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Micro Finance and NGOs

“Self realization and self initiative are the two most powerful

weapons to wash poverty out from the world” – Chanakya
World’s Greatest Ancient Economic and Political Scholar

Non-Governmental Organizations and voluntary action have

been part of the historical legacy1. In the context of contemporary
social empowerment, self realization and self initiative is the base for
the formation of self help groups. This is the logic motivated NGOs to
form SHGs in rural areas to empower them through developing their
inherent skills. Thus, SHG movement among the rural poor in different
parts of the country is emerging as a very reliable and efficient mode
for technology transfer2. Chanakya’s philosophical statement has
transformed into the SHGs with the help of NGOs and their efforts.
Microfinance is the tool to empower the rural poor and also tool against
human deprivation. Microfinance is motivating sustainable
development through the supportive NGOs.

As a responsible welfare state in the democratic systems, it can

be also say that the growth of micro-finance in India has been in
response to the failure of institutional initiatives of rural credit system
and involvement of informal credit system. Rural credits especially
rural cooperatives. This is led to establishment of microfinance
institutions under the guidelines of NABARD.

This is quoted by Rimjhim Mousami Das’s “Micro-finance through SHGs: A Boon for the Rural Poor”
from S.B. Verma and Yaswant Tukaram Pawar, (Ed) Rural Empowerment through Self Help Groups, Non
Governmental Organizations and Panchayati Raj Institutions, New Delhi: Deep and Deep Publication,
2005. p.16.
. S.B. Verma and Y.T. Pawar, 2005. p.99.
. Verma, S.B. and Pawar. Y.T. 2005, p. x.

Microfinance institutions are highly encouraging. Microfinance
through SHG has become a ladder for the poor to bring them up not
only economically but also socially, mentally and attitudinally 3. Initially,
SHGs and microfinance, as an instrument for social and economic
empowerment, are established by the non governmental
organizations. In the era of 21st century, NGOs are transforming from
non-profit to profit making business model NGOs. Especially, the
success formula of microfinance non profit model is learned from the
PRODEM - Bolivia and Grameen Bank – Bangladesh. It is proved that
committed for the social development NGOs can develop the society
through providing finance accessibility to the poor based on self help
model. Many NGOs (non-government organizations) in India came
forward to promote micro-finance. At present more than 1000 NGOs
are implementing micro-finance projects in India.

Some of them are leading MFIs (micro-finance institutions)

playing the role of social intermediation and building better society in
rural areas. These MFIs have adopted different strategies of people’s
livelihood through micro-finance delivery.

Microfinance Institutions:

The following are the some of leading microfinance institutions in

India working in the sector.
 Association for Sarva Seva Farms (ASSEFA)
 Mitrabharati - The Indian microfinance Information Hub Mysore
Resettlement and Development Agency (MYRADA)
 SADHAN - The Association of Community Development Finance
 SEWA: Self-help Women's Association

. Ibid, p.16.

 SKS India - Swayam Krishi Sangam
 Streedhan - Banking with Rural Women
 Working Women's Forum, Madras, India

The goals are

 Eradicate Extreme Poverty & Hunger.

 Achieve Universal Education.
 Promote Gender Equality & Women’s Empowerment.
 Reduce Child Mortality
 Combat Diseases
 Developing Entrepreneurial Spirit

Between the 1950s and 1970s, governments and donors

focused on providing agricultural credit to small and marginal farmers,
in hopes of raising productivity and incomes. These efforts to expand
access to agricultural credit emphasized supply-led government
interventions in the form of targeted credit through state-owned
development finance institutions, or farmers' cooperatives in some
cases, that received concessional loans and on-lent to customers at
below-market interest rates. These subsidized schemes were rarely
successful. Rural development banks suffered massive erosion of their
capital base due to subsidized lending rates and poor repayment
discipline and the funds did not always reach the poor, often ending up
concentrated in the hands of better-off farmers.

Meanwhile, starting in the 1970s, experimental programs in

Bangladesh, Brazil, and a few other countries extended tiny loans to
groups of poor women to invest in micro-businesses. This type of micro
enterprise credit was based on solidarity group lending in which every
member of a group guaranteed the repayment of all members. These
"micro enterprise lending" programs had an almost exclusive focus on

credit for income generating activities (in some cases accompanied by
forced savings schemes) targeting very poor (often women) borrowers.

• ACCION International, it is a Latin America’s one of the prime

microfinance institution working with the poor. In an early pioneer,
ACCION was founded by a law student, Joseph Blatchford, to address
poverty in Latin America's cities. Begun as a student-run volunteer
effort in the shantytowns of Caracas with $90,000 raised from private
companies, ACCION today is one of the premier microfinance
organizations in the world, with a network of lending partners that
spans Latin America, the United States and Africa.

• SEWA Bank. In 1972 the Self Employed Women's Association

(SEWA) was registered as a trade union in Gujarat (India), with the
main objective of "strengthening its members' bargaining power to
improve income, employment and access to social security." In 1973,
to address their lack of access to financial services, the members of
SEWA decided to found "a bank of their own". Four thousand women
contributed share capital to establish the Mahila SEWA Co-operative
Bank. Since then it has been providing banking services to poor,
illiterate, self-employed women and has become a viable financial
venture with today around 30,000 active clients.

• Grameen Bank. In Bangladesh, Professor Muhammad Yunus

addressed the banking problem faced by the poor through a
programme of action-research. With his graduate students in
Chittagong University in 1976, he designed an experimental credit
programme to serve them. It spread rapidly to hundreds of villages.
Through a special relationship with rural banks, he disbursed and
recovered thousands of loans, but the bankers refused to take over the
project at the end of the pilot phase. They feared it was too expensive
and risky in spite of his success. Eventually, through the support of

donors, the Grameen Bank was founded in 1983 and now serves more
than 4 million borrowers. The initial success of Grameen Bank also
stimulated the establishment of several other giant microfinance
institutions like BRAC, ASA, Proshika, etc.

Through the 1980s, the policy of targeted, subsidized rural credit

came under a slow but increasing attack as evidence mounted of the
disappointing performance of directed credit programs, especially poor
loan recovery, high administrative costs, agricultural development
bank insolvency, and accrual of a disproportionate share of the
benefits of subsidized credit to larger farmers.

