RESEARCH REPORT

ON

“MICROFINANCE ISSUES AND

CHALLENGES”
The partial fulfilment of degree course
Masters of Business Administration (MBA)

UNDER THE GUIDANCE OF:

Dr. Mohd. Anees

INSTITUTE OF MANAGEMENT SCIENCES

UNIVERSITY OF LUCKNOW

SUBMITTED BY:
Prachi Verma
MBA (F&C) (Sem. IV)
Roll No. 15001114034
 Acknowledgement

I hereby take the opportunity to express my profound sense of great

reverence, awe and gratitude to all of them who have helped me in the
success completion of this discretion project.
I wish to express my sincere gratitude to Dr. Mohd. Anees Institute of
Management Sciences, University of Lucknow, for their guidance and
support rendered to me in solving my problems and difficulties that I faced
in completing this task on such a varied and vast subject.
Last but not the least I take this opportunity to express my heartfelt
appreciation for my colleagues for their support and encouragement.

ii
 DECLERATION

I Archana Kumaristudent of MBA(F&C) IV semester, IMS, Lucknow, hereby

declares that I have successfully completed my Research report on “MICROFINANCE

ISSUES AND CHALLENGES”.

I hereby declare that all the information provided in this project report are true to the

fullest of my knowledge and it bear no resemblance to any other written material

whatsoever.

In the event of any information provided in this report being found incorrect or

misleading, I shall be liable to any outcome at any at any given day.

iii
 PREFACE

MBA Students IMS (F&C), Lko are required to undergo Research Project as an integral
part of curriculum.To accomplish this project as MICROFINANCE ISSUES AND
CHALLENGES, there is need to become familiar with the project.

It can be possible through theoretical inputs as well as practical exposure in which my

practical knowledge is helpful acquired at the college. I have also done this study from
secondary sources.

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 INDEX

PAGE NO.
Acknowledgement ii
Declaration iii
Preface iv

Introduction on topic 1
Literature Review 21
Research Methodlogy 24
Data Analysis 26
Findings 41
Recommendation 43
Conclusion 44
Bibliography 45

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 Chapter 1:
Introduction

1
 Introduction

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.

1.1 Microfinance Definition

According to International LaborOrganization (ILO), “Microfinance is an economic

development approach that involves providing financial services through institutions to
low income clients”.

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”.
2
"The poor stay poor, not because they are lazy but because they have no access to
capital."

The dictionary meaning of ‘finance’ is management of money. The management of

money denotes acquiring & using money. Micro Finance is buzzing word, used when
financing for micro entrepreneurs. Concept of micro finance is emerged in need of
meeting special goal to empower under-privileged class of society, women, and poor,
downtrodden by natural reasons or men made; caste, creed, religion or otherwise. The
principles of Micro Finance are founded on the philosophy of cooperation and its central
values of equality, equity and mutual self-help. At the heart of these principles are the
concept of human development and the brotherhood of man expressed through people
working together to achieve a better life for themselves and their children.

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 extending credit to
those who require most for their 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.

Who are the clients of micro finance?

The typical micro finance clients are low-income persons that do not have access to
formal financial institutions. Micro finance clients are typically self-employed, often

3
household-based entrepreneurs. In rural areas, they are usually small farmers and others
who are engaged in small income-generating activities such as food processing and petty
trade. In urban areas, micro finance activities are more diverse and include shopkeepers,
service providers, artisans, street vendors, etc. Micro finance clients are poor and
vulnerable non-poor who have a relatively unstable source of income.
Access to conventional formal financial institutions, for many reasons, is inversely
related to income: the poorer you are, the less likely that you have access. On the other
hand, the chances are that, the poorer you are, the more expensive or onerous informal
financial arrangements. Moreover, informal arrangements may not suitably meet certain
financial service needs or may 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.

The Need in India

 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.
 About 87 percent of the poorest households do not have access to credit.
 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.

4
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 means building permanent local institutions.
 Microfinance also means integrating the financial needs of poor people into a
country’s mainstream financial system.
 “The job of government is to enable financial services, not to provide them.”
 “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 institutions should measure and disclose their performance –
both financially and socially.

5
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.

