A Study On microfinance institution in rural India

Seminar programme

Submitted to
Amity school of economics

Faculty guide
Name; Dr. Kollapuri M.
Dpt:
Amity School Of Economics

Submitted by;
Name of the student: Riya Jain
Enrollment number: A6018218040
Programme / semester:
B.A (hons) economics / semester 1
 Candidate’s Declaration
I hereby declare that the work, which is being presented in the Major
Project/Seminar/Term Paper, entitled “microfinance instutions (rural india)”in partial
fulfillment for the award of Degree of “B.A(Honours) Economics” submitted to the Amity
School of Economics, Amity University, Uttar Pradesh is a record of my own investigations
carried under the Guidance of Dr. kollapuri M. , of Amity School of Economics.

I have not submitted the matter presented in this report anywhere for the award of any other
Degree.

(Signature of Candidate)

Name of Candidate riya jain

Enrolment No.: A6018218040

Programme/Semester: B.A.(Honours) Economics

Batch: 2018-2021

Counter Signed by
Dr .kollapuri M.
Amity School of Economics
 ACKNOWLEDGEMENT

I would like to thank Dr. Kollapuri M. in guiding and helping me in completing this project. Also
the constant support and guidance of my parents helped me in collecting the data efficiently and
they also helped me in analyzing the data too.

Date:

Faculty Guide Prof.(Dr.) Kollapuri

M.
Amity School of Economics Amity School of
Economics
 Index

1. Project synopsis
2. Introduction
3. Microfinance institution network
4. Microfinance institution in India
5. Need for credit
6. Challenges faced by microfinance institution in
India
7. Conclusion
8. References

9.
 Project Synopsis
Microfinance Institution (rural India)

1.1 Statement of the problem

Many people in India still use cash for their transaction especially in rural area.
Rural people need a variety of financial services, not just loan. In rural area
people have limited access to financial services. The way can get money is to
contact the local moneylenders. For centuries, moneylenders have monopolized
rural credit market. Rural people are caught in an inescapable cycle of debt.
Government repeated help have not benefitted them to the fullest.
However, microfinance has shown some growth and has been successful in
reaching to thousands of rural people. Microfinance institution can broaden
their resources by mobilizing their savings into a financial productive service.
Microfinance institution provides a platform where rural people can easily get
financial assistance. They can’t go to the formal lenders due to the high cost of
transaction, paperwork and lack of collateral security.

1.2 Objectives
 Access to capital
 To help their business to grow and diversify
 Diversify their income generating activity
 Poverty alleviation

1.3 Expectations
According to me, microfinance institutions can uplift rural area by providing
financial assistance in a lot of areas. They can use this money in diversifying their
business, money provided by them will help people especially women to be
independent and self-reliant. It can help in developing and strengthening self-help
groups.
 Introduction
1. Microfinance
Microfinance also known as microcredit is a type of banking system that grants credit
facilities to unemployed or low income individuals or groups. These services are
provided because these people do not have access to credit. It covers a wide range of
services like credit, savings ,insurance ,mobilizing funds into a productive activity and
it also provides non-financial services like counselling ,etc.

2. Birth of microfinance institution

In layman’s language an institution whose main activity is to provide microfinance is
known as microfinance institution. In India credit unions and lending cooperatives
have been around for hundreds of year. the introduction of modern microfinance was
given by Dr.Mohammad Yunus. He started by granting loans to poor women in the
village of Jobra(Bangladesh).

3. Features of microfinance
 Small amount of loans
 It is collateral free
 Short duration loans
 Easy repayment
 No paper work
 It provides employment opportunities
 Women empowerment

4. Channels of microfinance
 SHG- Bank Linkage Programme
It was initiated by NABARD in 1992.under this, women in villages are
encouraged to form a group of 10 – 15.each member has to contribute certain
amount of money and with this money other members get loan. Later on these
groups are provided small loans for productive activity. There is stipulated
time for saving, after certain period members have to give more
money(savings).recovery of past loan is and made and credit is granted again.
These SHGs are self-sustaining.

