Professional Documents
Culture Documents
A Study on
SUBMITTED BY
ANU. S
2009 – 2011
DECLARATION
I, ANU. S, hereby declare that this dissertation titled, “Microfinance Self Help Groups as an
Alternative Means for Alleviation of Urban Poverty”, is based on the original project study
conducted by me under the guidance of Dr. BHARATH K. A.
This has not been submitted earlier for the award of any other degree/ diploma by Bangalore
University or any other University.
Date: (09SKCMA009)
Certified that this dissertation titled, “Microfinance Self Help Groups as an Alternative
Means for Alleviation of Urban Poverty ”, is based on an original project study conducted by
MS. ANU.S of IV Semester MBA under my guidance.
This dissertation has not formed the basis for the award of any other degree / diploma by Bangalore
University or any other University.
Place: Bangalore
Certified that this dissertation titled, “A study on Financial Accounts of Urban Poor-with special
reference to microfinance”, is based on the study conducted by Ms.ANU.S of IV Semester MBA under
the guidance of Dr. BHARATH K.A.
This dissertation is based on the original project study undergone and has not formed the basis for the
award of any other degree / diploma by Bangalore University or any other University.
Date: Date:
ACKNOWLEDGEMENT
I, ANU.S, would like to convey my deep gratitude to my guide Dr. BHARATH K.A., for his valuable
guidance imparted, which has enabled me to complete this report in accord with Bangalore University
norms.
I would also like to express grateful thank to all the respondents who helped me to proceed at every
step of a perfect destined life and favoured me with their valuable feedback about the survey and
cooperation.
I am thankful to Dr. KERRON G REDDY, Principal and CEO of A.I.M.S., who had provided all the required
facilities to carry out the report work and nurturing my skills to execute the requirement.
Last but not least, my gratitude goes to my faculties, family members and friends, who showered upon
me their best of good wishes and help, towards successful completion of this report.
Executive Summary
The urban poor need to be brought up over the poverty line. In order to do this we need to understand
their finance totally so that we can deliver useful services or assistance to them.
In India, most studies on poverty have been concentrated on the rural poor and urban poor has received
little attention of the policy makers. With the rapid growth of big cities, slums, the breeding grounds of
urban squalor and poverty, expand primarily due to increased migration of the poor from the villages in
search of better employment opportunities and improved standard of living. All poor, however, do not
live in slums. In fact, the urban poor population in the country is estimated to be nearly eight crore
whereas the slum population hovers around four crore. Most of the working population in urban areas
work under utterly deplorable conditions in unorganised sector with a very few livelihood options.
Bangalore has globalised and introduced economic growth and opportunities to young people to
become financially independent from their families with a disposable income to carry in a higher
standard of living. Unfortunately, this prosperity is not shared throughout Bangalore's society. Bangalore
has 800 slums and over 2 million people living in poverty. Some of the poor have benefited from an
increase in demand for construction labor and domestic services, the wages they receive are not
sufficient to afford the rising cost of living in Bangalore. According to a report, the present minimum
wage is not enough to sustain a basic standard of living. This report calculated what an average family
would need tospend in order to meet basic requirements on a monthly basis. It found that a typical
family consisting of three wage earners supporting six family members earns an average monthly
income that falls short by 21% of what is needed to live. Even if a minimum wage earner works 8 hours a
day with no days off or sick pay, she will still only be able to bring third of the total amount an average
family needs.
In India, huge flow of migrants, poor and the not-so-poor, criss-cross the country in search of a better
life for themselves and their families who mostly stay behind in their villages. They take up non-
contractual and no permanent jobs, such as, house help, security guards, daily wage labourers, hawkers,
beggars staying on the streets and petty workers working in and around the industrial areas in cities.
These migrants need a fast, low cost, convenient, safe and widely accessible remittance service to send
money to their families and dependents to meet their consumption needs and other life cycle needs in
particular, medical emergencies. Safe, speedy and affordable means of remittance, however, remains a
major problem for the migrant domestic labour in urban, many of whom unlike overseas migrants do
not even have bank accounts either at their native places or their work places.
This Dissertation is titled “A study Microfinance Self Help Groups as an Alternative Means
for Alleviation of Urban Poverty on is done by Ms.ANU.S , Student, Acharya Institute of
Management and sciences, Bangalore under the guidance of Dr. BHARATH K. A. during the
period of April 2011 for fulfilling of the requirement of Bangalore University for the degree of
M.B.A. This project was undertaken to study and to understand the problems of urban poor in
Bangalore city, steps taken by government for their upliftment, to analyze the business model of
micro finance in India. The survey was conducted by taking the sample size of 100 respondents,
primary data was collected through questionnaire, and secondary data was collected through
journals, articles, news papers and websites. The collected data was classified and tabulated with
help of tables, charts and graphs for the purpose of analysis.
It was found by analyzing the data that there is much potential for micro finance institutions in India.
Poor need to be brought up in order to the development of Bangalore in terms of infrastructure as well
as education.
TABLE OF CONTENT
71-71
BIBILOGRAPHY
72-74
ANNEXURE
LIST OF TABLES
LIST OF FIGURES
month of march
CHAPTER 1
INTRODUCTION
The urban poor need to be brought up over the poverty line. In order to do this we need to
understand their financial totally so that we can deliver useful services or assistance to them.
In India, most studies of poverty have been concentrated on the rural poor and urban poor has
received little attention of the policy makers. With the rapid growth of big cities, slums, the
breeding grounds of urban squalor and poverty, expand primarily due to increased migration of
the poor of the poor from the villages in search of better employment opportunities and improved
standard of living. All poor, however, do not live in slums. In fact, the urban poor population in
the country is estimated to be nearly eight crores where as the slum population hovers around
four crore. Most of the working population in urban area work under utterly deplorable
conditions in unorganized sectors with a very few livelihood options. The deprivation of urban
poor is further accentuated as more than 40 percent of the adult Indian urban population has no
access to bank account. And thereby depriving them of savings, credit, remittance and other
financial service facilities from the formal financial system. Against this background, this paper
tries to study the issues an options involving financial inclusion of the urban poor.
Bangalore has globalised and introduced economic growth and opportunities to young people o
become financially independent from their families with a disposable income to carry a higher
standard of living. Unfortunately, this prosperity is not shared throughout Bangalore’s society.
Bangalore has 800 slums and over 2 million people living in poverty. Some of the poor have
benefited from an increase in demand for construction labor and domestic services, wages they
receive are not sufficient to afford the rising cost of living Bangalore. According to report, the
present minimum wage is not enough to sustain a basic standard of living. This report calculated
what an average family would need to spend in order to meet basic requirements on a monthly
basis. it is found that a typical family consisting of three wage earners supporting six family
members earns an monthly income that falls short by 21% of what is needed to live. Even if a
minimum wage earner works 8 hours a day with no days off sick pay, she will still only be able
to bring third of the total amount an average family needs.
In India huge flows of migrants, poor and the not-so- poor, criss-cross the country in search of a
better life for themselves and their families who mostly stay behind in their villages. They take
up non – contractual and no permanent jobs, such as, house help, security guards, daily wage
laborers, hawkers, beggars staying on the streets and petty workers working in and around the
industrial areas in cities. These migrants need a fast, low cost, convenient, safe widely accessible
remittance service to send money to their families and dependents to meet their consumption
needs and other life cycle needs in particular, medical emergencies. Safe, speedy and affordable
means of remittance however remains a major problem for the migrant domestic labor in urban,
many of whom unlike overseas migrants do not even have bank accounts either at their native
places or their work places.
Urban poor people generally come from various parts of the country and social groups, possibly
impacting the quality of social networks formed within self-help groups as well as restricting
ability of banks / MFIs to gather information on them. Other reason attributing to banks/ MFIs
inhibition in providing financial services to the urban poor may be primarily due to the lack of
identity proof and cohesion among the workers to and from rural areas in contrast to the rural
poor who have a permanent address proof as needed for the urban poor, there is a need to do a
reality check on the myths relating to urban poor, there is a need to do a relating to urban micro
finance.
Though SHGs can handle urban heterogeneity since they are designed to accommodate different
loan amounts, and, like chit funds can accommodate non- borrowing or net saver members who
prefer to sit back and earn interest on loan taken by others, not many SHG’s are functioning in
urban micro finance. The prime reason for underdeveloped SHG sector in urban areas is the
misconception that there is a lack of homogeneity among he urban slum dwellers, though a
reality check suggests that there is a scope develop homogeneous groups required to form SHGs
among the slum dwellers can be reestablished among some of them who have migrated from the
same village generations ago and have similar financial needs. With the implementation of a
number of urban development projects like Jawaharlal Nehru national urban renewal mission
(JNNURM), there is a possibility of growth in resettlement of colonies as the migrants with
better employment and educational opportunities and improved standard of living will tend to
bring their families from more and more homogeneous groups required for forming SHGs in
such areas.
Besides demystifying the misconceptions involved in selecting the appropriate delivery channel
in urban areas, there is a need to customize financial services for the poor keeping in view their
life cycle needs. Product development is an essential activity for market responsive financial
institutions. As clients and their needs change, demand driven financial institutions must refine
their existing products to develop new ones. Effectively conducted, systematic products
development will result in products that are popular in clients and more cost effective operations
for the financial institutions. As market led microfinance puts the customer at the centre of the
business, the importance of 8 P’s of marketing that includes product, price, place, positioning,
physical evidence, people, process is emphasized after rolling out the financial product.