Financial needs and Financial services

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:

 Lifecycle Needs: such as weddings, funerals, childbirth, education, homebuilding,

widowhood, old age.
 Personal Emergencies: such as sickness, injury, unemployment, theft, harassment
or death.
 Disasters: such as fires, floods, cyclones and man-made events like war or
bulldozing of dwellings.
 Investment Opportunities: expanding a business, buying land or equipment,
improving housing, securing a job (which often requires paying a large bribe), etc.

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
6
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.

The obstacles or challenges to building a sound commercial microfinance industry

include:

• Inappropriate donor subsidies

• Poor regulation and supervision of deposit-taking MFIs

• Few MFIs that mobilize savings

• Limited management capacity in MFIs

• Institutional inefficiencies
• Need for more dissemination and adoption of rural, agricultural microfinance
methodologies

Role of Microfinance:

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 endeavor of the poor people. Microfinance
impact studies have demonstrated that

Ø Microfinance helps poor households meet basic needs and protects them against risks.

Ø The use of financial services by low-income households leads to improvements in

household economic welfare and enterprise stability and growth.

Ø By supporting womens economic participation, microfinance empowers women,

thereby promoting gender-equity and improving household well being.
7
Ø The level of impact relates to the length of time clients have had access to financial
services.

Strategic Policy Initiatives

Some of the most recent strategic policy initiatives in the area of Microfinance taken by
the government and regulatory bodies in India are:

 Working group on credit to the poor through SHGs, NGOs, NABARD, 1995
 The National Microfinance Taskforce, 1999
 Working Group on Financial Flows to the Informal Sector (set up by PMO), 2002
 Microfinance Development and Equity Fund, NABARD, 2005
 Working group on Financing NBFCs by Banks- RBI

Activities in Microfinance

Microcredit: It is a small amount of money loaned to a client by a bank or other

institution. Microcredit can be offered, often without collateral, to an individual or
through group lending.

Micro savings: These are deposit services that allow one to save small amounts of
money for future use. Often without minimum balance requirements, these savings
accounts allow households to save in order to meet unexpected expenses and plan for
future expenses.

Micro insurance: It is a system by which people, businesses and other organizations

make a payment to share risk. Access to insurance enables entrepreneurs to concentrate
more on developing their businesses while mitigating other risks affecting property,
health or the ability to work.

Remittances: These are transfer of funds from people in one place to people in another,
usually across borders to family and friends. Compared with other sources of capital that
can fluctuate depending on the political or economic climate, remittances are a relatively
steady source of funds.
8
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.

Microfinance in India

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.

Microfinance changing the face of poor India

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,
9
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 labourers in
forestry, mining, household industries, construction and transport. This
segment requires, first and foremost, consumption credit during those months
when they do not get labour 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 pumpsets, borewells and livestock in case of farmers,
and equipment (looms, machinery) and worksheds in case of non-farm workers.

10
  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.

One of the statement is really appropriate here, which is as:

“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.

Poverty alleviation programmes and concepualisation of Microfinance:

There has been continuous efforts of planners of India in addressing the poverty . They
Have come up with development programmes like Integrated Rural Development
progamme (IRDP), National Rural Employment Programme (NREP) , Rural Labour
Employment Guarantee Programme (RLEGP) etc. But these progamme have not been
11
able to create massive impact in poverty alleviation. The production oriented approach of
planning without altering the mode of production could not but result of the gains of
development by owners of instrument of production. The mode of production does
remain same as the owner of the instrument have low access to credit which is the major
factor of production. Thus in Nineties National bank for agriculture and rural
development(NABARD) launches pilot projects of Microfinance to bridge the gap
between demand and supply of funds in the lower rungs of rural economy. Microfinance .
the buzzing word of this decade was meant to cure the illness of rural economy. With this
concept of Self Reliance, Self Sufficiency and Self Help gained momentum. The Indian
microfinance is dominated by Self Help Groups (SHGs) and their linkage to Banks.

Deprived of the basic banking facilities, the rural and semi urban Indian masses are still
relying on informal financing intermediaries like money lenders, family members, friends
etc.

Microfinance Social Aspects

Micro financing institutions significantly contributed to gender equality and women’s

empowerment as well as poor development and civil society strengthening. Contribution
to women’s ability to earn an income led to their economic empowerment, increased well
being of women and their families and wider social and political empowerment.

Microfinance programs targeting women became a major plank of poverty alleviation

and gender strategies in the 1990s. Increasing evidence of the centrality of gender
equality to poverty reduction and women’s higher credit repayment rates led to a general
consensus on the desirability of targeting women.