The basic tenets underlying the traditional directed credit

approach were debunked and supplanted by a new school of thought
called the "financial systems approach", which viewed credit not as a
productive input necessary for agricultural development but as just
one type of financial service that should be freely priced to guarantee
its permanent supply and eliminate rationing. The financial systems
school held that the emphasis on interest rate ceilings and credit
subsidies retarded the development of financial intermediaries,
discouraged intermediation between savers and investors, and
benefited larger scale producers more than small scale, low-income

Concept of Micro-Finance

Before we understand the concept of micro-finance, it would be

worthwhile to understand the term micro-credit as the two terms are
closely related to each other. Poor people need micro credit for various
and different purposes. It may be to meet the major household
expenses; emergency needs or even basic livelihood support. There

are two main systems of micro credit4. One is formal financial
institutions, banks and co-operatives, which provide micro-credit to the
poor people under different schemes for livelihood support or helping
them to start micro-enterprises. The other is informal system
comprising traditional moneylenders, pawnbrokers and trade specific
lenders. Both the systems have their own positive and negative

Concept and Features of Micro-Finance

Micro-finance, as is being practiced by the National Credit Fund

for Women or the Rashtriya Mahila Kosh (RMK), could be defined as a
set of services comprising the following activities:


Here, the following activities can be activated such as Small

loans; primarily for income generation activities, but also for
consumption and contingency needs.


SHGs micro savings are called as thrift. The thrift is the basic
element for the success of microfinance. Thrift or small savings from
borrowers’ own resources.

The main features of the micro-finance

1. It is a tool for empowerment of the poorest women.

. Chauhan, Brij Raj (1990). Rural – Urban Articulations, Etawah: A. C. Brothers. Chippa, M.L. (1987).
Commercial Banking Development in India: A Study in Regional Disparity. Jaipur: Printwell Publishers. p.

2. It is essentially for promoting self-employment; the opportunities
of wage employment are limited in developing countries - micro
finance increases the productivity of self-employment in the
informal sector of the economy - generally used for (a) direct
income generation (b) rearrangement of assets and liabilities for
the household to participate in future opportunities and (c)
consumption smoothing.
3. It is not just a financing system, but a tool for social change,
specially for women
4. Micro credit is aimed at the poorest; micro-finance lending
technology needs to mimic the informal lenders rather than the
formal sector lending.

It has to:

a) Provide for seasonality

(b) Allow repayment flexibility

(c) Eschew bureaucratic and legal formalities

(d) Fix a ceiling on loan sizes.

The positive aspects of formal financial system are that under

this system, micro-credit is available at low rate of interest with easy
and periodical repayments and moratorium period. The most important
aspect of this type of credit is that it is available for income generating
activities. But at the same time micro-credit from formal financial
system is not easily available. The system requires collateral or
security. It has complex legal and operational procedures, involving lot
of paper work. Since the process of credit disbursement is time
consuming, many times credit is not available in time. Finally, there is
a stigma attached to the poor people so that the bankers do not think

them credit-worthy and feel that the recovery rate is unsatisfactory.
But this may not necessarily be true.

The positive aspects of informal system of micro-credit are that

the credit disbursement is easy and relatively quick. No collateral is
required and there is least paper work. Credit can be given for any
activity, especially for consumption and emergency purposes. Credit is
generally given for non-productive purposes as well. But at the same
time there is very high interest rate in informal micro-credit system.
Exploitation is also attached with this system. Moneylender takes
repayment at one time only. Based on these two systems of micro-
credit, we can define “micro-credit as the provision wherein debtor
takes money either from formal or informal sources of credit on
unilaterally decided terms by the creditor”. If we combine together
positive aspects of both the systems like, low rate of interest, easy and
periodical repayments with moratorium period, credit for income
generating activities, easy process of disbursement, no collateral or
security and less paper work etc., we come closer to understanding the
concept of micro-finance. The ‘Task Force on Supportive Policy and
Regulatory Framework for Micro-Finance’ constituted by NABARD
(National Bank for Agriculture & Rural Development) defines “micro-
finance as the provision of thrift, saving, credit and financial services
and products of very small amounts to the poor in rural, semi-urban
and urban areas for enabling them to raise their income levels and
improve their standard of living”.

The emergence of microfinance’s prime objective is to bridge the

gap between demand and supply of funds in the lower rungs of the
rural economy, the formal sector took the initiative to develop a
supplementary credit delivery mechanism by encouraging institutional
arrangements outside the financial system with the launching of

NABARD’s pilot scheme, microfinance to cure the illness of rural
poverty gained visibility ion the India development landscape5.

Services of micro-finance are being provided by various MFIs. In

India, the Task Force mentioned above, has classified these MFIs under
three categories as mentioned below: 3 Not-for-Profit MFIs: These
include Societies registered under Societies Registration Act 1860 or
similar State Acts, Public Trusts registered under the Indian Trust Act
1882 and Non- Profit Companies registered under Section 25 of the
Companies Act 1956. Mutual Benefit MFIs: Such as State Credit Co-
operatives, National Credit Co-operatives and Mutually Aided Co-
operative Societies (MACS). For-Profit MFIs: Bodies like Non-Banking
Financial Companies (NBFCs) registered under the Companies Act
1956 and Banks which provide micro finance along with their other
usual banking services could be termed as micro-finance service
providers of this type.

Examples of Recent Innovations in World’s Financial Services

for the Poor:

1. CCACN (Central de Cooperativas de Ahorroy Crédito

Financieras de Nicaragua) is marketing its "Agriculture Salary"
savings product to farmers. The goal of the product is to smooth the
flow of income from the proceeds of an annual or semi-annual harvest.
Each credit union works with its farmers to identify their individual
expenses and determine a monthly "salary" (portion of harvest
proceeds on deposit combined with an above-market interest rate) to
be withdrawn from the credit union. In its infancy stage, the credit
unions have noted an interest from agriculture-based clients in such a
savings management program.

. S.B. Verma and Y.T. Pawar, 2005. p.100.

2. Caja los Andes in Bolivia offers four loan repayment options that
fit the cash flow of various agricultural activities, including an end-of-
term payment for both principal and interest that fits single crop
activities, and unequal payments at irregular intervals for farmers that
have planted several crops with different harvesting periods. Flexibility
is also provided in loan disbursements, and farmers can receive the
sanctioned loan amount in as many as three installments.

3. PRODEM in Bolivia has introduced a combination of biometric

fingerprint and Smart Cards to deliver financial services to its clients.
Biometric technology measures an individual's unique physical or
behavioral characteristics, such as fingerprints, facial characteristics,
voice pattern, and gait, to recognize and confirm identity. Although the
technology is still new, growing awareness of the importance of data
security is increasing adoption steadily. Prodem's fingerprint
verification has reduced fraud, error, and repudiation of transactions.
Staff had not had to deal with forgotten PIN numbers or unauthorized
use of cards and accounts so they have more time to provide personal
service and advice to clients.