Marketing of the product may be followed by inviting feedback from the clients that may help in
improvising the product.
The section of the urban poor, who are determined to save regularly even with their low
earnings, should be provided an investment option that fetches highest rate of return on his /her
savings. Mutual funds, pension for the unorganized sector and micro insurance products
customized to the financial needs of the poor have to be developed. The recently launched
mutual fund products with an entry point of Rs.50/- and Rs100/- may be a step in the right
direction.
In developed economies and particularly in the urban areas, many activities that would e
classified in the developed world as financial are not monetized: that is, moneys not used to carry
them out. Almost by definition, poor people have very little money. But situation often rise in
their lives in which they need money or he things money can buy. They may be as follows:
Poor people find creative and often other ways to meet these needs, primarily through creating
and exchanging different forms of non- cash value. Common substitutes for cash different from
country but typically include livestock, grains, jewellery and precious metals.
Cost of Retirement Irrigation, Food Send money Meet urgent Microenterp Housing,
burials, (for self or livestock, security, to family at family rise working wells,
health care, parents), transportation, health home & disaster like capital, irrigation
replacement migration, microenterprise, treatments, away, sickness or livestock, systems,
costs after farm home festivals & microenterp crop failure, sewing boats,
co
hurricanes equipment, renovation, social rise working pay off machines, motor
& floods wells, home schooling & obligations, capital, moneylender, radios, bikes,
etc… upgrade, self education etc… emergencies etc… etc… bikes, etc… etc…
insurance, etc…
etc…
Demand or
Various Pension plan Medium line short line Fund Emergency Short -term Long-term
insurance or long time deposit deposit transfers & loans loans loans
plans deposit cheques
MICRO FINANCE
PRODUCTS
Ruther ford argues that basic problem poor people as managers face is to a ‘usefully large’
amount of money. Building a new house may involve saving and protecting diverse building
materials for years until enough are available to proceed with construction. Children’s schooling
may be funded buying and raising chickens for sale as needed for expenses, uniforms bribes, etc.
because all the value is accumulated before it needed, this money management strategy is
referred as “SAVING UP”.
Often people don’t have sufficient money when they face a need, so they borrow. A poor family
might borrow from relatives to buy land, from a moneylender to buy rice, or from a microfinance
institution to buy a sewing machine. Since these loans must be repaid by saving after the cost is
incurred.. Rutherford calls this as “SAVING DOWN”. Ruther ford’s point is that microfinance
is addressing only half the problem. And arguably the les important half: poor people borrow to
help them and save and accumulate assets. Microcredit institutions should fund their loans
through savings accounts that help poor people manage their vast number risks.
The microcredit era that began in the 190s has lost its momentum, to be replaced by a ‘financial
systems’ approach. While microcredit achieved a great deal, especially in urban and near-urban
areas and with entrepreneurial families, its progress in delivering financial services in less
densely populated rural areas has been slow.
The new financial systems approach positively acknowledges the richness of centuries of
microfinance history and the immense diversity of institutions serving poor people in developing
world today. It is an increasing awareness of diversity of the financial service needs of the
world’s poorest people, and the diverse settings in which they live and work.
Brigit Helms in her book ‘Access for all: Building Inclusive Financial Systems’, distinguishes
between four general categories of microfinance providers, and argues for a pro-active strategy
of engagement with all of them to help them achieve the goals of the microfinance movement.
These include moneylenders, pawnbrokers, savings collectors an input supply shops. Because
they know each other well and living in the same community, they understand each other’s
financial circumstances and can offer flexible, convenient and fast services. This type of service
can also be costly and the choice of financial products limited and very short –term. Informal
services that involved in savings are also risky; many people loose their money.
These include self help groups, credit unions, and a variety of hybrid organizations like
‘Financial Service Associations’ and CVECA’s like their informal cousins, they are generally
small and local, which means they have access to good knowledge about each others financial
circumstances and can offer convenience and flexibility. Since they are managed by poor people,
their costs of operations are low. However these providers may have little financial skills and can
run into trouble when the economy turns downs or their operations become too complex. Unless
they are efficiently regulated and supervised, they can be ‘captured’ by one or two influential
leaders and the members can lose their money.
NGOs
The NGOs have spread around he developing world I the past three decades; others, like the
Gamelan Council, address larger regions. They have proven very innovative, advance banking
techniques like solidarity lending, village banking and mobile banking that have overcome
barriers to serving poor populations. However, with board that doesn’t necessarily represent
either their capital or their customers, their governance structures can be easily broken and they
can become overly dependent on external donors.
In addition to commercial banks, these include state banks, agricultural development banks,
savings banks rural banks and non- bank financial institutions. They are regulated and
supervised, offer a wide range of financial services, and control a branch network that can extend
across the country and internationally. However, they have proved unwilling to adopt social
missions, and due to their high cost of operation, often can’t deliver services to poor or remote
populations. The increasing use of alternative data in credit scoring, such as trade credit is
increasing commercial banks interest in micro finance.
With appropriate regulation and supervision, each of these institutional types can bring leverage
to solving microfinance problem. For example, effort are being made to link self- help groups to
commercial banks, to network member owned organizations together to achieve economies of
scale and scope , and to support efforts by commercial banks to ‘down scale’ by integrating
mobile banking and e-payment technologies into their extensive branch networks.
It is estimated that more than 90% of the Indian population does not enjoy social protection of
any kind, a higher proportion than those who are unsaved by banks in respect of savings and
credit. There are however strong synergies between micro insurance, micro-credit, and micro
savings. Insurance offers protection to assets created under credit programmes, and protects
savings from death, accident or asset loss caused by fire drought, floods and riots. While both
savings and insurance provide protect against such shocks, insurance offers a higher degree of
protection, especially when savings have just commenced and are still being built up to provide
an adequate cushion to themselves. Thus, there is a new set of incentives for the insurance
industry to reach the poor, the great deal of innovation in new product development and service
delivery is taking place in partnership with MFIs and others such as SEWA Bank’s insurance
and pension products in collaboration with the Life Insurance Corporation (LIC) and the Axis
Bank.
In the lines of the business correspondent model, NGOs SHGs and MFIs have been recognized
as micro insurance agents for purposes of acting as intermediaries between the insurance
companies and the urban poor. SEWA and DHAN Foundation are the two pioneers in the area of
providing micro insurance to the urban poor. As SEWAs members were employed in the
informal sector and recognized as workers, they were deprived of compensation in times of
accident or illness. This made them highly vulnerable to even small shocks which would not
affect people of similar economic status but with regular income. In fact, a survey of 100
defaulters conducted by SEWA bank confirmed that the roots of default could often be traced
back to shock such as, maternity, sickness, asset loss, or bad weather.
Livelihood during old age may be termed as a major problem for the urban poor with the lack of
proper support system and their inability to work in their old age. Relieving the elderly poor
women from suffering and ensuring that they spend their non productive years with dignity has
been a cause SEWA bank has worked on for a long time. Although SEWA’s pension program is
at too early stage to be evaluated, and the appropriate risk mitigation mechanisms may still be
proved and developed, interest has been expressed by MFIs and organization to replicate the
model and enable poor self employed women to provide for their old age. All these innovative
products can however be delivered to the urban poor at their doorstep through the business
correspondents of banks.
Chapter-2
Research Design
2.1 Introduction to SHG and Research Design
In India, Self Help Groups are most popular vehicles for microfinance operations. Self Help
Groups are voluntary association of poor people who come together to be enabled to solve or
mitigate their problems through self help and mutual help. the most important characteristics of
the groups are they are made of poor people, members background is relatively is homogeneous,
they have been initiated by gov’t or commercial banks or NGOs providing the microfinance
services and their policies as well as operations are democratically conducted.
Research design means the framework of study that leads to the collection and analysis of data. It
is a conceptual structure with which a research is conducted. It facilitates smooth sailing of
research operations to make the research as effective as possible. Research design can be
thought as the structure of research design. It is the “GLUE” that holds all the elements in the
research project together. We often describe a design using a concise notation that enables us to
summarize a complex design structure efficiently. It constitutes the blue print for the collection,
measurement and analysis of data. It is the plan structure and strategy of investigation conceived
so as to obtain answers to research questions. The plan is the overall scheme or programme of
research. A research design is the programme that guides the investigator in the process of
collecting, analyzing and interpreting observations.
The probability of success of a research project is greatly enhanced when the beginning is
correctly defined as a precise statement of goals and justification. Having accomplished this, the
sequential steps necessary for writing research plan and then successfully executing a research
project are easier to identify and organize. Therefore, the message of this chapter is: by the time
research is prepared for the first datum collected in the field, substantial effort should already
have been invested in the conceptual and logistical framework of a project.
Without a research plan or research design, research work becomes unfocused and aimless
empirical wandering. The use of research design prevents such a blind search and indiscriminate
gathering of data and guides him to proceed in the right direction. The design also enables the
researcher to anticipate potential problems of data gathering, operations of concepts,
measurement, etc…
Classification of research design depends on perception of the viewer for a study. They are:
Pure Research
Applied Research
Exploratory Research
Descriptive Research
Diagnostic Research
Evaluation Studies
Action Research
Experimental Research
Analytical Research
Historical Research
Survey
India has large population of urban poor. There is need to understand their finances to help them.