Self Help Groups (SHGs)

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,

12
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.

How self-help groups work

NABARD (1997) defines SHGs as "small, economically homogenous affinity groups of

rural poor, voluntarily formed to save and mutually contribute to a common fund to be
lent to its members as per the group members' decision".

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:

13
(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).

Sources of capital and links between SHGs and Banks

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.

Comparative Analysis of Micro-finance Services offered to the poor

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Micro Finance Institutions (MFIs):

MFIs are an extremely heterogeneous group comprising NBFCs, societies, trusts and
cooperatives. They are provided financial support from external donors and apex
institutions including the Rashtriya Mahila Kosh (RMK), SIDBI Foundation for micro-
credit and NABARD and employ a variety of ways for credit delivery.

Since 2000, commercial banks including Regional Rural Banks have been providing
funds to MFIs for on lending to poor clients. Though initially, only a handful of NGOs
were “into” financial intermediation using a variety of delivery methods, their numbers
have increased considerably today. While there is no published data on private MFIs
operating in the country, the number of MFIs is estimated to be around 800.
15
Legal Forms of MFIs in India
Types of MFIs
1.  Not for Profit MFIs
a.) NGO - MFIs
b.) Non-profit Companies 10
2. Mutual Benefit MFIs 200 to 250 Mutually Aided Cooperative Societies
a.) Mutually Aided Cooperative
Societies (MACS) and similarly
set up institutions
3.  For Profit MFIs
Estimated Legal Acts under which Registered
Number*
400 to 500 Societies Registration Act, 1860 or
similar Provincial Acts
Indian Trust Act, 1882
Section 25 of the Companies Act, 1956
Act enacted by State Government
6 Indian Companies Act, 1956

a.) Non-Banking Financial Reserve Bank of India Act, 1934

Companies (NBFCs)
Total 700 - 800  

Marketing of Microfinance Products

1. Contract Farming and Credit Bundling

Banks and financial institutions have been partners in contract farming schemes, set up to
enhance credit. Basically, this is a doable model. Under such an arrangement, crop loans
can be extended under tie-up arrangements with corporate for production of high quality
16
produce with stable marketing arrangements provided – and only, provided – the price
setting mechanism for the farmer is appropriate and fair.

2. Agri Service Centre – Rabo India

Rabo India Finance Pvt Ltd. has established agri-service centres in rural areas in
cooperation with a number of agri-input and farm services companies. The services
provided are similar to those in contract farming, but with additional flexibility and a
wider range of products including inventory finance. Besides providing storage facilities,
each centre rents out farm machinery, provides agricultural inputs and information to
farmers, arranges credit, sells other services and provides a forum for farmers to market
their products.

3. Non Traditional Markets

Similarly, Mother Dairy Foods Processing, a wholly owned subsidiary of National Dairy
Development Board (NDDB) has established auction markets for horticulture producers
in Bangalore. The operations and maintenance of the market is done by NDDB. The
project, with an outlay of Rs.15 lakh, covers 200 horticultural farmers associations with
50,000 grower members for wholesale marketing. Their produce is planned with
production and supply assurance and provides both growers and buyers a common
platform to negotiate better rates.

4. Apni Mandi
Another innovation is that of The Punjab Mandi Board, which has experimented with a
‘farmers’ market’ to provide small farmers located in proximity to urban areas, direct
access to consumers by elimination of middlemen. This experiment known as "Apni
Mandi" belongs to both farmers and consumers, who mutually help each other. Under
this arrangement a sum of Rs. 5.2 lakh is spent for providing plastic crates to 1000
farmers. Each farmer gets 5 crates at a subsidized rate. At the mandi site, the Board
17
provides basic infrastructure facilities. At the farm level, extension services of different
agencies are pooled in. These include inputs subsidies, better quality seeds and loans
from Banks. Apni Mandi scheme provides self-employment to producers and has
eliminated social inhibitions among them regarding the retail sale of their produce.

Success Factors of Micro-Finance in India

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
18
these microenterprise loans can be profitable for borrowers and for the lenders, making
microfinance one of the most effective poverty reducing strategies.

A. 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 resultsand 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

19
 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.