4. International Remittance Network (IRnet): In late 1999,

WOCCU, in partnership with Vigo, a money transfer firm, launched
IRnet. As of June 2003, 173 credit unions in Central America offer
IRnet, expanding the possibilities for sending remittances through 800
US credit union points of service. The Central American credit unions
distribute remittances primarily to rural clients. The distributing credit
unions help to integrate remittance recipients into the formal financial
sector through trained staff who cross-sell services. When a non-
member enters a credit union to pick up a remittance, a staff person
encourages this person to become a credit union member and save a

portion of the remittance in an interest-bearing voluntary savings

5. Unibanka (Latvia): Prior to introducing credit scoring, Unibanka, a

commercial bank, viewed microfinance loans as too costly to deliver.
With the assistance of Bannock Consulting, Unibanka instituted a
credit-scoring system based on qualitative client data because
sufficient quantitative data was not available to develop a statistical

6. Managed ASCAs: A number of local organisations in the Nyeri

District of Kenya provide management services to group-based loan
funds. The groups operate as Accumulating Savings and Credit
Associations (ASCAs) and receive management services provided by
ASCA Management Agencies (AMAs). The AMA model serves a wider
client base than the mainstream donor funded MFIs who tend to focus
their attention on micro and small entrepreneurs. The clientele of AMAs
are also drawn from other socio-economic strata, including salaried
workers such as nurses, teachers and civil servants as well as
subsistence and semi-commercial farmers. Hence their reach into the
rural areas is much greater than the MFIs8.

7. ICICI Bank (India): Two state banks in India (Corporation and

Canara) partnered with an NGO to provide salaried low-income workers
with access to savings. The project uses the already established

. WOCCU: A Technical Guide to Rural- Finance Exploring Products. WOCCU Technical Guide # 3,
December 2003.

. CGAP it innovation series: Credit Scoring.
. Nthenya Mule, Susan Johnson, Robert Hickson. Wambui Mwangi. The Managed ASCA Model:
Innovation in Kenya's Microfinance Industry. Micro-Save Africa. 2001.

automatic teller machines (ATMs) in the factories to offer a recurring
savings product, along with education on personal finance9.

8. Microenterprise Access to Banking Services (MABS) in the

Philippines nurtures the expanded use of the credit bureau by rural
banks, which was started in 2001 to minimize client over indebtedness
and defaults. MABS has helped to integrate the rural banks'
microenterprise loan clients into an existing national credit bureau, by
creating an e-mail encryption program that allows rural banks to share
information electronically at a low cost10.

9. The National Microfinance Bank in Tanzania (NMB) was

created to retain the extensive rural branch network of the National
Bank of Commerce (NBC) when it was privatized in 1997. The key to
making it commercially viable has been rigorous control of costs
through drastic simplification of the business model and tight
managerial oversight. Key initiatives have been correct pricing of
products, particularly payments and remittance services, which had
traditionally been cross-subsidized by other product lines, and the
development of microfinance products, mainly small (average US
$400) individual loans11.

10. ADOPEM (Dominican Republic) thoroughly evaluated its PDA

(Personal Digital Assistants) program and recorded dramatic
improvements. Client retention improved significantly, and the number
of days between application and disbursement dropped from five days

. CGAP it innovation series
. Anita Campion and John Owens, MABS: A Sustainable Approach to Rural Microfinance,
Microbanking Bulletin, July 2003.

. Rural financial services: Implementing the bank's strategy to reach the rural poor (Work in Progress).
Rural Private Sector, Markets, Finance and Infrastructure Thematic Group. Rural Sector Board, The World
Bank. Washington, D.C. March 2003.

to two days. Expenses for paperwork dropped by 60% and data entry
expenses dropped by 50%12.

11 The international NGO Technoserve has developed an

inventory credit scheme in Ghana that enables farmers' groups to
obtain higher value for their crops by providing post-harvest credit
through linkage with a rural financial institution. Instead of selling their
entire crop at harvest - when prices are lowest - in order to meet cash
needs, small-scale farmers in the scheme store their crop in a
cooperatively-managed warehouse and receive a loan of about 75-80%
of the value of the stored crop, which serves as collateral. This loan
permits them to clear their accumulated debts and satisfy immediate
cash requirements. Then, when prices have risen in the off-season, the
farmers either sell the stored crop or redeem it for home

12. Savings-based, Agriculture-oriented Rural Credit Unions -

SICREDI - Brazil specializes in agricultural lending, primarily for the
production of rice, wheat, beef, fodder, fish, vegetables and for
agricultural equipment. Loan approvals are based upon the members'
savings history and credit record, with the size limited to 50 percent of
production costs and dependent upon the potential return of crop sale
at harvest as well as household income and debt obligations. The
borrower makes monthly interest payments and then a balloon
payment of the principal at harvest time. In addition, SICREDI
participates in the PROAGRO national crop insurance, for which a

. CGAP IT Innovation Series. Washington, D.C.: CGAP, October 2003.

. Rural financial services: Implementing the bank's strategy to reach the rural poor (Work in Progress).
Rural Private Sector, Markets, Finance and Infrastructure Thematic Group. Rural Sector Board, The World
Bank. Washington, D.C. March 2003.

premium is added on the loan rate. PROAGRO pays 100% of the loan
loss if the crop fails14.

13. Producer Associations as Clients of a Financial Institution:

GAPI and CLUSA in Mozambique: GAPI offers investment and
working capital loans to fora (federations of associations) of small
farmers and small and micro-enterprises. Loans are secured through a
solidarity group-like guarantee between the participating fora. Each
forum on-lends to its member associations, who collect the produce
from their individual members and other area farmers and deliver it to
the forum in return for the loan. About 80% of the profits from the sale
of produce are handed back to the associations - the remaining 20% of
the profits are kept by the forum as interest payments15.

14. Equity Building Society (EBS) in Kenya has emerged as one of

Kenya's leading microfinance institutions, with over 155,000 savings
clients and 41,000 borrowers. Once insolvent, EBS transformed itself
into a profitable financial-service provider by rigorously focusing on the
needs of its clients - in particular, by developing a wide range of
market-based financial products and services, including a mobile
banking service16.

The above mentioned experiences shows that effective

functioning with focus group oriented will success in the area of

. WOCCU: A Technical Guide to Rural- Finance Exploring Products. WOCCU Technical Guide # 3,
December 2003.