2.5STATEMENT OF PROBLEM
India is the largest emerging market for microfinance. Over the past decade, the microfinance
sector has been growing in India at a fairly steady pace. Though no microfinance institution
(MFI) in India has yet reached anywhere near the scale of well known Bangladeshi MFI’s. The
sector in India is characterized by a wide diversity of methodologies and legal forms. However,
very few Indian MFIs have achieved high rate of sustainability yet. This research attempts to
study the growth of SHGs and its role in alleviating poverty.
Bangladesh experiment by Younus has surprisingly shown that poor have a good potential to
repay the loan. His bank gets more savings than loans. If we want to help poor, we must
understand their financial needs totally such as :
Transactions
Agencies they deal with
Assets and liabilities
Receipts and payments.
2.6REVIEW OF LITERATURE
Urban poverty after the Truly Disadvantaged: the rediscovery of the family, the neighborhood
and culture
In this article the authors have assessed the broad explanations of the increased concentration of
poverty in the urban neighborhoods characteristic. Then, in the section on the family, they
addressed the rising disproportionately high teenage birth rates of urban poor women.
Microfinance SHGs are gaining momentum among the Indian poor who need money or capital to
lead their family or business. This has increased the demand for microfinance. The study gives
an in depth analysis of SHGs, their role in eradicating the poverty and problems associated with
it.
Primary data
The project basically consists of data from secondary data; a basic questionnaire is collected
from the people in and around Bangalore.
Secondary data
Major sources of secondary data are collected from various magazines, journals, Text books,
websites, Research papers etc.
Graphs
Chart
Tables
2.12PLAN OF ANALYSIS
The analysis will be done through the evaluation of various published data & the results
presented in the form of graphs tables and charts.
Research Limitations
3 CHAPTER SCHEME
Chapter 1 - INTRODUCTION
The first chapter deals with the introduction about the research topic, background of the research
topic and explains need for the study.
The research design is covered in the second chapter which consists of statement of the Problem,
review of literature, objectives of the study, sampling techniques, methodology used and
methods of analysis and limitations of the study.
Chapter 3- PROFILES
This chapter defines Analysis of data collected both from primary and secondary sources.
It contains the summary of findings and suggestions. This chapter gives summary of findings of
the study along with the suggestions to overcome such problems.
Chapter 7- CONCLUSION
CHAPTER 3
INDUSTRY PROFILE
3.1 Introduction
Acharya Institute Of Management & Sciences Page 26
ROLE OF MICRO FINANCE IN ERADICATING URBAN POVERTY
Microfinance is defined as any activity that includes the provision of financial services such as
credit, savings, and insurance to low income individuals which fall just above the nationally
defined poverty line, and poor individuals which fall below that poverty line, with the goal of
creating social value. The creation of social value includes poverty alleviation and the broader
impact of improving livelihood opportunities through the provision of capital for micro
enterprise, and insurance and savings for risk mitigation and consumption smoothing. A large
variety of actors provide microfinance in India, using a range of microfinance delivery methods.
Since the ICICI Bank in India, various actors have endeavored to provide access to financial
services to the poor in creative ways. Governments also have piloted national programs, NGOs
have undertaken the activity of raising donor funds for on-lending, and some banks have
partnered with public organizations or made small inroads themselves in providing such services.
This has resulted in a rather broad definition of microfinance as any activity that targets poor and
low-income individuals for the provision of financial services. The range of activities undertaken
in microfinance include group lending, individual lending, the provision of savings and
insurance, capacity building, and agricultural business development services. Whatever the form
of activity however, the overarching goal that unifies all actors in the provision of microfinance
is the creation of social value.
In India, Microfinance has been defined by “The National Microfinance Taskforce, 1999” as
“provision of thrift, credit and other financial services and products of very small amounts to the
poor in rural, semi-urban or urban areas for enabling them to raise their income levels and
improve living standards”.
"The poor stay poor, not because they are lazy but because they have no access to capital."
Traditionally micro finance was focused on providing a very standardized credit product. The
poor, just like anyone else, (in fact need like thirst) need a diverse range of financial instruments
to be able to build assets, stabilize consumption and protect themselves against risks. Thus, we
see a broadening of the concept of micro finance-- our current challenge is to find efficient and
reliable ways of providing a richer menu of micro finance products. Micro Finance is not merely
extending credit, but also extending credit to those who require it the most and family’s survival.
It cannot be measured in term of quantity, but due weightage to quality measurement. How credit
availed is used to survive and grow with limited means.
exclude you anyway. Individuals in this excluded and under-served market segment are the
clients of micro finance.
As we broaden the notion of the types of services micro finance encompasses, the potential
market of micro finance clients also expands. It depends on local conditions and political
climate, activeness of cooperatives, SHG & NGOs and support mechanism. For instance, micro
credit might have a far more limited market scope than say a more diversified range of financial
services, which includes various types of savings products, payment and remittance services, and
various insurance products. For example, many very poor farmers may not really wish to borrow,
but rather, would like a safer place to save the proceeds from their harvest as these are consumed
over several months by the requirements of daily living. Central government in India has
established a strong & extensive link between NABARD (National Bank for Agriculture & Rural
Development), State Cooperative Bank, District Cooperative Banks, Primary Agriculture &
Marketing Societies at national, state, district and village level.
India is said to be the home of one third of the world’s poor; official estimates range from
26 to 50 percent of the more than one billion population.
Acharya Institute Of Management & Sciences Page 30
ROLE OF MICRO FINANCE IN ERADICATING URBAN POVERTY
The demand for microcredit has been estimated at up to $30 billion; the supply is less
than $2.2 billion combined by all involved in the sector.
Due to the sheer size of the population living in poverty, India is strategically significant in the
global efforts to alleviate poverty and to achieve the Millennium Development Goal of halving
the world’s poverty by 2015. Microfinance has been present in India in one form or another since
the 1970s and is now widely accepted as an effective poverty alleviation strategy. Over the last
five years, the microfinance industry has achieved significant growth in part due to the
participation of commercial banks. Despite this growth, the poverty situation in India continues
to be challenging.
Some principles that summarize a century and a half of development practice were encapsulated
in 2004 by Consultative Group to Assist the Poor (CGAP) and endorsed by the Group of Eight
leaders at the G8 Summit on June 10, 2004:
Poor people need not just loans but also savings, insurance and money transfer
services.
Microfinance must be useful to poor households: helping them raise income, build up
assets and/or cushion themselves against external shocks.
“Microfinance can pay for itself.” Subsidies from donors and government are scarce
and uncertain, and so to reach large numbers of poor people, microfinance must pay
for itself.
Microfinance also means integrating the financial needs of poor people into a
country’s mainstream financial system.
“Donor funds should complement private capital, not compete with it.”
“The key bottleneck is the shortage of strong institutions and managers.” Donors
should focus on capacity building.
Interest rate ceilings hurt poor people by preventing microfinance institutions from
covering their costs, which chokes off the supply of credit.
Microfinance can also be distinguished from charity. It is better to provide grants to families who
are destitute, or so poor they are unlikely to be able to generate the cash flow required to repay a
loan. This situation can occur for example, in a war zone or after a natural disaster.
In developing economies and particularly in the rural areas, many activities that would be
classified in the developed world as financial are not monetized: that is, money is not used to
carry them out. Almost by definition, poor people have very little money. But circumstances
often arise in their lives in which they need money or the things money can buy.
In Stuart Rutherford’s recent book The Poor and Their Money, he cites several types of needs:
Disasters: such as fires, floods, cyclones and man-made events like war or bulldozing of
dwellings.
Family Needs
Poor people find creative and often collaborative ways to meet these needs, primarily through
creating and exchanging different forms of non-cash value. Common substitutes for cash vary
from country to country but typically include livestock, grains, jewellery and precious metals.
As Marguerite Robinson describes in The Microfinance Revolution, the 1980s demonstrated that
“microfinance could provide large-scale outreach profitably,” and in the 1990s, “microfinance
began to develop as an industry”. In the 2000s, the microfinance industry’s objective is to satisfy
the unmet demand on a much larger scale, and to play a role in reducing poverty. While much
progress has been made in developing a viable, commercial microfinance sector in the last few
decades, several issues remain that need to be addressed before the industry will be able to
satisfy massive worldwide demand.
• Institutional inefficiencies
The micro credit of microfinance progamme was first initiated in the year 1976 in Bangladesh
with promise of providing credit to the poor without collateral , alleviating poverty and
unleashing human creativity and endeavour of the poor people. Microfinance impact studies
have demonstrated that
Microfinance helps poor households meet basic needs and protects them against risks.
The use of financial services by low-income households leads to improvements in
household economic welfare and enterprise stability and growth.
The level of impact relates to the length of time clients have had access to financial
services.
In the 1970s a paradigm shift started to take place. The failure of subsidized government or
donor driven institutions to meet the demand for financial services in developing countries let to
several new approaches. Some of the most prominent ones are presented below.
