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SWOT Analysis of Microfinance and Self Help Groups in India

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 SWOT Analysis of Microfinance and Self Help Groups in India
Dr. Dimpal Vij*

Abstract/Purpose of the study

Even after 65 years of independence and several developmental efforts initiated by central
and state governments, rural India still plagues with problem of poverty, unemployment,
inequality, illiteracy, gender disparity etc. Though Micro-Finance and Self Help Groups
(SHGs) are playing a good role in increasing income and Self-employment among rural
people but still much has to be done in this area. The present paper showcases the
experiences of Micro finance sector and Self Help Groups of India till now. The central
theme of the paper is to find the weaknesses of microfinance sector and to provide
recommendations to overcome them so that this sector may become more efficient and
contribute in inclusive growth and sustainable development of Indian economy.

Design /Methodology/Approach
Research methodology is analytical and descriptive based on authentic secondary data. This
research paper is divided into five sections. Section first introduces the concept of
microfinance, its history and objectives. Section second gives a brief view of microfinance
models applied in India. Section third analyses the performance of microfinance and Self
Help groups (SHGs) in India till now. Section fourth does SWOT analysis of microfinance
sector while section fifth gives recommendations and concludes it.

Findings
The analytical findings revealed that though microfinance and self help groups have achieved
a lot in past two decade still it has to go to a long way by overcoming its weaknesses and
taking advantages of the opportunities ahead for becoming a more vibrant tool of rural
development and poverty alleviation.

Practical Implications
This study is very useful for policy makers, planners and researches in this field to get a
greater insight into this sector and to improve it on the basis of its recommendations.

Keywords: Inclusive growth, Micro-finance, Poverty alleviation, Rural development, Self-

Help Groups, Sustainable development

*Reader, Dept. of Economics, MMH College, Ghaziabad (UP) Email:dimpal.vij@rediffmail.com

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I Introduction
India is a country of villages with majority (68.2%) [1] of its population living in rural areas.
Even after 65 years of its independence rural India is still plagued with problems of poverty,
unemployment, economic inequality, illiteracy, gender disparity etc. Thus rural development
has been remained a key area in all our planning process. In rural areas the main problem of
rural poor and farmers is timely availability of credit as institutional measures of providing
credit are insufficient and procedure is too long and cumbersome to fulfil for the rural poor.
Here Micro-finance can play a catalyst role in changing rural India by providing timely and
hassle free credit to the rural people.

In simple terms microfinance means providing very small loans (microcredit) to very small
families in order to help them to take productive activities and grow their tiny business. Over
time, microfinance now includes a broader range of services like credit, savings, insurance
etc. However some microfinance institutions also provide additional services like technical
assistance, skill training etc. According to task force of NABARD [2] constituted on Micro-
finance it is “provision of thrift, credit and other financial services and products of very small
amounts to the poor to enable them to raise their income and improve their living standards.”

Micro finance is not a new concept. It dates back 19th century when moneylenders were
informally performing the role of now formal institutions. Micro finance industry in India
emerged in the 1970s to provide poor and illiterate people access to credit to save them from
high interest rates fixed by the informal moneylenders. Because of their weak assets base,
poor people are generally unable to fulfil loan guarantee requested by traditional banks and
remain trapped in a vicious circle of low income, low investment and low revenue. In 1974,
SEWA Cooperative Bank was established to help poor and illiterate women to escape them
from the trap of moneylenders and to reduce their dependence on them. Much like Grameen
Bank in Bangladesh, SEWA relied on peer pressure group to ensure high loan repayment
rates. Through its success, SEWA Bank proved that poor can be helped and were provided
bank services successfully. This paved the way for the emergence of hundreds of
microfinance institutions during the 1980s and 1990s. However the progress of microfinance
sector in India from 1960‟s to till now has been given in figure 1 given below.