. Pearce, Douglas. "Buyer and Supplier Credit to Farmers: Do Donors Have a Role to Play?" prepared
for Paving the Way Forward for Rural Finance: An International Conference on Best Practices, held June
2-4, 2003.

. Source: CGAP Case Studies In Donor Good Practices No. 8. Donors as Silent Partners in MFI Product
Development: Micro Save-Africa and Equity Building Society in Kenya. July 2003.

microfinance. At the global microfinance scenario, most of the
institutions are providing loans for the purpose of agriculture and allied
services, micro enterprises and other rural based micro economic

Growth of Micro-Finance Sector at Global Level

Let us look at the historical account of the emergence and

growth of micro finance sector at the global level. The Grameen Bank,
Bangladesh, was started as an experiment in 1976 and accorded a
special banking charter in 1983. In 1981 NDF (National Development
Foundation), Jamaica, was started with support of Pan American
Development Foundation. In 1983 ADEMI (Association for Development
of Micro Enterprises) was established in Dominican Republic, Santo
Domingo with support from ACCION, an International Agency. In 1984
BRI (Bank Rakayat Indonesia) started micro-finance in Indonesia. In
1984, K-REP (Kenya Rural Enterprise Programme) was set up by USAID
(United States Agency for International Development) to develop credit
programmes for micro-enterprises through NGOs intermediation. In
1986 ACEP (Agence de Credit Pour ‘L Enterprise Privee) was
established in Senegal with the support of USAID.

In 1986, PRODEM (Foundation for the Promotion and

Development of Micro Enterprises) which was established by USAID
and ACCION International in Bolivia, started micro finance. Later on it
was converted into a bank called Bancosol (Banco Solidario) in 1992. In
1987 IDH (Instituto de Desarrollo Hondurando) was started in Honduras
with the support of Opportunity International. In 1992, BANPECO
(Banco Nacional del Pequeno Comercio) that is, National Bank for Small
Traders was renamed as BNCI (Banco Nacional de Comercio Interior),
that is National Bank for Domestic Commerce and started micro-

financing in urban areas of Mexico. Micro-Credit Summit (2-4 February,
1997) held at Washington D.C. was organized to launch a global
movement to reach 100 million of the world’s poorest families,
especially the women of those families, with credit for self-
employment, by the year 2005.

Meanwhile, micro credit programs throughout the world

improved upon the original methodologies and defied conventional
wisdom about financing the poor. First, they showed that poor people,
especially women, had excellent repayment rates among the better
programs, rates that were better than the formal financial sectors of
most developing countries. Second, the poor were willing and able to
pay interest rates that allowed microfinance institutions (MFIs) to cover
their costs. 1990s These two features - high repayment and cost-
recovery interest rates - permitted some MFIs to achieve long-term
sustainability and reach large numbers of clients.

Another flagship of the microfinance movement is the village

banking unit system of the Bank Rakyat Indonesia (BRI), the largest
microfinance institution in developing countries. This state-owned bank
serves about 22 million micro savers with autonomously managed
micro banks. The micro banks of BRI are the product of a successful
transformation by the state of a state-owned agricultural bank during
the mid-1980s.

The 1990s saw growing enthusiasm for promoting microfinance

as a strategy for poverty alleviation. The microfinance sector
blossomed in many countries, leading to multiple financial services
firms serving the needs of micro entrepreneurs and poor households.
These gains, however, tended to concentrate in urban and densely
populated rural areas.

It was not until the mid-1990s that the term "micro credit" began
to be replaced by a new term that included not only credit, but also
savings and other financial services. "Microfinance" emerged as the
term of choice to refer to a range of financial services to the poor, that
included not only credit, but also savings and other services such as
insurance and money transfers.

Today, practitioners and donors are increasingly focusing on

expanded financial services to the poor in frontier markets and on the
integration of microfinance in financial systems development. The
recent introduction by some donors of the financial systems approach
in microfinance - which emphasizes favorable policy environment and
institution-building - has improved the overall effectiveness of
microfinance interventions. But numerous challenges remain,
especially in rural and agricultural finance and other frontier markets.

Today, the microfinance industry and the greater development

community share the view that permanent poverty reduction requires
addressing the multiple dimensions of poverty. For the international
community, this means reaching specific Millennium Development
Goals (MDGs) in education, women's empowerment, and health,
among others. For microfinance, this means viewing microfinance as
an essential element in any country's financial system.

Non-Institutional or Informal Sources of Micro-Credit in India

In nutshell, one can say that RFIs do not fulfill the credit needs of
the farmers, rural producers and the rural poor in general, resulting in
non-institutional sources of credit. The indirect reason responsible for
the growth of non-institutional sources of credit was also the economic
weakness of the Jajmani System*. The non-institutional sources of
credit would include big farmers, big farmer-cum-money-lenders,

commission agents, friends/ relatives, moneylenders, traders, village
shopkeepers and others. The All India Rural Credit Survey Committee,
appointed by the RBI in 1951 under the Chairmanship of Gorwala,
undertook a comprehensive survey of rural credit and submitted its
report in August 1954. The survey revealed that shares of institutional
and non-institutional sources of rural credit were 7.3 per cent and 92.7
per cent respectively.

At present about two-third of the credit need in rural areas is met

out by informal sources. But the moneylenders have yet to disappear.
Though they charge very high rate of interest, varied between 36 per
cent to 30.00 per cent per annum. The is also need to sensitize the
issue of informal rural banks that they provide timely and adequate
credit to the rural poor without much paperwork and for any purpose,
especially for meeting consumption and other social needs. But
physical, economic and social exploitation of the poor people is
attached with this system.

In brief analysis micro finance chronology can be evaluated by

the following steps:

• Microfinance has been in practice for ages (though informally).

• Legal framework for establishing the co-operative movement set up
in 1904.
• Reserve Bank of India Act, 1934 provided for the establishment of
the Agricultural Credit Department.
• Nationalisation of banks in 1969
• Regional Rural Banks created in 1975.
• NABARD established as an apex agency for rural finance in 1982.
• Passing of Mutually Aided Co-op. Act in AP in 1995.

The Profile of Microfinance in India

The profile of micro finance in India at present can be traced out

in terms of poverty, it is estimated that 350 million people live Below
Poverty Line and this translates to approximately 75 million
households with annual credit demand by the poor in the country is
estimated to be about Rs. 60,000 crores.