Bank Dagan Bali (BDB) was established in September 1970 to serve low income people in
Indonesia without any subsidies and is now “well-known as the earliest bank to institute
commercial microfinance”. While this is not true with regard to the achievements made in
Europe during the 19th century, it still can be seen as a turning point with an ever increasing
impact on the view of politicians and development aid practitioners throughout the world. In
1973 ACCION International, a United States of America (USA) based non governmental
organization (NGO) disbursed its first loan in Brazil and in 1974 Professor Muhammad Yunus
started what later became known as the Grameen Bank by lending a total of $27 to 42 people in
Bangladesh. One year later the Self-Employed Women’s Association started to provide loans of
about $1.5 to poor women in India. Although the latter examples still were subsidized projects,
they used a more business oriented approach and showed the world that poor people can be good
credit risks with repayment rates exceeding 95%, even if the interest rate charged is higher than
that of traditional banks. Another milestone was the transformation of BRI starting in 1984. Once
a loss making institution channeling government subsidized credits to inhabitants of rural
Indonesia it is now the largest MFI in the world, being profitable even during the Asian financial
crisis of 1997 – 1998.
In February 1997 more than 2,900 policymakers, microfinance practitioners and representatives
of various educational institutions and donor agencies from 137 different countries gathered in
Washington D.C. for the first Micro Credit Summit. This was the start of a nine year long
campaign to reach 100 million of the world poorest households with credit for self employment
by 2005. According to the Microcredit Summit Campaign Report 67,606,080 clients have been
reached through 2527 MFIs by the end of 2002, with 41,594,778 of them being amongst the
poorest before they took their first loan. Since the campaign started the average annual growth
rate in reaching clients has been almost 40 percent. If it has continued at that speed more than
100 million people will have access to microcredit by now and by the end of 2005 the goal of the
microcredit summit campaign would be reached. As the president of the World Bank James
Wolfensohn has pointed out, providing financial services to 100 million of the poorest
households means helping as many as 500 – 600 million poor people.
Working Group on Financial Flows to the Informal Sector (set up by PMO), 2002
Legal Regulations
Banks in India are regulated and supervised by the Reserve Bank of India (RBI) under the RBI
Act of 1934, Banking Regulation Act, Regional Rural Banks Act, and the Cooperative Societies
Acts of the respective state governments for cooperative banks.
NBFCs are registered under the Companies Act, 1956 and are governed under the RBI Act.
There is no specific law catering to NGOs although they can be registered under the Societies
Registration Act, 1860, the Indian Trust Act, 1882, or the relevant state acts. There has been a
strong reliance on self-regulation for NGO MFIs and as this applies to NGO MFIs mobilizing
deposits from clients who also borrow. This tendency is a concern due to enforcement problems
that tend to arise with self-regulatory organizations. In January 2000, the RBI essentially created
a new legal form for providing microfinance services for NBFCs registered under the Companies
Act so that they are not subject to any capital or liquidity requirements if they do not go into the
deposit taking business. Absence of liquidity requirements is concern to the safety of the sector.
At present lending to the economically active poor both rural and urban is pegged at around Rs
7000 crores in the Indian banks’ credit outstanding. As against this, according to even the most
conservative estimates, the total demand for credit requirements for this part of Indian society is
somewhere around Rs 2,00,000 crores.
Micro-Finance is emerging as a powerful instrument for poverty alleviation in the new economy.
In India, micro-Finance scene is dominated by Self Help Groups (SHGs) - Banks linkage
Programme, aimed at providing a cost effective mechanism for providing financial services to
the 'unreached poor'. In the Indian context terms like "small and marginal farmers", " rural
artisans" and "economically weaker sections" have been used to broadly define micro-finance
customers. Research across the globe has shown that, over time, microfinance clients increase
their income and assets, increase the number of years of schooling their children receive, and
improve the health and nutrition of their families.
A more refined model of micro-credit delivery has evolved lately, which emphasizes the
combined delivery of financial services along with technical assistance, and agricultural business
development services. When compared to the wider SHG bank linkage movement in India,
private MFIs have had limited outreach. However, we have seen a recent trend of larger
microfinance institutions transforming into Non-Bank Financial Institutions (NBFCs). This
changing face of microfinance in India appears to be positive in terms of the ability of
microfinance to attract more funds and therefore increase outreach.
In terms of demand for micro-credit or micro-finance, there are three segments, which demand
funds. They are:
At the very bottom in terms of income and assets, are those who are landless and
engaged in agricultural work on a seasonal basis, and manual laborers in forestry,
mining, household industries, construction and transport. This segment requires, first
and foremost, consumption credit during those months when they do not get labor work,
and for contingencies such as illness. They also need credit for acquiring small
productive assets, such as livestock, using which they can generate additional income.
The next market segment is small and marginal farmers and rural artisans, weavers
and those self-employed in the urban informal sector as hawkers, vendors, and
workers in household micro-enterprises. This segment mainly needs credit for working
capital, a small part of which also serves consumption needs. This segment also needs
term credit for acquiring additional productive assets, such as irrigation pump sets, bore
wells and livestock in case of farmers, and equipment (looms, machinery) and work
sheds in case of non-farm workers.
The third market segment is of small and medium farmers who have gone in for
commercial crops such as surplus paddy and wheat, cotton, groundnut, and others
engaged in dairying, poultry, fishery, etc. Among non-farm activities, this segment
includes those in villages and slums, engaged in processing or manufacturing activity,
running provision stores, repair workshops, tea shops, and various service enterprises.
These persons are not always poor, though they live barely above the poverty line and
also suffer from inadequate access to formal credit.
Well these are the people who require money and with Microfinance it is possible. Right now the
problem is that, it is SHGs' which are doing this and efforts should be made so that the big
financial institutions also turn up and start supplying funds to these people. This will lead to a
better India and will definitely fulfill the dream of our late Prime Minister, Mrs. Indira
Gandhi, i.e. Poverty.
“Money, says the proverb makes money. When you have got a little, it is often easy to get
more. The great difficulty is to get that little.”
Adams Smith.
Today India is facing major problem in reducing poverty. About 25 million people in India are
under below poverty line. With low per capita income, heavy population pressure, prevalence of
massive unemployment and underemployment, low rate of capital formation, misdistribution of
wealth and assets, prevalence of low technology and poor economics organization and instability
of output of agriculture production and related sectors have made India one of the poor countries
of the world.
India falls under low income class according to World Bank. It is second populated country in
the world and around 70 % of its population lives in rural area. 60% of people depend on
agriculture, as a result there is chronic underemployment and per capita income is only $ 3262.
This is not enough to provide food to more than one individual. The obvious result is abject
poverty, low rate of education, low sex ratio, exploitation. The major factor account for high
incidence of rural poverty is the low asset base. According to Reserve Bank of India, about 51 %
of people house possess only 10% of the total asset of India .This has resulted low production
capacity both in agriculture (which contribute around 22-25% of GDP) and Manufacturing
sector. Rural people have very low access to institutionalized credit (from commercial bank).
Over the last ten years, successful experiences in providing finance to small entrepreneur and
producers demonstrate that poor people, when given access to responsive and timely financial
services at market rates, repay their loans and use the proceeds to increase their income and
assets. This is not surprising since the only realistic alternative for them is to borrow from
informal market at an interest much higher than market rates. Community banks, NGOs and
grass root savings and credit groups around the world have shown that these microenterprise
loans can be profitable for borrowers and for the lenders, making microfinance one of the most
effective poverty reducing strategies.
For NGOs
1. The field of development itself expands and shifts emphasis with the pull of ideas, and
NGOs perhaps more readily adopt new ideas, especially if the resources required are
small, entry and exit are easy, tasks are (perceived to be) simple and people’s acceptance
is high – all characteristics (real or presumed) of microfinance.
2. Canvassing by various actors, including the National Bank for Agriculture and Rural
Development (NABARD), Small Industries Development Bank of India (SIDBI), Friends
of Women’s World Banking (FWWB), Rashtriya Mahila Kosh (RMK), Council for
Advancement of People’s Action and Rural Technologies (CAPART), Rashtriya Gramin
Vikas Nidhi (RGVN), various donor funded programmes especially by the International
Fund for Agricultural Development (IFAD), United Nations Development Programme
(UNDP), World Bank and Department for International Development, UK (DFID)], and
lately commercial banks, has greatly added to the idea pull. Induced by the worldwide
focus on microfinance, donor NGOs too have been funding microfinance projects. One
might call it the supply push.
3. All kinds of things from khadi spinning to Nadep compost to balwadis do not produce
such concrete results and sustained interest among beneficiaries as microfinance. Most
NGO-led microfinance is with poor women, for whom access to small loans to meet dire
emergencies is a valued outcome. Thus, quick and high ‘customer satisfaction’ is the
USP that has attracted NGOs to this trade.
4. The idea appears simple to implement. The most common route followed by NGOs is
promotion of SHGs. It is implicitly assumed that no ‘technical skill’ is involved. Besides,
external resources are not needed as SHGs begin with their own savings. Those NGOs
that have access to revolving funds from donors do not have to worry about financial
performance any way. The chickens will eventually come home to roost but in the first
flush, it seems all so easy.
5. For many NGOs the idea of ‘organising’ – forming a samuha – has inherent appeal.
Groups connote empowerment and organising women is a double bonus.
Moreover, for banks the operating cost of microfinance is perhaps much less than for pure MFIs.