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 Figure 1

Evolution of Microfinance in India (1960s to Today)

Before 1960s 1960s-1980s 1990s 2000-till now

Phase 1: Phase 1: Phase 2: Financial Phase 3:

Co-operative Banking Social Banking Systems Approach Financial Inclusion
InclusionIIncInclusi
on
Legal framework Nationalisation of SHG-Bank Linkage NGO-MFIs and SHFs
for micro-finance banks in 1969 Program by gaining more legitimacy
developed in NABARD in 1992
1904 with MFIs emerging as
Introduction of
establishment of strategic partners to
lead Bank scheme Passing of diverse entities interested
co-operative
movement mutually aided co- in the low-income
Establishment of operative act in segments
RBI 1934 act Rural Regional Andhra Pradesh in
provided for Banks in 1975 1995 Consumer finance
establishment of emerged as high growth
agriculture credit area
Establishment of Establishment of
department
Apex Institutions MFIs, typically of Increasing
such as NABARD and commercialization
non-profit origins
SIDBI for rural
finance Increased policy regulation

Source – Self made

The basic idea of microfinance is simple. If poor people are provided with easy access to
financial services, including credit, they may be able to start or expand a micro-enterprise that
will allow them to break out their poverty. Micro-finance programmes may help poor to open
or expand their micro-enterprise thus increase their income levels and they are able to easy
access of financial services. With the new emphasis now given to micro enterprises, self
employment activities and household enterprises, micro-finance has now become very
fashionable and one of the most attractive interventions for rural development and economic
empowerment of poor people.

The broad objectives [3] of micro-finance system are:

 To foster savings and micro-credit among rural population, particularly empowering
women by their participation in productive services (farm/non-farm), building
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 capacity, leadership building and involving them in decision –making and planning in
households and group activities
 To ensure sustainable livelihood of the community by promoting income generation
through micro-enterprises and bringing in improvement in agricultural practices
(diversification of crops, marketing, asset building etc.)
 To build up effective liaison between village based organizations and training
institutions, resource agencies and government, departments which can assist them in
development initiatives and
 To strengthen and empower the Self-Help Groups or community groups so that they
can articulate and address their strategic interests including issues relating to
Panchayati Raj, literacy, environmental concerns, community health etc.
II Micro-Finance Models applied in India

Micro-Finance Institutions (MFIs) around the world follow a variety of different

methodologies to provide financial services to low-income groups. These methodologies are
based on the principle to provide cash flows to low income groups thus facilitate them with
relatively very small or micro-loan and mobilise their savings. The focus of these services is
women, based on the observation that in financial matters, they are more responsible than
men particularly since their ability is restricted by family responsibilities. In India
Microfinance operates through two models [4]

1. SHG-Bank Linkage Model

2. MFI-bank Linkage Model

SHG-Bank Linkage Model

This model was pioneered in India by NABARD in 1992. SHG [5] is a registered or
unregistered group of 15-25 members of micro entrepreneurs having homogenous social and
economic background, voluntarily coming together to save small amount regularly, to
contribute a common fund and to meet their emergency needs on mutual help basis. The
group members use collective wisdom and peer pressure to ensure proper end use of fund and
timely repayment thereof. They are informal groups where members come together towards
collective action for common cause. The common need is meeting their urgent economic
needs without being dependent on outside help. Savings thus precede borrowing by the

4
members. NABARD (1997) defines SHGs [6] as “small, economically homogenous affinity
groups of rural poor, voluntarily formed to save and mutually contribute to a common fund to
be lent to its members as per the group members‟ decision”. In many SHG programmes, the
volume of individual borrowing is determined either by the volume of member savings or the
savings of the group as a whole. In India, For SHGs credit there are three different models

I. In Model I, SHGs are formed and extended credit by banks

II. In Model II SHGs are formed by the NGOs but credit extended by the banks

III. In Model III NGOs in addition to forming SHGs avail bulk loan from banks for
lending to SHGs

MFI-Bank Linkage Model

This model covers financing of microfinance institutions (MFIs) by banking agencies for on-
lending to SHGs and other small borrowers covered under microfinance sector. Under this
various organizations with varied size and legal forms perform the function of providing
microfinance. These institutions lend through the concept of joint liability group (JLG). [7] A
JLG is an informal group comprising of 5-10 individuals who come together for the purpose
of availing bank loans either individually or through the group mechanism against a mutual
guarantee. Table 1

Sl. Type of MFI Number Legal Registration

No.