6. Finally, to many NGOs, microfinance is a way to financial sustainability.

Especially for the medium-to-large NGOs that are able to access bulk funds for
on-lending, for example from SIDBI, the interest rate spread could be an
attractive source of revenue than an uncertain, highly competitive and
increasingly difficult-to-raise donor funding.

20
 REVIEW OF LITERATURE

1. Sayma Rahman, (2010) Consumption difference between Micro-credit borrowers

and Non-Borrowers: A Bangladesh Experience. The Journal of Developing areas,
Vol.43, Iss 2; p.g. 313, 14 pgs

This paper investigates the consumption behavior of borrowers of two major microcredit
institutions in Bangladesh and compares that with non-borrowers. Primary data has been
collected from borrowers of the Grameen Bank and Bangladesh Rural Advancement
Committee (BRAC) operating in three major districts in Bangladesh. Along with
borrowers, non-borrowers data has also been collected from non-program village to avoid
endogeneity. Control-group method (non-borrowers from non-program villages) has been
used to compare the differences in consumption patterns between the two groups. This
study analyses the impact of per capita monthly expenditure and other household
characteristics on the budget share of eleven items (food and non-food) consumed by
borrowers and non-borrowers. Results from the estimation on linear and quadratic model
suggest that borrowers of microcredit programs are better off in terms of consumption
than non-borrowers.

2.Masahiro Shoji. Does Contingent Repayment in Microfinance Help the Poor During
Natural Disasters? The Journal of Development Studies. London: Feb 2010. Vol. 46,
Iss. 2; pg. 191

Microfinance’s in Bangladesh introduced a contingent repayment system beginning in

2002, which allowed rescheduling of savings and instalments during natural disasters for
affected members. This paper is one of the first attempts to evaluate the system
employing a unique dataset. In using evidence from a flood in 2004, the author found that
rescheduling plays the role of a safety net by decreasing the probability that people skip
meals during negative shocks by 5.1 per cent. This effect is even higher on the landless
and females. This study attempts to contribute to the issue regarding the poverty
reduction effect of microfinance’s.

21
3. Sayma Rahman, Rafiqul Bhuyan Rafiq, Mo Vaziri. Microcredit Programs and
Consumption Behaviour of the Borrower: Evidence from Bangladesh. Journal of
American Academy of Business, Cambridge. Hollywood: Mar 2009. Vol. 14, Iss. 2;
p. 83 (10 pages)

Microcredit program in Bangladesh provides small loans to rural people especially to

women with the purpose of eradicating poverty. This study investigates the impact of
microcredit on consumption pattern of borrowers and compares if the impact is the same
for non-borrowers. Primary data has been collected from the Grameen Bank and the
Bangladesh Rural Advancement Committee (BRAC) borrowers of some selected villages
from three major districts in Bangladesh. Data of non-borrowers are collected from the
same cohort to provide a control group for comparison with borrowers. To estimate the
impact of per capita monthly expenditure and other household characteristics on budget
share of items consumed by borrowers and non-borrowers the study relies on An Almost
Ideal Demand System (AIDS) model. The estimated results of Iterative Seemingly
Unrelated Regression (SURE) suggest that borrowers of microcredit programs are better
off in terms of consumption of most of the food and non-food items compared to non-
borrowers.

4. Yunus, Banker to the Poor: The Story of Grameen Bank.The Lahore Journal of
Economics. Lahore: Summer 2009. Vol. 14, Iss. 1; pg. 173, 3 pgs

Loans are given for income-generating work and initially it was decided to influence the
clients on their choice of work. The principle of the Grameen Bank system is that the
people should not have to go to the bank, rather the bank should go to the people. In
comparing Grameen to conventional banks, Yunus states that the difference for one, lies
in the fact that their clients do not need to show how large are their savings and how
wealthy they may be, instead they need to prove how poor they are and how meagre are
their savings.

22
SCOPE:

Micro Financing has greatest scope in India especially in developing semi -urban cities
like Lucknowbecause many of the people don’t have high income resulting in low
purchasing power and Micro Finance institutions target market as low income group and
it is common impression is that the poor people need and use a variety of financial
services including deposits, loans etc. they use financial services for some reason like –

 Seize business opportunities

 To fulfill their need of necessities
 Improve their standard of living
 Deal with emergencies like illness etc.

23
OBJECTIVE OF THE STUDY

Microfinance has proved to be a successful step towards poverty alleviation and

empowerment in rural area.