The following are some of important components of microfinance:

• Cumulative disbursements under all microfinance programmes is

only about Rs. 5000 crores.(Mar. 04)
• Total outstanding of all microfinance initiatives in India estimated to
be Rs. 1600 crores. (March 04)
• Only about 5 % of rural poor have access to microfinance.
• Though a cumulative of about 20 million families have accessed
microfinance to the extent of Rs. 5000 crores, the total outstanding
is estimated to be only about Rs. 1600 crores. The active borrowers
are estimated to have a per capita outstanding of only Rs. 2500.
• While 10 % lending to weaker sections is required for commercial
banks, they neither have the network for lending and supervision on
a large scale nor the confidence to offer term loans to big MFIs.
• The non poor comprise of 29 % of the outreach.

The Status of Microfinance

• Considerable gap between demand and supply for all financial

• Majority of poor are excluded from financial services. This is due to,
inter-alia, the following reasons
• Bankers feel that it is fraught with risks and uncertainties.

• High transaction costs
• Unfavourable policies like caps on interest rates which effectively
limits the viability of serving the poor.
• While MFIs have shown that serving the poor is not an unviable
proposition there are issues that have constrained MFIs while
scaling up. These include
• Lack of an appropriate legal vehicle
• Limited access to equity
• Difficulty in accessing low cost on-lending funds (as of now they are
unable to offer savings services in a legitimate manner.
• Limited access to Capacity Building support which is an important
variable in terms of quality of the portfolio, MIS, and the
sustainability of operations.
• About 56 % of the poor still borrow from informal sources.
• 70 % of the rural poor do not have a deposit account
• 87 % have no access to credit from formal sources.
• Less than 15 % of the households have any kind of insurance.
• Negligible numbers have access to health insurance (0.4 %) and
crop insurance (0.2 %).
• NABARD’s bank linkage program has cumulatively reached a total of
9.4 lakh SHGs with about 1.4 crore households.

Related Issues
• Designing financially sustainable models
• Aim for community participation & ownership
• Increase outreach and scale up operations
• Demonstrate that banking with the poor is viable
• Build professional systems and processes.
• Ensure transparency and enhance credibility through disclosures.
• Provide support for capacity building initiatives.

Opportunities for Micro-Finance Sector in India

Keeping in view of above mentioned issues relating to how and

why the rural informal credit system is strengthened, NGOs are need
to sensitize the state institutions and NGOs it self has to take initiatives
for the rural banking in micro rural credit system. Moreover, rural
population is a major population segment in India.

According to the 2001 Census of India 2001, 72.22 percent of the

total population is rural and dependent on agriculture and allied
activities for their livelihood. Due to the failure of agricultural reforms
and not adopting a farmer-oriented agricultural policy, growth rate of
employment in agriculture sector has declined from 2.32 per cent in
1972-73 to 1.2 per cent in 1983 to 0.65 per cent in 1985. Agriculture
contributed only 31.7 percent to GDP in 1993-94 down from 56.5 per
cent in 1951. But this is not the complete picture of the rural economy.
The rural economy has a strong base for employment generation.

Rural economy still accounts nearly 40 per cent of India’s GDP

including 10 per cent of RNFS. Share of exports in GDP has increased
from 6.2 per cent in 1991-92 to 9.2 per cent in 1994-95. Major
contribution to exports comes from the agricultural and allied sectors
such as handloom, power loom, gem and jewellery, handicrafts,
carpets, leather and mineral products, all of which have at least one
primary rural production base.

The rural market share of both consumer durable and non-

durable products exceeds 40- 50 per cent for most items and is
growing every year. Papola (1991) while analysing the trends in rural

non-farm employment, based on the analysis of the data from the
quinquennial rounds of the National Sample Survey during the 1970s
and 1980s, reveals that the share of rural area in total employment
has declined from around 82 per cent in 1977-78 to 78 per cent in
1987-88; that the share of the rural nonagricultural employment has
increased from around 14 per cent to 17 per cent in total employment;
and from 17 per cent to 22 per cent in rural employment.

Employment in the * W H. Wiser in his study of Karimpur village

of United Provinces of India during 1930s found that Jajmani System is
an example of solidarity in inter-caste relationships, but at the same
time it does not represent symmetrical interrelationship for the
members of different castes involved in the system. He found that the
system has economic weakness.

Rural non-agricultural activities have thus been growing much

more rapidly than the overall employment, agricultural employment
and also urban employment. In fact, the non-agricultural rural
employment has grown at an average rate of about 5 per cent during
the ten-year period 1977-78 to 1987-88. Consequently, there has been
a shift from agriculture in which employment has grown at a rate of
only 0.74 per cent, to the non-agricultural activities.

It is because of decrease in self-employment and regular wages/

salaried employment in agriculture and increase in employment in
non-agricultural sector. Micro-enterprises established in RNFS
contribute about 40 per cent of the gross industrial turnover and 34
per cent of total exports. RNFS is the potential sector for employment
generation through establishment of micro-enterprises.

There is a need to match the decline in agriculture sector with
the gain in non-farm activities, to absorb the surplus labour from
agriculture. Eighth Five-Year Plan document (Government of India
1992: 122) states that: "In the long run, however, it must be
recognized that agriculture and other land-based activities, ever with a
reasonably high rate and possible diversification of growth, will not be
able to provide employment to all the rural workers at adequate levels
of incomes.

Indian microfinance continued growing rapidly towards the main

objective of financial inclusion, extending outreach to a growing share
of poor households, and to the approximately 80 percent of the
population which has yet to be reached directly by the banks. The
larger of the two main models, the Self-Help Group (SHG) Bank Linkage
Programme (SBLP) covered about 143 million poor households in
March 2006 and provided indirect access to the banking system to
another 14 million, including the "borderline poor".

Although firm estimates are lacking, the other, Microfinance

Institution (MFI) model served 7.3 million households, of which 3.2
million were poor. Even allowing for a degree of overlap of borrowers
from both models, the total number of poor households being reached
was roughly a fifth of all poor households, as well as a smaller share of
the larger number of non-poor households who have yet to be reached
by the formal financial sector.

Apart from providing financial services to both these segments of

the population, there is widespread evidence that much stronger
competition provided to the informal sector has significantly improved

the terms of credit provided to both segments by the informal sector,
which is losing share to both the formal and (semi-formal) MFI sector17.

SHG Bank Linkage Programme

Of the two major models of microfinance in India, the SHG Bank

Linkage Programme (SBLP) is by far the dominant model in terms of
number of borrowers and loans outstanding18. The cumulative number
of SHGs linked has grown almost tenfold in the last five years, to
achieve an outreach of about 31 million families through women's
membership in about 2.2 million SHGs by March 2006. Not all SHGs are
currently "linked" in the sense of having loans outstanding to the
banks or federations, and only an estimated half of their members are
poor. However, this still means about 14 million poor households have
been reached so far. Moreover the entire membership is saving
regularly, and has access to a ready source of small emergency and
consumption loans in the form of loans extended out of the group's
own funds19.