Not-for Profit MFIs

1 NGOs 400-500 Society Registration Act, 1860

Indian Trust Act, 1882

2 Non-Profit companies 20 Section-25 of Indian Companies Act,
1956
Mutual Benefit MFIs
3 Mutual benefit MFIs – 200-250 Mutually Aided Co-operative
Mutually Aided societies, Act enacted by State
Cooperative Societies Governments
(MACS)
For Profit MFIs
4 Non-Banking Financial 45 Indian companies Act, 1956
Companies (NBFCs)
Reserve Bank of India Act, 1934
Source: NABARD issues related to microfinance

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Non-Banking Financial Companies (NBFCs), Co-operative societies, Section-25 companies,
Societies and Trusts, all such institutions operating in microfinance sector constitute MFIs
and together they account for about 42 percent of the microfinance sector in terms of loan
portfolio. The MFI channel is dominated by NBFCs which cover more than 80 percent of the
total loan portfolio through the MFI channel. Table 1 given above provides comprehensive
view of MFIs institutions in India.

III Performance of Microfinance Sector in India

1. Progress under SHG-Bank Linkage Model

First we take progress of microfinance sector under SHG-Bank linkage model. Table 2
clearly depicts progress of micro-finance sector under this model. It clearly shows that
NABARD initiative of linking only 500 SHGs to banks in 1992 now has been recognised as a
decentralised, cost effective and fastest growing microfinance initiative in the world, enabling
over 103 million poor households access to a variety of sustainable financial resources from

Table 2 Progress of Micro-finance under SHG-Bank linkage Model

(amount in Rs. Crore/Numbers in lakhs)
Particulars SHG Savings with Banks as Loans disbursed to SHGs Loans outstanding against
on 31st March during the year SHGs as on 31st March

Year Total No. of Amount Total No. of Amount Total no. of SHGs Amount
SHGs SHGs and their %

1992 255 - 255 0.30 - -

1997 14317 - 5719 11.92 - -
2002 4.61 - 1.97 545.94 - -
2006-07 41.60 3512.71 11.05 6570.39 28.94 12366.49
2007-08 50.09 3785.39 12.27 8849.29 36.25 16999.90
2008-09 61.21 5545.62 16.10 12253.51 42.24 22679.84

(22.2%) (46.5%) (31.1%) (38.5%) (16.5%) (33.4%)

2009-10 69.53 6198.71 15.87 14453.3 48.51 28038.28

(13.6%) (11.8%) (-1.4%) (17.9%) (14.8%) (23.6%)

2010-11 74.62 7016.30 11.96 14547.73 47.87 31221.17

(7.3%) (13.2%) (-24.6%) (0.01) (-1.3%) (11.4%)

2011-12 79.60 6551.41 11.48 16534.77 43.54 36340.00

(6.7%) (-6.7%) (-4%) (13.7%) (-9.0%) (16.4%)

Source- different reports of NABARD on microfinance

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the banking system by becoming members of nearly 8 million SHGs by March
2012.Together the 8 million SHGs of the poor maintain a balance of over Rs. 6551 crore
(Table 2) in the savings bank accounts with the banks, while they are estimated to have
harnessed savings of over Rs. 22000 crore of which nearly 70%(over 15000 crore) goes for
internal lending. [8] Over 4.4 million SHGs are regularly availing credit facilities from the
banks. During 2011-12 alone, over 1.15 million groups availed loans amounting to Rs. 16535
crore from banks and together 4.4 million groups have loans to the extent of Rs. 36340 crore
outstanding against them with the financing banks as on 31-3-1012.

Figure 2 give comprehensive picture of savings, credit (loan disbursed) and loan outstanding
of SHGs under SHG-Bank linkage model in the last four years.

Figure 2: Savings and Credit of SHGs with banks as on 31-3-12

Source- NABARD Report on microfinance 2011-12

Figure 3 gives comprehensive picture of finance of different banks to SHGs during 2011-12
that shows commercial banks have highest share (58%) among all banks to finance SHGs.

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 Figure 3

Source- NABARD Report on microfinance 2011-12

If we analyse the region-wise progress of microfinance sector under this model we find that
from almost 100% of SHGs linked to banks at pilot stage from southern states, the share of
southern states in the total number of SHGs linked shrank to 46% by March 2012, while the
share of eastern states (especially West Bengal, Orissa, Bihar) shot up to over 20%. The
balance in the saving accounts of banks as at the end of March 2012 stood at Rs. 6551.41
crore (Table 1). Among the major states, Karnataka SHGs maintain the highest saving bank
balance of over Rs. 16000 per SHG followed by Punjab of nearly Rs. 12500 per SHG.
Among the regions, southern region (see figure 4) has highest balance at Rs. 10080 per SHG
and north-eastern region recorded the lowest balance of Rs. 4159 per SHG as is clear from
figure 4. On an average, the SHGs maintain a balance of Rs. 8230.
Figure 4: Average Savings Balance of SHGs with Banks- region-wise