 The objective of this study is to find out how feasible will the replication of micro
finance model be in semi-urban area of Lucknow . We will also try to gauge the
openness of people towards microfinance.
 The study shall also measure the effectiveness of microfinance. It is a feasibility
study which we intend to share with the people who wish to implement
microfinance in Lucknowregion.
 What are the various sources available for the micro-finance credit in Lucknow.
 Which source the clients prefers the most to avail the facility of micro-credit.
 What are the major factors for which people are taking micro-credit.
 What are the problems faced by clients while opting for micro-credit.

24
 RESEARCH METHODOLOGY

 RESEARCH TYPE- Descriptive research

 DATA COLLECTION TOOLS;

-SECONDARY DATA: With the help of websites of various banks and

Govt. websites, magazines, news-papers etc.

-PRIMARY DATA:By direct interaction with clients and local

Non- Banking institutes and money-lenders

and withhelp of questionnaire.

 SAMPLING TECHNIQUE: Convenience sampling

 SAMPLING UNIT: Lucknow region

 SAMPLE SIZE: 60 Respondents

 TOOLS USED FOR THE STUDY:
 Open Ended & Closed Ended
Questionnaire with the help of
Semantic Differential Scale
 TECHNIQUES OF ANALYSIS

Quantitative: One-way Anova & MS-Excel

25
 Data Analysis

Issues in Microfinance

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

26
as the organization uses up capital to build its business, thus accentuating the negative
rather than the positive.

3. Financial service delivery

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:

27
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.
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. 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. 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
28
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.

5. Adverse selection and moral hazard

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.

29
 DATA ANALYSIS AND INTERPRETATION

Part-I

I. Have you ever taken micro-credit?

OPTION NO. OF RESPONDENTS

YES 50

N0 10

Micro-Credit Availed

NO
17%

YES
83%

Interpretation:-

This shows that most of the respondents we cover were availing the service of micro-
credit and thus shows that micro-credit is playing vital role in their life in some or the
other way.

II. What is your occupation?

30
 No. of respondents percentage

Occupation

Farmer 3 5%

Auto/rikshaw puller 9 15%

Business 22 37%

Service 18 30%

Others 8 13%

occupation
others
13%
farmer service
5% 30%

auto/rikshawpuller
15%

bussiness
37%

Interpretation:-

This shows that most of the respondents were indulged in the business and service class
contributing about 67% of the total respondents where respondents like farmers are low
i.e. just 5% , with auto/rikshaw puller form 13 and 15% respectively.

III. What is your income level (Per Month)?

31
 Income level No. of respondents Percentage %

Below Rs. 5000/- 7 12

Rs.5000-10,000/- 17 28

Rs.10,000-15,000/- 21 35

More Than Rs.15,000/- 15 25

Income level
Below Rs. 5000/-
12%

More Than Rs.15,000/-

25%
Rs.5000-10,000/-
28%

Rs.10,000-15,000/-
35%

Interpretation:-

The basic purpose to ask this question was to know the respondents who belong to
income group more than 15000/- were not availing much of the micro-credit facility this
question further helped us to conduct our study as only 6 people among this group are
availing the service of micro credit where as people belonging to the lowest income
group i.e. 7 all are availing this service.

IV. Which source you rely the most while taking micro-credit?(50 respondents)

Source No. of respondent Percentage %

32
 Local-Money Lenders 11 22

Public Banks 13 26

Self-Help Groups 0 0

Co-Operative banks 2 4

Private Banks 16 32

Peers 3 6

NBFI’s 4 8

others 1 2

Reliable Source
others
NBFI’s 2%
8%
Local-Money Lenders
22%
Peers
6%

Public Banks
26%
Private Banks
32%

Co-Operative banks
4%

Interpretation:-
33
 This shows that most of the respondents rely on private banks followed by public banks
contributing about 58% as the reliable source for taking micro-credit and then local
money lenders i.e. 22% where as others i.e. NBFC, peers, others contributes about 20%
for total respondents where as self-help groups have just 0% showing that self-help
groups should be formed in Lucknowregion as we know that self help groups have played
a very significant role in the South India for success of micro-finance there.

V. What are the reasons for which you have taken micro-finance?(50 respondents)
Reasons No. of respondents Percentage %

Seize business opportunities 22 44

34
 to fulfill needs of necessities 10 20

Improve standard of living 4 8

Deal with emergencies like 14 28

illness etc.