NGOs Involvement in Micro-Finance and Strategies of People’s


However, there is no smooth flow of funds from any sources to

provide loans to the rural poor for establishing their micro enterprises
in the RNFS. Karmakar20 laments that: “Moneylenders rarely provide
credit for capital assets acquisition. They concentrate on lending for
consumption needs and social/ medical contingencies while trader
lenders provide working capital. Thus, venture capital for the rural non-
. Prabhu Ghate, Microfinance in India: A state of the sector Report 2006, New Delhi, Microfinance India,
. Ibid. p. 27.
. Ibid,
. Karmakar, K.G. (1999). Rural Credit and Self-Help Groups: Micro-finance Needs and Concepts in
India. New Delhi: Sage Publications, p 164.

farm sector is generally financed from own resources and
supplemented by loans from friends and relatives. The time taken for
getting a loan sanctioned by a bank for the rural non-farm sector can
very from two months to 18 months. Some moneylenders do provide
bridge loans to those rural borrowers who have been sanctioned bank
loans but have yet to receive the funds.”

Based on the observations of the failure of development policy

and administration, with a weak role played by the State in supporting
the institutions of development, Shah (1996) emphasized the
importance of developing NGOs as change agents. Government of
India21 also realized its failure in properly implementing development
projects and decided to involve NGOs during the Seventh Five-Year
Plan, in executing development projects.

The NGO’s strength lies in target group approach, flexibility,

experimentation, innovation, grassroots presence and motivation. By
learning from the example of Grameen Bank, Bangladesh, many NGOs
in India, came forward to provide financial services to the rural poor
and RNFS enterprises. For NGOs, it is also a shift in approach from
development to empowerment wherein they can plan their withdrawal
strategy from service delivery projects and think of their own
sustainability by providing financial services. At present there are
almost 600 NGOs involved in micro-finance delivery systems in India.
These NGOs have adopted different strategies of promoting people’s
livelihood through micro-finance. These strategies are based on their
clientele, approach, focus area, interest rate, savings linkages,

. Government of India, Seventh Five Year Plan (Vol. I): Perspective, Objectives, Strategy, Macro-
dimensions and Resources and (Vol. II): Sectoral-Programmes of Development. New Delhi: Planning

collateral, coverage and organisational/ legal structure. These
strategies can be classified into four broad categories, namely, SHG
promotion, MFI, micro-enterprise development and social development.

The SHG promotion approach is based on the premise that the

NGO promotes SHGs and provides them services as financial advisor.
This ultimately leads to build the capacity of SHGs in terms of savings
mobilization, linking them with banks and providing technical support
in starting viable micro enterprises by the members of SHGs members.
In this approach NGO basically is a mediating contact between SHGs
and banks. NGO also examines creditworthiness of the SHGs so that
bank can lend money to the SHGs.

In all this NGO gets some financial support in terms of grant from
Apex Financial Institutions (AFIs) like NABARD and RMK (Rashtriya
Mahila Kosh). The examples of such NGOs who are following SHG
promotion approach are: MYRADA in Karnataka, SHARE in Andhra
Pradesh, RDO (Rural Development Organisation) in Manipur, PREM
(People’s Right and Environment Movement) in Orissa & Andhra
Pradesh, YCO (Youth Charitable Organisation) in Andhra Pradesh,
Anarde (Acil Navsarjan Rural Development Foundation) in Gujarat,
PRADAN (Professional Assistance for Development Action) &
RUDSOVAT (Rural Development Society for Vocational Training) in
Rajasthan and ADITHI in Bihar.

Micro-Finance Institution Strategy

The approach of promoting MFIs is based on the premise that

AFIs like SIDBI (Small Industries Development Bank of India), RMK and
other donor agencies provide bulk lending, soft loan and some grant to
such NGOs which can act as MFIs by on-lending the money to the poor

people/ SHGs/ Federations/ smaller NGOs. These MFIs stimulate the
credit demand of the poor people. They also provide technical support
for the beneficiaries to ensure proper utilization of loans and
repayment. At the same time they meet their cost of funds, cost of
credit management and cost of default through the spread of interest
and generate surplus for the viable operation of micro-finance.

The examples of such MFIs are Sewa Bank & FWWB in Gujarat,
BASIX in Andhra Pradesh and RGVN (Rashtriya Grameen Vikas Nidhi) in
north-eastern states, Orissa and Bihar. 8.3 Micro-Enterprise
Development Strategy Entrepreneurship is one of the most important
inputs in the economic development of a country and of the regions
within the country. Economic growth and industrialization are the by-
products of entrepreneurship.

It is a breeding ground for the development of small-scale

enterprises. The term EDP (Entrepreneurship Development
Programme) means a programme of entrepreneurship development
designed to help a person in strengthening his/ her entrepreneurial
motive and in acquiring skills and capabilities necessary for playing
his/her entrepreneurial role effectively. It inculcates entrepreneurial
traits into a person and develops his/her personnel, financial, technical,
managerial and marketing skills. There are number of programmes
which are aimed at providing informational or managerial inputs
required by a new entrepreneur. However, a programme not touching
upon entrepreneurial motivation and behaviour cannot be called an

. Desai, Vasant. Entrepreneurial Development (Vol. I): Principle, Programmes and Polices. Bombay:
Himalaya Publishing House. 1991.

NGOs are actively involving in microfinance to make successful
and effective in terms of identification of place or location, pre-
promotional activities, selection of potential entrepreneurs,
entrepreneurial training, monitoring and follow-up mechanism. NGOs
are playing important role as catalyst in helping the rural unemployed
persons to acquire training through MEDPs (Micro-Enterprise
Development Programmes) so that they can become self-employed by
starting their enterprises in RNFS. Moreover, they can also become job
providers instead of job seekers.

Thus, institutionalization of MEDPs through NGOs can be an

alternative approach of rural development in India. The success of any
MEDP in terms of starting the enterprises by the trainees trained under
it depends mainly upon the availability of loan. Micro-finance sector
can provide help to solve this problem. Micro-finance for micro-
enterprise development is a proper approach in India.