Source- NABARD Report on microfinance 2011-12

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 2. Progress of Microfinance under MFI-Bank Linkage Model

Though most of these MFIs entered into micro-finance sector only after NABARD SHG-
Bank linkage programme became quite successful but these institutions grew at a much
larger scale than SHG-Bank linkage programme after government policy of „Inclusive
Growth‟ during 11th plan of 2007-12. They were more aggressive and innovative in
reaching out to the rural poor than the formal banking system. The progress of micro-
finance sector under MFI-Bank linkage model is given below in table 3

Table 3 Progress of Microfinance under MFI-Bank linkage Model

(Amount Rs. Crore)
Year Loan disbursed by banks to Loans outstanding against Fresh loans as % of loan
MFIs MFIs as on March 31 outstanding

No. of MFIs Amount No. of MFIs Amount No. of MFIs Amount

2006-07 334 1151.56 550 1584.48 - -
2007-08 518 1970.15 1109 2748.84 - -

(55.1%) (71.1%) (101.6%) (73.5)

2008-09 581 3732.33 1915 5009.09 329.6 134.2

(12.2%) (89.4%) (72.7%) (82.2%)

2009-10 691 8062.74 1513 10147.54 219.0 125.8

(18.9%) (116%) (-21%) (102.6%)

2010-11 471 8448.96 2315 13730.62 491.5 162.5

(-31.8%) (4.8%) (53%) (35.3%)

2011-12 465 5205.29 1960 11450.35 - -

(-1.3%) (-38.39%) (-15.3%) (-16.6%)

Source- various reports of NABARD on micro-finance

Though these institutions were working well initially but later on the functioning of these
institutions (mostly „for profit‟ NBFCs) were being subjected to criticism [9] due to their high
profitability, unethical business practices, inhuman way of debt recovery, higher rate of
interest etc. which resulted regulation of these MFIs through Andhra Pradesh government
ordinance of 2010 (due to suicide of women in Andhra Pradesh), setting up of Malegam
committee in 2011 to give recommendations on regulation of malfunctioning of these MFIs.
However government accepted and applied Malegam committee report and as a result the
lending operations of these institutions virtually came to a halt. This is clear from table 3
given above the growth and amount disbursed to these institutions after 2010-11 became
negative. The fact that commercial banks (and financial institutions like SIDBI) are losing
9
their confidence in lending to these MFIs is evident from the fact that the fresh lending to
MFIs by banks during the year 2011-12 declined by over 38% as compared to last year (table
3). There has also been a marginal decline in the number of MFIs availing fresh loans from
banks in spite of the fact that the loan outstanding against MFIs has come down by almost
17% during the year. If the trend continues, this sector is likely to face serious resource
crunch and could affect its outreach plans in the near future. [10]

IV SWOT Analysis of Microfinance sector of India

SWOT analysis of microfinance sector and Self help groups has been done by me to find out
the weaknesses and potentialities of this sector and accordingly recommendations have been
provided to overcome these weaknesses. The SWOT analysis is as follows --

Strengths
 Providing saving and credit facilities
to poor and unreached people
 Reduced dependence of poor people
on informal money-lenders and non-
institutional sources
 Employment and income generation
through micro enterprises
 Diversification of non-farm activities
 Enhancing rural economic
productivity through easy finances
 Providing wide range of services like
saving, credit, insurance, training,
counselling etc.
 Building up support system through
non-financial assistance like technical
support, skill development, training
etc.
 Increase in the standard of living of
people
 Women empowerment through
saving mobilisation and capacity
building
 Strengthening SHGs or community
groups to address their problems and
promoting leadership qualities among
the members
 Establishing the linkages between
banks and marginalised citizens
especially women
Weaknesses
 Regional disparity in disbursement of
credit across the country
 High administrative cost
 High repayment structure/high rate of
interest
 Multiple lending and over-
indebtedness
 Financial illiteracy of the people
 Indiscipline among the borrowers for
eg. Dropout and migration of group
members
 No proper regulatory body or legal
structure to check working of MFIs
 No field supervision to check
operational feasibility of lending
 Inability of microfinance institutions
to generate sufficient funds
 Non transparent pricing
 Fight among MFIs to grab established
markets
 Inhuman behaviour of recovery of
loans sometimes led to tensions even
suicides