 Micro finance institution

Institution whose primary activity is to lend are called microfinance institution
.they can operate on large scale or small scale. They offer variety of
microfinance services.they lend through the concept of Joint Liability
Group(JLG).JLG is an informal group of 5 to 10 individuals. Members main
purpose is to avail loan ,it can be individually or in a group against a mutual
gurantee.MFI chanel is dominated by Non Banking Financial
Companies(NBFCs).

Type of MFI Number Legal Registration

Not For Profit
1.NGOs 400-500 Society registration act 1860
Indian trust act 1882

2.Non Profit 20 Section 25 of indian companies

companies act,1956
Mutual benefit MFIs
1. Mutual 200-250 Mutually aided cooperative socities
benefit MFIs- ,act enacted by state governments
(MACS)
For Profit MFIs
1.NBFCs 45 Indian companies act 1956
Reserve bank od india act 1934

Source; http://www.iitk.ac.in/ime/MBA_IITK/avantgarde/?p=475
 Microfinance institution network

MFIN was established in october 2009 .it was established under the Andhra Pradesh
societies regulation act 2001 . to a large extent MFIN is member funded. MFIN is a
main representative body and the self regulatory organization (SRO) for NBFC , MFI
regulated by RBI.

Mission
Main objective is to robust work towards improvement of microfinance in india . It
can be done by promoting the following
 Microfinance institution in India

1. Joint responsible lending liability

group(JLG)
It was a concept which
came in client protection India in 2014
by NABARD.
It is as a informal group
of 4 to 10 people who
try avail good governance loan against
mutual grantee from
banks (without
a supportive regulatory collateral) .they
take environment loans for
agricultural and
allied activities. This consists of tenants, farmers and other rural workers. They
mainly offer money for lending purpose however they also offer saving facility. These
type of institution is simple in nature and require less financial administration.

2. Self-help group(SHG)
It is a village based intermediary committee in which there are 10-20 local women or
men. It may be a formal or informal group.it consists of small entrepreneurs whose
economic background is same. There is no need for collateral. The rate of interest
offered is low. NABARD operated self-help linkage program wherein SHGs can
borrow money from bank , if they have given their record of regular payments.it is
successful in Andhra Pradesh ,Tamil Nadu, Kerala and Karnataka.

3. The grameen bank model

Nobel Laureate Prof. Muhammad Yunus introduced grameen bank model I 1970’s. it
is now known and adopted in the form of regional rural bank. Main objective of this
model is inclusive growth especially of rural and backward areas where people can’t
get access to credit facilities.it provides loans without collateral .

4. Rural Cooperatives
It was set uop during the time of independence . it has a complex mechanism. They
pool money of people with relatively small means and provide financial services.their
success is limited because of the complex structure.
 Joint
Self Help
Liability Grameen
  Group Rural Cooperatives
Group Bank Model
(SHG)
(JLG)

Intial 2
5-10 10-20 members ,
then starts 70-80 members (per
Size members members
growing group)
(per group) (per group)

Provides both
saving and
Regular Lending to agrarian
Services Lending only deposit to
savings sector
weaker
section

Amount is Individual Amount

Formed for a singular
invested for group work recovered in
Model purpose, like
different on same further
agricultural activities
purpose activity reinvested

Formal way
Formal
Members of interaction
structure it
interact the , there are
consists of Members interact the
Structure institution at post of
field manager institution jointly.
an individual general
and unit
level secretary and
manager, ets.
treasures
Source; https://www.projectguru.in/publications/types-microfinance-institutions-
india/
 Need for credit in rural area

Rural credit for the farmers

 Commercialization of farming – commercialization of farming means when farmers

grow crops for sale in the market and not for their consumption. It started under the
British era . They want money to enjoy the benefits of large scale production.