The banks already have a vast network of branches. To the extent that an NGO has already
promoted SHGs and the SHG portfolio is performing better than the rest of the rural (if not the
entire) portfolio, microfinance via SHGs in the worst case would represent marginal addition to
cost and would often reduce marginal cost through better capacity utilisation. In the process the
bank also earns brownie points with policy makers and meets its priority sector targets.
It does not take much analysis to figure out that the market for financial services for the 50-60
million poor households of India, coupled with about the same number who are technically
above the poverty line but are severely under-served by the financial sector, is a very large one.
Moreover, as in any emerging market, though the perceived risks are higher, the spreads are
much greater. The traditional commercial markets of corporates, business, trade, and now even
housing and consumer finance are being sought by all the banks, leading to price competition
and wafer thin spreads.
Further, bank-groups are motivated by a number of cross-selling opportunities in the market, for
deposits, insurance, remittances and eventually mutual funds. Since the larger banks are offering
all these services now through their group companies, it becomes imperative for them to expand
their distribution channels as far and deep as possible, in the hope of capturing the entire
financial services business of a household.
Finally, both agri-input and processing companies such as EID Parry, fast-moving consumer
goods (FMCG) companies such as Hindustan Levers, and consumer durable companies such as
Philips have realised the potential of this big market and are actively using SHGs as entry points.
Some amount of free-riding is taking place here by companies, for they are using channels which
were built at a significant cost to NGOs, funding agencies and/or the government.
1. Sustainability
The first challenge relates to sustainability. MFI model is comparatively costlier in terms of
delivery of financial services. 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. This is partly explained by the fact that while the cost of supervision of credit is
high, the loan volumes and loan size is low. 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. It is, therefore, 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, which are on the growth path, is that they face a
paucity of owned funds. This is a critical constraint in their being able to scale up. Many of
the MFIs are socially oriented institutions and do not have adequate access to financial
capital. As a result they have high debt equity ratios. Presently, there is no reliable
mechanism in the country for meeting the equity requirements of MFIs.
The IPO issue by Mexico based ‘Compartamos’ was not accepted by purists as they thought
it defied the mission of an MFI. The IPO also brought forth the issue of valuation of an MFI.
The book value multiple is currently the dominant valuation methodology in microfinance
investments. In the case of start up MFIs, using a book value multiple does not do justice to
the underlying value of the business. Typically, start ups are loss making and hence the book
value continually reduces over time until they hit break even point. A book value multiplier
to value start ups would decrease the value as the organization uses up capital to build its
business, thus accentuating the negative rather than the positive.
Another challenge faced by MFIs is the inability to access supply chain. 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. The latter players who bring with them an understanding of
similar client segments, ability to create microenterprise opportunities and willingness to
nurture them, would be keen on directing microfinance to such opportunities. This enables
MFIs to increase their client base at no additional costs.
Those businesses that procure from rural India such as agriculture and dairy often identify
finance as a constraint to value creation. Such businesses may find complementarities
between an MFI’s skills in management of credit processes and their own strengths in supply
chain management.
ITC Limited, with its strong supply chain logistics, rural presence and an innovative
transaction platform, the e-choupal, has started exploring synergies with financial service
providers including MFIs through pilots with vegetable vendors and farmers. Similarly, 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.
ITC has initiated a pilot project called ‘pushcarts scheme’ along with BASIX (a microfinance
organization in Hyderabad). Under this pilot, it works with twenty women head load vendors
selling vegetables of around 10- 15 kgs per day. BASIX extends working capital loans of
Rs.10,000/- , capacity building and business development support to the women. ITC
provides support through supply chain innovations by:
3.1 Making the Choupal Fresh stores available to the vendors, this avoids the hassle of
bargaining and unreliability at the traditional mandis (local vegetable markets). The
women are able to replenish the stock from the stores as many times in the day as
required. This has positive implications for quality of the produce sold to the end
consumer.
3.2 Continuously experimenting to increase efficiency, augmenting incomes and reducing
energy usage across the value chain. For instance, it has forged a partnership with
National Institute of Design (NID), a pioneer in the field of design education and
research, to design user-friendly pushcarts that can reduce the physical burden.
3.3 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. The model augments the incomes of the vendors
from around Rs.30-40 per day to an average of Rs.150 per day. From an environmental
point of view, push carts are much more energy efficient as opposed to fixed format retail
outlets.
4. HR Issues
Recruitment and retention is the major challenge faced by MFIs as they strive to reach more
clients and expand their geographical scope. Attracting the right talent proves difficult
because candidates must have, as a prerequisite, a mindset that fits with the organization’s
mission.
Many mainstream commercial banks are now entering microfinance, who are poaching staff
from MFIs and MFIs are unable to retain them for other job opportunities.
85% of the poorest clients served by microfinance are women. However, women make up
less than half of all microfinance staff members, and fill even fewer of the senior
management roles. The challenge in most countries stems from cultural notions of women’s
roles, for example, while women are single there might be a greater willingness on the part of
women’s families to let them work as front line staff, but as soon as they marry and certainly
once they start having children, it becomes unacceptable. Long distances and long hours
away from the family are difficult for women to accommodate and for their families to
understand.
Microinsurance
First big issue in the Microinsurance sector is developing products that really respond to the
needs of clients and in a way that is commercially viable.
Secondly, there is strong need to enhance delivery channels. These delivery channels have
been relatively weak so far. Microinsurance companies offer minimal products and do not
want to go forward and offer complex products that may respond better. Microinsurance
needs a delivery channel that has easy access to the low-income market, and preferably one
that has been engaged in financial transactions so that they have controls for managing cash
and the ability to track different individuals.
Thirdly, there is a need for market education. People either have no information about
microinsurance or they have a negative attitude towards it. We have to counter that. We have
to somehow get people - without having to sit down at a table - to understand what insurance
is, and why it benefits them. That will help to demystify microinsurance so that when agents
come, people are willing to engage with them.
The joint liability mechanism has been relied upon to overcome the twin issues of adverse
selection and moral hazard. The group lending models are contingent on the availability of
skilled resources for group promotion and entail a gestation period of six months to one year.
However, there is not sufficient understanding of the drivers of default and credit risk at the
level of the individual. This has constrained the development of individual models of micro
finance. The group model was an innovation to overcome the specific issue of the quality of
the portfolio, given the inability of the poor to offer collateral. However, from the perspective
of scaling up micro financial services, it is important to proactively discover models that will
enable direct finance to individuals.
In places where there are less micro finance institutions, the government channels at the
grassroots level may be used to serve the poor with microfinance.
Postal savings banks may participate more not only in mobilizing deposits but also in
providing loans to the poor and on lending funds to the MFIs.
More commercial banks may participate both in microfinance wholesale and retailing.
They many have separate staff and windows to serve the poor without collateral.
International NGOs and agencies may develop or may help develop microfinance
programs in areas or countries where micro financing is not a very familiar concept in
reducing poverty.
Considering that the majority of the 360 million poor households (urban and rural) lack access to
formal financial services, the numbers of customers to be reached, and the variety and quantum
of services to be provided are really large. It is estimated that 90 million farm holdings, 30
million non-agricultural enterprises and 50 million landless households in India collectively need
approx US$30 billion credit annually. This is about 5% of India's GDP and does not seem an
unreasonable estimate.
However, 80% of the financial sector is still controlled by public sector institutions. Competition,
consolidation and convergence are all being discussed to improve efficiency and outreach but
significant opposition remains.
Many private and foreign banks have unveiled their plans to enter the Indian microfinance sector
because of its very low NPAs and high repayment rate of more than 95% in spite of offering
loans without any collateral security.
Microfinance is not yet at the centre stage of the Indian financial sector. The knowledge, capital
and technology to address these challenges however now exist in India, although they are not yet
fully aligned. With a more enabling environment and surge in economic growth, the next few
years promise to be exciting for the delivery of financial services to poor people in India
Development of Small-Scale Enterprises through microfinance will not only increase the
outreach but will also help the generation of more employment and income for the poor. It is
expected that in the following years there will be considerable deepening of microfinance in this
direction along with simultaneous drives to reach and serve the poorest of the poor.
Self-Help Groups (SHGs) or Thrift and Credit Groups are mostly informal groups whose
members pool savings and relend within the group on rotational or needs basis. These groups
have a common perception of need and impulse towards collective action. Many of these groups
got formed around specific production activity, promoted savings among members and use the
pooled resources to meet emergent needs of members, including consumption needs. Sometimes
the internal savings generated were supplemented by external resources loaned/donated by the
Voluntary Agency which promoted the SHGs. Since SHGs were able to mobilize savings from
the poor who were not expected to have any savings and could also recycle effectively the
pooled savings among members, they succeeded in performing/providing banking services to
their members, may be in a primitive way, but in a manner which was cost effective, simple,
flexible at the door step of the members and above all without any defaults in repayment by
borrowers
Involvement of SHGs with banks could help in overcoming the problem of high transaction costs
in providing credit to the poor, by passing on some banking responsibilities regarding loan
appraisal, follow-up and recovery etc… to the poor themselves. In addition, the character of
SHGs and their relations with members offered ways of overcoming the problem of collateral,
excessive documentation and physical access which reduced the capacity of formal institutions to
serve the poor.
Based on local conditions and requirements, the SHGs have evolved their own methods of
working. Some of the common characteristics of functioning of these groups are indicated
below:
The groups usually create a common fund by contributing their small savings on a regular
basis.