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 Threats Opportunities

 Cut throat competitions among MFIs
 MFIs vested interests like to grab the
market lead to non-required lending
even
 Loans being provided for
unproductive or unfeasible projects
 Multiple loans to the same borrower
lead to unrecovery of loans
 No use of SHGs peer pressure group
for repayment
 Large number of people and areas in
India are still uncovered
 Various regions still untapped
 Government and Banks support to the
programme
 Range of services can be increased
from financial to non-financial and
others
 Members can be helped to invest in
asset creation, diversify their
occupation and improve their risk
bearing capacities

V Recommendations

Based on above SWOT analysis some recommendations are given below to overcome
weaknesses of Microfinance sector

 First Microfinance sector should be regulated by the government and regulation has
to be tempered by a sensible institution like Reserve Bank of India (RBI)
 Second There should be field supervision of these loans and micro finance institutions
should check ground realities and the operational efficiency of such lending.
 Third Microfinance now should focus on untapped and lean regions and incentives
should be offered to microfinance institutions for opening branches in untapped
villages so as to reduce regional imbalances and increase rural penetration.
 Fourth Regulation should encourage bonding with their members with savings, self-
help, education and training and not just lending. Money should be provided in those
cases only wherever it is required and productive also. The capacity of a village or
cluster to support income generating activities has to be worked out and to tap MFIs
lending geographically.
 Last but not the least microfinance institutions should be encouraged to offer a
complete range of services to their clients. For this a holistic scheme to help the poor
that includes insurance, self-help, education and training and finally credit should be
introduced and MFIs should now come out of merely tapping saving and providing
credit facilities to poor.

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 Conclusion

Microfinance has come of age in India. It must be understood that microfinance in itself is no
magic bullet – not for poverty eradication, livelihood creation, empowerment of women or
the poor, financial inclusion or economic equality. But it can be developed as a powerful tool
for reaching the poor and unprivileged people by providing a whole range of services from
financial to non-financial to them as well as creating employment opportunities, reducing
gender and geographical disparities by overcoming its weaknesses through the suggestions as
given above. Though some efforts have been done recently to strengthen and regulating the
microfinance sector as enactment of Microfinance Regulation Bill by government of Andhra
Pradesh after getting complaints of anomalies and suicide of women due to torture of MFIs,
acceptance of Malegam Committee Recommendations by RBI and implementation of sector
specific regulation by Reserve Bank of India and most recently release of draft microfinance
institution Development and Regulation Bill, 2011. But much has to done to make this sector
a powerful tool of inclusive growth and sustainable development of Indian economy. It is
high time to do so if we implement above recommendations our microfinance sector can be
made more efficient and more inclusive.

References

1. Census 2011
2. National Bank for Agriculture and Rural Development
3. Raut, Paramita (2007), “Financing Rural Poor: Performance of Micro-Finance Sector in India”
Chaudhari, T.D (ed) “Rural Financial Sector: Alternate Models” Hyderabad, The Icfai
University Press pg. 185
4. Accessed from www.india.gov.in microfinance on 30/9/2012
5. Hole, Rushikesh (2011, Jan 11) “Micro-Finance And Self-Help Groups: Catalyst For Rural
Transformation” <<Public diplomacy-Task ahead Daily news: 9 Jan 2011 (current affairs)
retrieved from http://www.prep4civils.com/blog/daily-essay/488/micro-finance-and-self-help-
groups-catalyst-for-rural-transformation/ on 4-6-2012 7.20 am
6. Ibid 3
7. MicroFinance – Current Status and Growing Concerns in India _ AvantGarde_files Oct 1,
2011 Biz Arena Executive Summary by Jacob Vishal Vivek retrieved HTML files on
24/8/2012

8. NABARD Report (2011-12) “Status of Microfinance in India” retrieved from

http://www.nabard.org on 23/11/12
9. Sehgal, S.A (2011), “Shoshan Ka Naya Hathiaar” NW Dainik Jagran, Dec. 21, 2011 pg. 6
10. Ibid 10

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