. The banks should simplify their procedures for loans, and try offering col-
lateral-free loans to the poor. The studies have shown that the poor can effectively engage with the
banking system – they have the ability and the willingness to repay (Bedoya 2006; Gupta 2008).
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There are many villages where there is not a single bank branch available. With the introduc-
tion of information technology (IT), banks can easily move into previously bank-free areas.
Mobile banking, business correspondents, and business facilitator models are some of the IT-
enabled mechanisms that could be used to reach the unreached. IT-enabled services have
already been successfully implemented in three banks – PNB, OBC, and SBOP – in the district
of Fatehgarh Sahib on a pilot basis.
Though the Government of India is providing many facilities to encourage banks to promote
financial inclusion to its full extent – e.g. in the form of debt waiver schemes, a financial
inclusion fund (FIF), financial inclusion technology fund (FITF), etc. – the banks should con-
tinue developing more schemes under the microfinance umbrella, according to the needs of the
rural poor, and should increase the fund allocation to this end.

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The authors
Sangeeta Arora is a Reader in the Department of Commerce and Business Management, at Guru Nanak
Dev University in Amritsar, India. ,sukhsangeet@yahoo.com.
Meenu is a Research Scholar in the Department of Commerce and Business Management at Guru Nanak
Dev University in Amritsar, India. ,meenu.rattan@gmail.com.

Development in Practice, Volume 22, Number 7, September 2012 1005