 Long gestation period – there is a huge time gap between sowing and harvesting. In
other words there is a gap between order and realization of sales. Farmers need credit
to buy raw materials as sale of output takes time

 Vicious cycle of poverty – Indian farmers have been oppressed at the hands osf
moneylender and zamaindars since ages. Absence of other credit facilities force the
farmers to go to the moneylenders to borrow money,. The rate of interest offered by
tem is high .

 Dependence on monsoon –in India till now most of the farmers are still depended on
monsoon for growing their crops . its like gamble of monsoon . in a time of lean
season they have to borrow so as to start from fresh .
 Challenges faced by the Indian
microfinance institution in India
Poverty has griped India. It’s becoming difficult for India to come out of the
poverty. India has only 2.4% of the worlds area, it contributes1.2% of the
world income, but it accommodates 17.5% of world’s population. The main
reason for hindrance of economic growth is its large population. However
most of the India population consists of the working population, however it is
not beneficial because of illiteracy, lack of job opportunities, voluntary and
involuntary employment. Inequality in distribution of income contributes to
the problem of whom to produce.

The growth of microfinance institution have been remarkable but there are
many milestone to achieve. There are many problems that they have to
overcome. it is lagging behind in terms of structural , operational and financial
process.

1. over –indebtedness due to multiple borrowings and inefficient risk management

MfIs provide loan to the poor section of society for improving their quality of life.
That implies over indebtedness is the major issue. They provide loan without any
collateral security which increases the risk of bad debts. There is lack of
infrastructure in this sector.

2. High rate of interest as compared to other banking institutions

The rate of interest offered by the mfis lies in the bracket of 2% to 30%. Lending
smaller amount of loans means high rate of interest due to high operational cost.
This issue has left farmers to commit suicide, hence the rate of suicide in Andhra
Pradesh and Maharashtra.

3. Over – dependence on banking system for funding

Most of the MFIs in India registered as non-governmental organizations. Their
source of funding is dependent on financial institution .Private banks charge high
rate of interest and they provide short term loan.MFI s are totally dependent on the
banks to meet their financial needs, such dependency make them incompetent.

4. Lack of awareness of financial services

Nearly 82 of men and 60 % women are literate. However 76% of the population
can’t understand basic banking terms. They are not aware of their rights and other
facilities. Mostly this population consists of rural elderly population, making them
understand the facilities is quite cumbersome.
5. Regulatory issue
Reserve bank of India is the regulatory body for microfinance industry in India.
Some of the changes made by RBI benefitted MFIs while some hampered its
growth like creating barriers for entry to restrict unworthy players.
So there should be separate regulatory board.

Other challenges are as follows:

 Lack of stability
 Cost of outreach
 Quality of SHGs
 High transaction cost
 Limited budgets
 Conclusion

Microfinance institution has been able to fulfill diverse

needs of rural household. It has been able to provide
loans for personal and business. It has also contributed
to women empowerment. It has helped them to make
them financially independent. Repayment of loan by
poor people is done timely. They are also willing to pay
higher rate of interest as compared to commercial banks
if they are provided stable and secure source of credit.
Rural people save and microfinance institution should
provide more saving and investment facilities.

Microfinance has been seen as a development tool for

sustainable rural development .sustainable rural
development means development of rural people
through productive self-employment, income generating
activities, skill enhancement, and awareness on various
matters.
References

https://www.slideshare.net/yogi3250/impact-of-micro-finance-
on-living-standard-empowerment-and-poverty-alleviation-of-
poor-women-a-case-study-of-north-india

http://www.iitk.ac.in/ime/MBA_IITK/avantgarde/?p=475

http://mfinindia.org/

https://en.wikipedia.org/wiki/NBFC_%26_MFI_in_India
https://economictimes.indiatimes.com/industry/banking/finance
/microfinance-institutions-are-struggling-for-survival-heres-
why/articleshow/60931020.cms

http://www.spandanaindia.com/pdfs/MFIs%20in
%20India.pdf.pdf

https://www.nabard.org/auth/writereaddata/tender/1307174808
Status%20of%20Microfinance%20in%20India%202016