Most of the groups themselves, or with help of NGOs, evolve flexible systems of
working and managing their pooled resources in a democratic way, with participation of
every member in decision-making.
Request for loans are considered by the group in their periodic meetings and competing
claims on limited resources are settled by consensus.
Loaning is done mainly on trust with a bare minimum documentation and without any
security.
The amounts loaned are small, frequent and for short duration.
The loans cover a variety of purposes, some of which are non-traditional and rather un-
conventional.
Rate of interest differs from group to group and even with purpose. Interest charged is
generally higher than that charged by banks and lower than that charged by money
lenders.
Periodic meetings of members also serve as a forum for collecting dues from members.
Defaults are rare mainly due to group pressure and intimate knowledge of end use of
credit.
Self- help groups (SHGs) play today a major role in poverty alleviation in rural India. A growing
number of poor people (mostly women) in various parts of India are members of SHGs and
actively engage in savings and credit (S/C), as well as in other activities (income generation,
natural resources management, literacy, child care and nutrition, etc.). The S/C focus in the SHG
is the most prominent element and offers a chance to create some control over capital, albeit in
very small amounts. The SHG system has proven to be very relevant and effective in offering
women the possibility to break gradually away from exploitation and isolation.
Most SHGs in India have 10 to 25 members, who can be either only men, or only women,
or only youth, or a mix of these. As women's SHGs or sangha have been promoted by a
wide range of government and non- governmental agencies, they now make up 90% of
all SHGs.
The rules and regulations of SHGs vary according to the preferences of the members and
those facilitating their formation. A common characteristic of the groups is that they meet
regularly (typically once per week or once per fortnight) to collect the savings from
members, decide to which member to give a loan, discuss joint activities (such as
training, running of a communal business, etc.), and to mitigate any conflicts that might
arise. Most SHGs have an elected chairperson, a deputy, a treasurer, and sometimes other
office holders.
Most SHGs start without any external financial capital by saving regular contributions by
the members. These contributions can be very small (e.g. 10 Rs per week). After a period
of consistent savings (e.g. 6 months to one year) the SHGs start to give loans from
savings in the form of small internal loans for micro enterprise activities and
consumption. Only those SHGs that have utilized their own funds well are assisted with
external funds through linkages with banks and other financial intermediaries.
However, it is generally accepted that SHGs often do not include the poorest of the poor,
for reasons such as:
(a) Social factors (the poorest are often those who are socially marginalized because of
caste affiliation and those who are most skeptical of the potential benefits of collective
action).
(b) Economic factors (the poorest often do not have the financial resources to contribute
to the savings and pay membership fees; they are often the ones who migrate during the
lean season, thus making group membership difficult).
(c) Intrinsic biases of the implementing organizations (as the poorest of the poor are
the most difficult to reach and motivate, implementing agencies tend to leave them out,
preferring to focus on the next wealth category).
SHGs can only fulfill a role in the rural economy if group members have access to financial
capital and markets for their products and services. While the groups initially generate their own
savings through thrift (whereby thrift implies savings created by postponing almost necessary
consumption, while savings imply the existence of surplus wealth), their aim is often to link up
with financial institutions in order to obtain further loans for investments in rural enterprises.
NGOs and banks are giving loans to SHGs either as "matching loans" (whereas the loan amount
is proportionate to the group's savings) or as fixed amounts, depending on the group's record of
repayment, recommendations by group facilitators, collaterals provided, etc.
Self-help groups mobilize savings from their members, and may then on-lend these funds to one
another, usually at apparently high rates of interest which reflect the members’ understanding of
the high returns they can earn on the small sums invested in their micro-enterprises, and the even
higher cost of funds from money lenders. If they do not wish to use the money, they may deposit
it in a bank. If the members’ need for funds exceeds the group’s accumulated savings, they may
borrow from a bank or other organization, such as a micro-finance non-government organization,
to augment their own fund.
The system is very flexible. The group aggregates the small individual saving and borrowing
requirements of its members, and the bank needs only to maintain one account for the group as a
single entity. The banker must assess the competence and integrity of the group as a micro-bank,
but once he has done this he need not concern himself with the individual loans made by the
group to its members, or the uses to which these loans are put. He can treat the group as a single
customer, whose total business and transactions are probably similar in amount to the average for
his normal customers, because they represent the combined banking business of some twenty
‘micro-customers’. Any bank branch can have a small or a large number of such accounts,
without having to change its methods of operation.
Unlike many customers, demand from SHGs is not price-sensitive. Illiterate village women are
sometimes better bankers than some with more professional qualifications. They know that rapid
access to funds is more important than their cost, and they also know, even though they might
not be able to calculate the figures, that the typical micro-enterprise earns well over 500% return
on the small sum invested in it (Harper, M, 1997, p. 15). The groups thus charge themselves high
rates of interest; they are happy to take advantage of the generous spread that the NABARD
subsidized bank lending rate of 12% allows them, but they are also willing to borrow from
NGO/MFIs which on-lend funds from SIDBI at 15%, or from ‘new generation’ institutions such
as Basix Finance at 18.5% or 21%.
NABARD is presently operating three models of linkage of banks with SHGs and NGOs:
Model – 1:
In this model, the bank itself acts as a Self Help Group Promoting Institution (SHPI). It takes
initiatives in forming the groups, nurtures them over a period of time and then provides credit to
them after satisfying itself about their maturity to absorb credit. About 16% of SHGs and 13% of
loan amounts are using this model (as of March 2002).
Model – 2:
In this model, groups are formed by NGOs (in most of the cases) or by government agencies.
The groups are nurtured and trained by these agencies. The bank then provides credit directly to
the SHGs, after observing their operations and maturity to absorb credit. While the bank provides
loans to the groups directly, the facilitating agencies continue their interactions with the SHGs.
Most linkage experiences begin with this model with NGOs playing a major role. This model has
also been popular and more acceptable to banks, as some of the difficult functions of social
dynamics are externalized. About 75% of SHGs and 78% of loan amounts are using this model.
Model – 3:
Due to various reasons, banks in some areas are not in a position to even finance SHGs promoted
and nurtured by other agencies. In such cases, the NGOs act as both facilitators and micro-
finance intermediaries. First, they promote the groups, nurture and train them and then approach
banks for bulk loans for on-lending to the SHGs. About 9% of SHGs and 13% of loan amounts
are using this model.
The United India Insurance Company has designed two PLLIs (personal line life
insurances) for women in rural areas. The company will be targeting self-help groups, of
which there are around 200,000 in the country, with 15-20 women in a group. The two
policies are
(1) the Mother Teresa Women & Children Policy, with the aim of giving to the woman in
the event of accidental death of her husband and to support her minor children in the
event of her death, and
(2) The Uni-micro Health Scheme, giving personal accident and hospitalization covers
besides cover for damage to dwelling due to fire and allied perils.
CHAPTER 4
Occupation Respondent
Self employed 22
Manual labor 36
Govt. Employees 05
Unemployed 6
TOTAL 100
Analysis:
From the table, we can see that more than 70% of the populations are manual labors and private
company employees.
Interpretation:
Poor people normally work under private people and some would work in their own business
like carpenters, plumbers, etc…
Analysis:
The average respondent’s education is 10th or equaling 46% following by Un-educated 24%and
PUC 18%
Interpretation:
The average educational background of the respondents is 10th or equaling they have some
knowledge about market and government announcements. They are usually ignorant about the
changing trends in the market.
Analysis:
The average income group of the respondents are Rs3000-Ra8000 is 48% and less than Rs 3000
is 24%, it shows the respondents have low income
Interpretation:
Microfinance main customers are Poor individuals which fall below the poverty line. It helps
generate their income.
No. OF RESPONDENTS % OF
RESPONDENTS
Word of mouth 60 60%
Advertisement 10 10%
Govt. announced 20 20%
Radio 10 10%
Total 100 100%
Analysis
Majority of the respondents now about the Microfinance through Word of mouth 60% and
followed by Government announcements.
Interpretation
With account 18
Without account 82
Total 100
Analysis
The most obvious and the easiest way to measure the level of financial status is to find out the
number of households with or without an account. The survey has found that a greater share of
the households are not access to banking facility, even though the area has a number of slum
dwellings. The survey found that 82% of the households in the areas are not access to banking
facilities. Only around 18 households have account. However 18% of the respondents are having
bank account.
Interpretation
From the data it is clear that, many of the urban poor do not have bank accounts. So, it is
necessity to make them aware of various financial services.
Yes 69
No 31
Total 100
Analysis:
The data indicates that 69% of the respondents have BPL cards.
Interpretation
It showed that 31% of the poor are not availing the benefits of the government. It is because they
are not aware of the benefits that can be reaped.
Table.4.7 showing various types of loans taken by the respondents for various
purposes
Loans Numbers
Vehicles 36
House 27
Business 30
Furniture 7
Total 100
Analysis:
From the table, most of the respondents take loan mainly for vehicles and for business.
Interpretation:
In the city like Bangalore, it is inevitable to have vehicle for day to day activities and for
business purposes. So the financial institutions have to work on providing more loans for
business and vehicles.
Source Responses
Friends 41
Money lenders 25
Others 11
Total 100
Analysis:
Major portion of the respondents have taken loan from the friends and moneylenders.