Some of the NGOs in India have adopted the approach of micro-

enterprise development through micro-finance. The examples are CDF
(Co-operative Development Foundation) in Andhra Pradesh, LHWRF
(Lupin Human Welfare Research Foundation) in Rajasthan, UPLDC
(Uttar Pradesh Land Development Corporation) in Uttar Pradesh and
Group Enterprise Development Project of EDI (Entrepreneurship
Development Institute of India) in Nagaland.

Growth trends in the SHGs Bank Linkage Programme

Source: NABARD annual reports and data sheet for 2005-06published in Prabhu Ghate, Microfinance in
India: A state of the sector Report 2006, New Delhi, Microfinance India, p.28.

Social Development Strategy

The social development approach of micro-finance is based on
the premise that people should earn money by investing in viable
micro-enterprises. They should earn profit from their enterprises. Major
share of the profit should be reinvested in enterprises for their growth.
The other share of the profit should be spent on social development
that is, health, education, housing, sanitation etc.

By earning profit from the viable micro-enterprises, people will

increase their paying ability for services delivered to them under
different social development projects run by NGO and States/ Central

Government. For the NGOs and Government it can be a process of
gradual withdrawal and for people, decrease dependency on the NGOs
and Government. Such projects have micro-finance as a major
component coupled with social service delivery.

These projects have demonstrably positive effects. The examples

of such projects are Indo- Canada Agriculture Extension Project in Uttar
Pradesh, IFFDC (Indian Farm & Forestry Development Corporation)
project of farm and forestry development in Uttar Pradesh and
Rajasthan, ICDS (Integrated Child Development Services) project of
RASS (Rayalseema Sewa Samiti) in Andhra Pradesh and Conversion of
ICDS project into Indira Mahila Yojana.

Role of Financial Institutions in Micro-Finance

Especially during 1991-92, NABARD launched projects to provide

micro credits to SHGs by bank linkages. In the same way, NGOs also
have done excellent work in the areas of microfinance. tSince the
emergence of micro-finance sector in India, role of AFIs has become
significant. NABARD initiated the process of micro-finance in India
through linkage programme of SHGs under Automatic Refinance
Scheme. SIDBI is second important player in microfinance, providing
bulk lending to MFIs. RMK is the third player providing loans to NGOs
for on lending to the women SHGs. These are the three major AFIs in
India. Each has a different approach in micro-finance sector.

Achievements under SHG – NABARD linkage scheme

YEAR Amoun Groups

t (in lakhs)
(Rs. in
1998-1999 41.90 0.12
1999-2000 88.63 0.44
2000-2001 173.38 1.03
2001-2002 255.00 0.75

While NABARD’s emphasis is entirely on SHGs linkage

programme by mobilizing their own savings also, SIDBI is focusing on
building and creating larger MFIs and RMK is lending money to smaller
NGOs as well. Taking into consideration the growth and potential of
micro-finance sector in India, other organizations and international
agencies have also made their entry in the micro-finance sector by
providing loans and grants to NGOs for different income generating
projects as well as for incorporating micro-finance component in the
service delivery projects of social development.
Exposure to Commercial Banks as on March 2006

Exposure to

ICICI Bank 31
The important names among them are HUDCO, NBCFDC
(National Backward Classes Finance Development Corporation),
NMFDC (National Minorities Finance Development Corporation),
National Handicrafts Development Corporation (NHDC), OXFAM (Oxford
Committee for Famine & Relief), NOVIP (Dutch International
Development Agency), GTZ (Gesellschaftfur Tecnische
Zusammenarbeit), CIDA (Canadian International Development Agency),
ActionAid, CARE India, International Fund for Agriculture Development
(IFAD), UNDP, UNIFEM (United Nations Development Fund for Women),
British Department of Foreign and International Development (DFID)
and Consultative Group to Assist the Poorest (CGAP).

It is seen as an important phenomenon in the process of

development, especially in context of globalisation and liberalisation
wherein subsidy and grant based programmes / schemes are losing
their importance. Micro-finance sector is seen as the best option based
on saving mobilisation of the poor people and credit linkages. In India,
many AFIs have come forward to lend money to the MFIs. MFIs of
different nature (NGO registered under Societies Registration Act,
Trusts under Public Trust Act, Co-operatives under Co-operative Act,
NBFCs under Company Act and LABs under Banking Act etc.) have also
come up with different strategies of promoting people’s livelihood.

Microfinance Support Institutions in the Formal Sector

The following are the major support institutions in India.

 National Bank for Agriculture and Rural Development

 Rashtriya Mahila Kosh
 SIDBI - Small Industries Development Bank of India
 Tamil Nadu Women's' Development Corporation

of s
Models of Micro Finance

There are different models followed by the different microfinance

institutions in India. The following are the some of established
microfinance and their activities in microfinance can be seen here.

• Grameen bank
• Spandana
• Grameen koota
• Swayam krishi sangam
• Danda credit society

Grameen Bank

Grameen Bank (GB) has reversed conventional banking practice

by removing the need for collateral and created a banking system
based on mutual trust, accountability, participation and creativity. GB
provides credit to the poorest of the poor in rural Bangladesh, without
any collateral. Professor Muhammad Yunus, the founder of
"Grameen Bank"

As of July, 2004, it has 3.7 million borrowers, 96 percent of whom
are women. With 1267 branches, GB provides services in 46,000
villages, covering more than 68 percent of the total villages in

Interest R
General features of Grameen credit are :
a. It promotes credit as a human right
b. Its mission is to help the poor families to help themselves to

overcome poverty. It is targeted to the poor, particularly poor
c. Most distinctive feature of Grameen credit is that it is not
based on any collateral, or legally enforceable contracts. It is based
on "trust", not on legal procedures and system.
d. It is offered for creating self-employment for income-

generating activities and housing for the poor, as opposed to

It was initiated as a challenge to the conventional banking

which rejected the poor by classifying them to be "not

FixedDeposit :
creditworthy". As a result it rejected the basic methodology of the

conventional banking and created its own methodology.
f. It provides service at the door-step of the poor based on the
principle that the people should not go to the bank, bank should go
to the people.
g. In order to obtain loans a borrower must join a group of
h. Loans can be received in a continuous sequence. New loan
becomes available to a borrower if her previous loan is repaid.
i. All loans are to be paid back in installments (weekly, or bi-
j. Simultaneously more than one loan can be received by a
k. It comes with both obligatory and voluntary savings
programmes for the borrowers.
l. Grameen credit's thumb-rule is to keep the interest rate as
close to the market rate, prevailing in the commercial banking
sector, as possible, without sacrificing sustain-ability. Reaching the
poor is its non-negotiable mission. Reaching sustainability is a
directional goal. It must reach sustainability as soon as possible, so
that it can expand its outreach without fund constraints.