REASONS

Deal with emergencies like illness etc.

28%

Seize business opportunities

44%

Improve standard of living

8%

to fulfill needs of necessities

20%

Interpretation:-

This shows that most of the respondents takes micro-credit to do some business so that
they could earn their livelihood for business the respondents contributes about 44% of the
whole respondents followed by to deal with emergencies i.e. 28% where as to improve
standard of living and to fulfill necessities contributes about 28% of the total.

VI. If you are taking the micro-credit from banks which bank you prefer themost?
(50respondents)

Banks No. of respondents Percentage %

ICICI 12 24
35
 PNB 3 6

HDFC 3 6

State Bank of Patiala 18 36

Punjab Grameen Bank 2 4

NBFI’S 4 8

Others 8 16

BANKS

Others
16% ICICI
24%

NBFI’S
8%

Punjab Grameen Bank PNB

4% 6%

HDFC
6%

State Bank of Patiala

36%

Interpretation:-

This shows that about 32% of the respondents are taking micro-credit from State Bank of
Patiala i.e. for 36% of total respondents followed by ICICI Bank contributing about 24%
of total where as for others its about 44% which is of NBFI’s, Punjab Grameen Bank ,
PNB ,HDFC and others sources.
36
VII. Rate the essence of micro-finance on the scale of 1-5?(60 respondents)

Scale 1 2 3 4 5 Significant
Insignificant
No. 31 17 8 3 1
Respondent
s

scaling 1to5
35

30

25

20 Series 1

15

10

0
Significant 1 2 3 4 5 Insignificant

Interpretation:-

This shows that as most of the people lie between 1 to 2 rating on scale i.e. about 48
number of respondents therefore we can say that micro-credit will have significant at
present in Lucknowregion as people at scaling rate of 4 and 5 are very low i.e. about 4
out of 60 respondents.

VIII. How much Interest rates are charged by micro-credit providers? (50 respondents)

Interest rates No. of respondents Percentage %

Below 5% Nil Nil
37
 5-10 27 54

10-15 13 26

15-20 3 6

20-25 6 12

More than 25 1 2

more than 25%

2%

20 to 25%
12%
15 to 20%
6%

5 to 10%
54%
10 to 15%
26%

Interpretation:-

This show that most of the respondents are undertaking the micro-credit at the interest
rate of 5 to 10 % that contributes about 54% of the total respondents followed by 10
to 15% interest rates which are about 26 % of the respondents. It shows that
respondents mostly prefer to take micro-credit at the rate of 5 to 15 percent which
accounts for 80% of the total respondents. Whereas micro-credit is not available at a
low interest rate of less than 5%.

IX. How will you rate the present interest rates being charged on you for taking micro-
credit? (50 respondents)

38
 Scale 1 2 3 4 5 Significant
Insignificant
No. 23 14 8 3 2
Respondent
s

scaling 1to5
25

20

15
Series 1

10

0
Satisfactory 1 2 3 4 5 Unsatisfactory

Interpretation:-

This shows that most of the respondents are satisfied with the present interest rates
charged on micro-credits as most of the respondents lie between the rating scale of 1 to 2
i.e. about 37 out of 50 respondents who have undertaken the micro-credit.

39
X. According to you which factor will be more crucial for the growth of micro-finance in
Lucknowcity? (50 respondents)

FACTOR NO.OF RESPONDENTS PERCENTAGE %

LOW INTEREST RATES 8 16

TIME PROCESSING 12 24

INSTALLMENT FACTOR 2 4

AVAILABILITY 7 14

BUSINESS ASSISTANCE 18 36

OTHERS 3 6

Factor's
OTHERS
6% LOW INTEREST RATES
16%

BUSINESS ASSISTANCE
36%
TIME PROCESSING
24%

INSTALLMENT FACTOR
AVAILABILITY 4%
14%

Interpretation:-

This show that most of the respondents take micro-credit not only to get money for their
business but also to get business assistance to run their business successfully, here about
36% of the respondents have stated that the business factor is the most important factor of
the micro-credit facility followed by time for processing which is about 26%, then
availability, installment factor and low interest rates forms about 38% of the total
respondents.

40
 FINDINGS

 H1: micro-credit is feasible in Lucknowregion, as proved by Anova test.