Interpretation:
It is clear from the chart that, poor are away from the financial institutions as they think the
formalities are more. They usually go for money lenders, friends and relatives.
House 66%
2 wheeler 11.39%
TV 3.15%
Gas 1.43%
Furniture 3.19%
Gold 4.43%
Cash 2.75%
Mobile 1.84%
Others 3.24%
Total 100%
Analysis:
About 65% of the investments go for House and next comes, 2 wheeler vehicles.
Interpretation:
As the majority of the investments are made for house, the financial institutions can provide
more housing loans and other facilities related to homes like reverse mortgage to the poor
people.
Table 4.10 showing average expenditure on various items by the respondents in the month of March
2010
Groceries 1725
Cable 470
Clothing 600
Entertainment 285
Medicine 590
Education 700
Rent 800
Transportation 600
Others 130
Figure 4.10 showing expenditure on various items by the respondents in the month of Mar
2010
Analysis:
Food, clothing, shelter are the basic necessity of life. This is common for both the rich as well as
the poor. The above chart indicates that majority of the budget will go for the grocery items,
clothing, and rent.
Interpretation:
If government provides facilities properly for the BPL card holders to fulfill their basic
necessities, they can be more financially stable and viable.
Yes 28
No 72
Total 100
Analysis:
About 72% people do not have their own house. Only 28% of respondents live in their own
house.
Interpretation
This shows that most of the poor cannot afford for a house. If government provides financial
assistance for poor, their financial viability would increase.
Repayment rates are higher than men, so lending to women is a better Investment.
Women are on average poorer than men, so focusing on women can help achieve poverty
targets.
The members in a group are selected so as to be in the same age group and residing in the same
locality being friends but are not from family. In case of problems in a recovery from even one
of the members, the system of joint liability ensures recovery of the dues from all the members
within a group.
Women are better borrowers because they repay their loans more faithfully than men repay and
tend to spend money on improving the standard of living of their family.
It has been proved that women are able to manage the money of the household. Experience had
shown that women are a good credit risk, and that women invest their income surround the well
being of their families.
Women are proven to be the best poverty fighters. Experience and studies had shown that they
use the profits from their businesses to send their children to school, improve their families
‘living conditions and nutrition, and expand their businesses.
By providing access to financial services only through women and making women responsible
for loans, ensuring repayment through women, maintaining savings accounts for women,
providing insurance coverage through women—microfinance programs send a strong message to
households as well as to communities.
4.13 Criticisms for micro finance
It was found that while women were getting the loans, a "significant portion" of those loans are
directly invested by male relatives (although women bear the liability for repayment)
Only 37% of the cases had women retained full or significant control over the businesses that
were in their names.
Repayment tensions in other microfinance programmes as well. In India in 2008 in the state of
Andhra Pradesh, media reports linked to 70 suicide deaths to repayment issues in Grameen type
programmes. The same reports also documented techniques forcing credit circle members to
stand in the sun until recalcitrant members paid up, verbal abuse etc.
One more reason why MFI‘s criticized for giving loans to the women only because, women‘s are
weak compared to men‘s and by coerce them the MFI‘s can easily repayment their loans.
CHAPTER 5
5.1 Findings
India technically challenges the world in all fields and stands top in the global business, but the
irony is that the country is the third poor country in the whole world. Yes, in India ‘Rich get
richer and poor get poorer’, this may be hard to digest, but this is the bitter reality. There are rich
IT parks, star rated hotels, satellite launch centre and all posh places in one side of the nation,
whereas on the other side there are hunger strikes, huts, despair, slums that stands as the signs of
Poverty.
The major reasons for poverty prevailing in India are listed out and discussed below.
Population: The very well known fact is that India is the second populated country
globally. Let us take for an example two families A and B, with normal earnings, the
family A has four members, where as there are 15 members in family B. The family A
can live peacefully with the income, wherein poverty will prevail in family B dominantly.
This is what happens throughout India, we are still a developing country but a highly
populated one, so poverty has become a prominent one in the nation.
Unemployment: This is also a clear reason for poverty. Unemployed people become
dependents of the nation as they increase the level of poverty. In the recent ten years, this
problem has been greatly reduced due to the vast employment opportunities that came
across in India, in various fields.
This is also a note worthy reason. This unequal distribution is due to Bribery, forgery and various
social problems. The professionals and the successful businesspeople get the highest salaries, in
the country where as the rest really get low pays. But, the cost of living and the price of
miscellaneous products remain common to all. So the prevalence of Poverty is obvious.
Corruption: This is a fast growing reason for poverty. Because of corruption the capital
of the common people, get blocked as a huge some of black money, thereby making India
still poor.
Economic Policies in India: The economic policies in India are so very poorly built, that
the average annual income of the Indians is very low when compared to other countries
and there has been no continuous significant improvement over the years.
Status of India: In India, all most seventy percent of the population falls below the
poverty line. So a satisfying fact is that poverty is declining in India. The government has
planned so many strategies to eradicate poverty. India owes a very large amount of
money to the World Bank in which statistics say that the country has to repay a huge
amount of money
Unequal distribution of money: This is also a note worthy reason. This unequal
distribution is due to Bribery, forgery and various social problems. The professionals and
the successful businesspeople get the highest salaries, in the country where as the rest
really get low pays. But, the cost of living and the price of miscellaneous products remain
common to all. So the prevalence of Poverty is obvious.
Improper training
Slow job growth.
Failure of PDS system
Government has taken numerous steps for flushing out this social problem. Every FIVE YEAR
plan has some or the other plan for removing poverty. Poverty can be diversified into urban and
rural. The prior steps taken by the Indian Government to wipe off rural poverty are Small
farmer’s development plan, assurance on employment, Minimum employment program, Drought
area development program, National rural employment program and many more. The strategic
plans introduced to eradicate the urban popularity are National social assistance program, Prime
Minister Rozgar Yogna, Nehru Rozgar Yogna, Urban basic services program and it goes on. Due
to the success of the government plans, more than20 percent of the poverty has been truly
reduced.
Education can be used as a tool for removing poverty, educated people are capable of earning
their money, and hence become independent. As a result, simultaneously poverty will go down.
Education can be used for wealth development as well. Women also contribute a lot in this issue
as they excel in all fields these days.
Thus, it is the mandatory duty of every Indian citizen and the government to not only discuss the
ways and means to wipe off poverty, but also take relevant ways and means, to solve this social
issue. If all this successfully happens then, twenty five years from now India will become a
developed, rich and advanced country where ‘Poverty’ will be a word that was in history and a
evil that will never be back again. It is the duty of every Indian to fulfill this dream, and make
these expectations come true.
The evolution of social banking concept in India is through the development of the Self Help
Group–Bank Linkage Scheme. The genesis of the scheme was an experiment piloted by the
National Bank for Rural Development (NABARD) in the late 1980s to link informal groups of
low income individuals in rural areas with banks The experiment was mainstreamed by the
Reserve Bank of India as the SHG-Bank Linkage Scheme in 1996 when linkage banking was
included as an activity of banks under priority sector lending. The institutional structure that
facilitates rural financial intermediation was strengthened by the setting up of Regional Rural
Banks in 1975 and the National Bank for Agriculture and Rural Development in 1982 with the
mandate of developing the cooperative credit system.
The debate on financial services to the poor and low income households in India has revolved
around the rural population since the time when banks were nationalized for the first time in the
country. Unlike rural financial intermediation, flow of financial resources to urban populations
was never a matter of serious debate in India. The tendency among microfinance intermediaries
to move towards urban centers came only after it found that the rural markets coming to a
saturation point. Still now the SHG-Bank Linkage model remains predominantly a rural
phenomenon.
The first targeted credit programmed with focus on enterprise and self employment opportunities
in urban areas was launched in 1989 during the Seventh Five Year Plan period (1985-90).
Various urban poverty alleviation schemes with a credit focus introduced in India since 1989
shows that they broadly followed a top-down approach. The Swarna Jayanti Shahari Rozgar
Yojana (SJSRY) is the first such urban scheme launched by Government of India where
community based organizations, especially poor urban women, were recognized as the critical
points of delivery of benefits Indian Bank has started Microstate branches that are exclusive
satellite branches for servicing micro loans (Business Line, 2007). Later State Bank of India has
promoted about 7000 SHGs in the city of Mumbai of which nearly 2000 are bank linked.
Credit flow from formal financial institutions to the urban population groups steadily increased
in India since the 1970s and this has come to be concentrated in large cities and larger sized
credit brackets. Though the social banking efforts of the central bank and the government
financial intermediation in rural areas too have gone through a phase of expansion but the low
income asset holding segments of urban areas have largely been bypassed by such overall
expansion in financial intermediation. While the state’s poverty alleviation approach has steadily
expanded from mere provision of basic amenities and services to facilitating creation of income
earning opportunities, it has failed to make any significant impact on the urban poor. The impact
of microfinance interventions will be severely limited both in urban and rural locations unless
well directed investments are made in physical and social infrastructure.
The analysis shows that wealthiest 20% of the population received about 25% of the actual
government health spending while the poorest 20% received only 15%.The poverty of health is
exacerbated not only by wealth but also by other socio-economic measures, such as sex, race,
ethnic group, language, educational level, occupation and residence. Lack of access to formal
land market forcing Poor people to inhabit unhealthy environment which creates serious
implications on their health and they have to spent higher percentage of their income on health
care.