 Most of the respondents below the income group of more than Rs. 15000/-
are taking micro-credit in order to start business, meet need of necessities or
to meet certain emergencies.50 out of 60 respondents are under taking this
facility of micro-credit.
 Most of the respondents are taking micro-credit to start business in order to
earn their livelihood and so that they generate some regular source of income
for their families. These are about 44 % of the total respondents followed by
ot deal with emergencies such as illness etc. which is about 28%.
 Most of the respondents rely on both public and private i.e. about 58% of
total respondents collectively followed by Local-money lender i.e. about
22%. Showing that respondent’s reliability towards public and private sector
banks is maximum.
 As the range of micro-credit interest rates is between 5% to 25 % , most of
the respondents are paying interest rates between 5 to 15 % which forms
about 80% of the total respondents.
 Majority of the respondents are happy with the present interest rates being
charged on micro-credit.
 The business assistance factor has been regarded as the most significant
factor of the micro-credit which form about 62 % of the total respondents
followed by time taken and availability of micro-credit.
 About 59% of the total respondents say that, it will help to remove the
poverty so it can be seen as tool to remove poverty from Lucknowregion.
 For being helpful for unemployed youth 45% says no and 42% says yes , as
the variation between the two is quite low thus it’s difficult to judge ,
therefore we can say it has neutral effect for helping unemployed youth.
 About 64% of the respondents says that , it will help in women upliftment
therefore it can be said it can play a vital role for women upliftment.

41
 Peers as the source of micro-credit has been regarded as the most favorable
one in terms of time, availability and effectiveness.
 Local-money-lenders are high at availability but these are highly exploitive.
 Private Banks such as ICICI, HDFC etc. has been regarded as highly
courteous, efficient and but these are a bit high at exploitive part too.
 Public Banks such as Punjab National Bank, State Bank of Patiala are
moderately rated
 Self Help Groups and Co-operative Societies are highly moderate in nature.

42
 SUGGESTIONS
 People should be make aware about Self-Help Groups and various steps
should be taken by various Private and Public banks to form Self Help
Groups among masses.
 Various NGO’s should come forward to help poor people by helping them
to provide micro-credit at low interest rates and provide them business
assistance.
 People’s reliability over Local-money-lenders should be tried to decrease
as they exploit poor by not only charging high interest rates but also in
compounded form.
 The interest rates charges shouldn’t be more than 15% for micro-credit as
it should be regarded as a tool for poor’s upliftment.
 Public and Private sector Banks should try to open their own MFI’s in
Lucknowregion.
 There should be MFI’s such as SSK working in South India, which is not
only working successful but also main reason for the success of
microfinance in South India.

43
 CONCLUSION

 To conclude we can say that its just the beginning of the micro-credit in
Lucknowregion and it will of more success when people will rely more towards
organized sector for micro-credit such as Public and Private sector banks.
 There is need for opening of MFI’s in Lucknowregion so that micro-credit can be
provided with more of ease
 Micro-credit can be regarded as tool which will help to eradicate poverty
 Help for women upliftment by making them more independent and monitory fit.
 Help poor to set—up businesses and earn their livelihood.

44
 References:

 NABARD website

 Anil K Khandelwal, “Microfinance Development Strategy for India”, Economic

and Political Weekly, March 31, 2007

 R Srinivasan and M S Sriram, “Microfinance in India- Discussion”

 Shri Y S P Thorat, Managing Director, NABARD, “Innovation in Product
Design, Credit Delivery and Technology to reach small farmers”, November,
2005

 Shri Y S P Thorat, Managing Director, NABARD, “Microfinance in India:

Sectoral Issues and Challenges”, May, 2005

 Report, “Status of Microfinance in India 2006-2007”, NABARD

 http://www.microfinancegateway.org/p/site/m/
 http://www.microfinancegateway.org/p/site/m/
 brijj.com/group/microfinance-in-india--presentation--Nabard-And-Microfinance
 http://www.infibeam.com/Books/info/PRABHU-GHATE/MICROFINANCE-IN-
INDIA-A-State-of-the/9788178298931.html

 http://www.merinews.com/article/microfinance-fact-and-fiction/147023.shtml
 http://www.rediff.com/money/2007/nov/08micro.htm
 http://www.axisbank.com/corporate/credit/microfinance/Micro-Finance.asp

45
46