Physical inability, social discrimination by education, caste, sex and economic stratification
increases the gap between demand and inadequate supply of services. Besides the physical and
social factors, lack of access to money poor are unable to use health services and have less access
to the facilities in the public or private sector. They hardly seek heath care when they are ill. The
poor have to depend on loans and sale of assets to pay for hospitalization. Cost is a greater
barrier than the Physical access to health providers. There is no provision in the government
programme for the unorganized sector to get access to medical benefits while the organized
sector employees have provisions for medical benefits. Author has given a few examples of the
attempts made in the country for insurance cover to poor both from both government and NGO
sector.
Quality defines in terms of poor teaching standard and facilities, teacher absenteeism, insensitive
curriculum and content, poor motivation of teachers. This is compounded with lack of physical
access and infrastructure. The analysis also shows that smaller million-plus cities have more
schools per capita population when compared to four mega polis. Contrary to health services,
education infrastructure is poorer in cities with larger population and there is a huge gap in
achieving universal access to education in all cities, impacting the disadvantaged children the
most and million plus cities, which are hub of economic activities, need to improve access of girl
children to education. The proportion of children from marginalized communities in mega cities
is very low compared to smaller towns.
These shows:
Larger a city is, the better is health environment and the lesser prone is it to
communicable diseases likes pneumonia and diarrhoea. Similarly, cities from southern
states of India have healthier population, while the least healthy are from cities in central
India.
Education infrastructure is poorer in cities with larger population base and higher
urbanization, thus increasing the possibility of marginalizing children of urban poor from
education.
There is still a huge gap in achieving universal access to education in cities, impacting the
disadvantaged children the most.
Million plus cities, which are hub of economic activities, need to improve access of girl
children to education.
A holistic and integrated approach in response to the specific needs of each area need to
be adopted along with adequate resource back-up
The states should incorporate initiatives for urban health needs in their Programme
Implementation Plan.
Increasing role of the corporate, private sectors and NGOs for health services to the poor.
Development of a social security system that is pro-poor and is inclusive of groups like
migrant population, socially marginalized groups and also adolescents.
Effective monitoring and surveillance system for improving the student-to-classroom and
student-to-teacher ratio in the cities.
Most of the SHG members have take loan from SHG for self-employment, which is
productive investment.
Most of the households (82%) not having bank account due to lack of accessibility.
More than 30% of the households don’t have BPL card due to political interference.
Majority of poor are excluded from financial services. This is due to, inter-alia, the
following reasons:
People who seek loan from SHG’s are majorly Self employed
Basic knowledge regarding SHG’s and banks are well known to educated people
66% of the people who borrow loan from friends and local money lenders’.
Word of mouth is the communication medium because majority of the borrowers are
backward area.
Some valuable lessons can be drawn from the experience of Microfinance operation.
First of all, the poor repay their loans and are willing to pay for higher interest rates than
commercial banks provided that the venture they decide to start from the loan executes
successfully.
Technology should be used for proper streamlining the flow of funds and at the same
time creating a transparent business model for the MFIs.
Consultancies should be used to decide if establishing a large scale industry is better for
providing stability to target segment
5.6 Suggestions
The credit needs and amount of credit needed by the poor or the financially excluded
differs from the middle class and the upper class needs hence require adoption of new
strategies. Most of the self-employed and the daily wage earners find it cumbersome to
go to banks and cash their money; therefore, the use of Business Correspondents (BC)
could bring in such occupational groups who have little time for the conventional system
of banking. It would require person-to-person interactions to make banking and the use of
financial services a part of their lifestyle.
There is a need for increasing professionalism among MFIs, SHG and NGOs. There is no
doubt that these organizations have helped the poor tremendously but just as in the case
of many co-operative banks and RRBs they remain prone to lack of professionalism and
negligence. The intention with which NGOs have been working to help the un-banked
poor cannot be doubted but NGOs have to become more professional and pragmatic if
they want to help the poor access to micro-finance. If banks have to use individuals from
SHGs or NGOs as correspondents to reach out to the poor, then they have to be
accountable for the work and it would an understanding of how the financial system
works. The commercial banks and other agencies can play their part by training
individuals and organizations that help to reach out to the poor.
The concept of Micro Finance is still new in India. Not many people are aware the Micro
Finance Industry. So apart from Government programmes, we the people should stand
and create the awareness about the Micro Finance.
There are many people who are still below the poverty line, so there is a huge demand for
MFIs in India with proper rules and regulations.
An important suggestion with regard to catering to specific needs of the manual labourers
or self-employed is that of the creation of a pension fund. Instead of spending thousands
of cores of Rupees on programmes to help the poor which have been futile the
government should help the marginal poor, the manual laborers and the self-employed
with pension schemes.
From the data it is clear that, many of the urban poor do not have bank accounts. So, it is
necessity to make them aware of various financial services.
In the city like Bangalore, it is inevitable to have vehicle for day to day activities and for
business purposes. So the financial institutions have to work on providing more loans for
business and vehicles
It is clear from the chart that, poor are away from the financial institutions as they think
the formalities are more. They usually go for money lenders, friends and relatives. The
financial institution need to educate them regarding the financial services available for
poor.
As the majority of the investments are made for house, the financial institutions can
provide more housing loans and other facilities related to homes like reverse mortgage to
the poor people.
If govt provides facilities properly for the BPL card holders to fulfil their basic
necessities, they can be more financially stable and viable.
CHAPTER 6
CONCLUSION
6.1 Conclusion
As the time moves on, there will be more number of people living in urban areas than in rural
areas. In fact, the 20th century witnessed a rapid growth in urban population. The next few
decades will see unprecedented scale of urban growth in the developing world including those in
Asia and Africa continents. The urban population in these two continents will double in a period
of 30 years. Asia has been witnessing the triple dynamics of growth, rapid urbanization and
growing poverty. While many Asian countries witnessed higher economic growth, the growth
pattern brought about enormous disparities across and within nations.
India has shared the growth pattern and rapid urbanization with some of the fastest growing
regions in Asia. The Country has witnessed around 8% growth in GDP in the last couple of
years. India’s urban population is also increasing at a faster rate than its total population. With
over 575 million people, India will have 41% percent of its population living in cities and towns
by 2030 AD from the present level of 286 million and 28%. Economic development and
urbanization are closely linked. In India, cities contribute over 55 % to country’s GDP and
urbanization has been recognized as an important component of economic growth.
With India becoming increasingly globalized and urban, there is also an increase in the number
of poor people living here. The Slum population is also increasing and as per estimates 2001,
over 61.80 million people were living in slums. It is interesting to note that the ratio of urban
poverty in some of the larger states is higher than that of rural poverty leading to the
phenomenon of ‘Urbanisation of Poverty’. Urban poverty poses the problems of housing and
shelter, water, sanitation, health, education, social security and livelihoods along with special
needs of vulnerable groups like women, children and aged people. Poor people live in slums
which are overcrowded, often polluted and lack basic civic amenities like clean drinking water,
sanitation and health facilities. Most of them are involved in informal sector activities where
there is constant threat of eviction, removal, confiscation of goods and almost non-existent social
security cover.
With growing poverty and slums, Indian cities have been grappling with the challenges of
making the cities sustainable i.e. inclusive, productive, efficient and manageable. The
sustainability of urban development in India is seen in the context of shelter and slums, Basic
urban services, Financing urban development and Governance and Planning. India has entered
the Eleventh Plan period with an impressive record of economic growth. However, the incidence
of decline of urban poverty has not accelerated with GDP growth. In fact, urban poverty will
become a major challenge for policymakers in our country as the urban population in the country
is growing, so is urban poverty. Therefore, a need has arisen to develop new poverty reduction
tools and approaches to attack the multi-dimensional issues of urban poverty. For this,
policymakers at the national and local levels should have a good understanding of the nature of
urban poverty as well as accurate data on various issues relating to it, in order to develop
program policies to manage urban poverty in a systematic manner.
India Urban Poverty Report using human development framework provides a good insight on
various issues of urban poverty such as basic services to urban poor, migration, urban economy
and livelihoods, micro finance for urban poor, education and health, unorganized sector and
livelihoods.
BIBLIOGRAPHY
Books
Muhammad yunus, “banker to the poor”, public affairs publication New York
R Krishnaswami and M Ranganatham, “Methodology of research in social sciences”,
Himalaya publications
Journals
WEBSITES
www.indaimicrofinance.com
www.wikipedia.com
www.nabard.org
www.banknetindia.com
www.tradechakra.com
www.globalvision.com
www.financialinclusion.com
Questionnaire
I am ANU.S, a final year MBA student of Acharya Institute of Management and Sciences,
conducting a study on ‘Microfinance Self Help Groups as an Alternative Means for Alleviation
of Urban Poverty’, for the partial fulfillment of my course. Please help me by filling in the
questionnaire completely. The information you provide is purely for academic purpose and
hence will be kept confidential.
1. Name
2. Gender:
Male female
3. Qualification:
Illiterate SSLC PUC Graduate
Post Graduate Others _____________________(Please Specify)
4. Occupation:
Private Employee Govt. Employee Self Employed
Others ___________________________ (Please Specify)
Sl Income Expenditure
no
============THANK YOU==============