Grameen credit gives high priority on building social capital. It is

promoted through formation of groups and centres, developing
leadership quality through annual election of group and centre
leaders electing board members when the institution is owned by the

Institution's Mission

Spandana envisions itself as a financially self sustainable Micro
Finance Institution with a diversified ownership. It is committed to
strengthening significantly the socio-econmic status of poor women
in Rural and Urban areas by providing technical and financial services
on a continued basis for establishing their identity and self-image

Background and Main Challenges

There are two important challeges ahead. Spandana at present is

a non profit making society and has initiated the process of

transformation into a regulated Company. Spandana has
outperfromed the most performing organisations by setting up trends
with high level of efficiency, productivity and thereby profitability
levels. Thus the biggest challenge lies in retaining these levels in the
pace of increasing competition.


• Voluntary Savings
• Insurance

Main Funding Sources

• Grants
• Loans
• Savings

Largest funder for Micro Finance

The following institutions are the important funders:

ICICI Bank, SIDBI, Indian Overseas Bank, HDFC Bank, IDBI Bank, ABN
AMRO Bank, ING Vysys Bank, HDFC, FWWB, UTI Bank

Swayam Krishi Sangam

Swayam Krishi Sangam (self-cultivation society) is an initiative in

rural India to empower the poorest of the poor to become self-reliant. In
June 1998, SKS began operating its main activity, microfinance, which
follows the Grameen Bank model by seeking to eradicate poverty by
providing small loans for income generating activities through a process of
collective peer lending.

SKS established its first women’s banking sangams (centers) in the

Narayankhed region. As of July 2005, SKS Microfinance has grown to
include 32 branches in Six Districts of Telangana and serves over 100,000
clients. Swayam Krishi Sangam began its education activities by
implementing a Preschool (Balwadi) Program in February 2001 in one of
the poorest parts of India—the Narayankhed region of Medak district in
Andhra Pradesh.

RASHTRIYA MAHILA KOSH - Its Profile, Aims & Objectives,

It has been felt for some time in India that the credit needs of
poor women, particularly in the unorganized sector, have not been
adequately addressed by the formal financial institutions in the
country. The vast gap between demand for and supply of credit to this
sector established the need for a National Credit Fund for Women.

The National Credit Fund for Women or the Rashtriya Mahila

Kosh (RMK) was set up in March 1993 as an independent registered
society by the Department of Women & Child Development in
Government of India’s Ministry of Human Resource Development with
an initial corpus of Rs. 310,000,000 - not to replace the banking sector
but to fill the gap between what the banking sector offers and what the
poor need.

Its main objectives are:

• To provide or promote the provision of micro-credit to poor women

for income generation activities or for asset creation.
• To adopt a quasi-informal delivery system, which is client friendly,
uses simple and minimal procedures, disburses quickly and
repeatedly, has flexibility of approach, links thrift and savings with
credit and has low transaction costs both for the borrower and for
the lender.
• To demonstrate and replicate participatory approaches in the
organization of women’s groups for thrift and savings and effective
utilization of credit.
• To use the group concept and the provision of credit as an
instrument of women’s empowerment, socio-economic change and

• To cooperate with and secure the cooperation of the Government of
India, State Governments, Union Territory administrations, credit
institutions, industrial and commercial organizations, NGOs and
others in promoting the objectives of the Kosh.
• To disseminate information and experience among all these above
agencies in the Government and non-government sectors in the
area of microfinance for poor women.
• To receive grants, donations, loans, etc., for the furtherance of the
aims and objectives of the Kosh.

The office of the Kosh is situated in New Delhi. The Kosh does not
have any branch offices. The Executive Director is the chief executive
officer of the Kosh. The Executive Director functions under the overall
supervision, direction and control of the Governing Board. The
Governing Board comprises 16 members consisting of senior officers of
the Government of India and State Governments, specialists and
representatives of NGOs active in the field of microfinance for women.
The Governing Board is chaired by the Minister in charge of the
Department of Women & Child Development in the Government of
India. The General Body of the Kosh consists of all members of the
Board, institutional members and individual members.

RMK- Main Roles:

Wholesaling Role - It acts as a wholesaling apex organization for

channelising funds from government and donors to retailing
intermediate microfinance organizations (IMOs). [The Kosh has so far
received only a one-time grant from government and has not needed
to raise funds from any other sources].

Market Development Role -

It develops the supply side of the micro finance market by
offering institution building support to new and existing-but-
inexperienced IMOs by structures of incentives, transfers of
technology, training of staff and other non-financial services -

[The Kosh realizes that it can play a value adding wholesaling

role only when a sufficiently large and well established micro
finance sector already exists - this depends on the number of
IMOs and the sustainability of IMOs - subsidized institution
building increases the equity of any IMO as much as grants do -
large and premature disbursement of funds to the IMO can
reduce the effectiveness of any institution building effort.

Micro finance programmes of CAPART

The Council for Advancement of People’s Action and Rural

Technology (CAPART) is set up by the Ministry of Rural Development,
Government of India, to fund voluntary organizations and community
based organizations engaged in serving rural areas. CAPART occupies
a significant space in shaping the development innovations of NGOs
and catalyzing development initiatives to reach the poor.

The main objective of the scheme is:

• To fund VOs and CBOs already working with self help groups to
extend their reach to new areas and improve the quality of existing
• To extend training support to potential VOs and registered CBOs
who are desirous of working in the area of micro finance and self
help groups.
• To identify and support VOs and registered CBOs having
outstanding experience in formation of SHGs and micro finance who

would act as resource centers. The unit cost for the promotion of
group is worked out to a maximum of Rs.9, 000/- per group, which
includes expenditure for a 3-year project cycle.
• To fund Rs.10, 000/- per SHG without interest, where bank linkages
are not available as revolving fund.
• to finance up to Rs.2.00 lakhs as bridge funds for a federation of
over 100 active SHGs

SHARE Micro Finance Limited


SML started operations in 1989 as a not-for-profit society. It was the

first MFI in India to obtain a NBFC (non-deposit accepting) license and
also the first Indian MFI to carry out a microfinance securitization

SML has employed a for-profit approach to create social returns by

channeling funds from development institutions and commercial
banks as collateral-free loans to Joint Liability Groups (JLGs). JLGs are
the central element of the Grameen lending methodology adopted by


To improve the quality of life of the poor by providing access to

financial and support services add to be a viable financial institution
developing sustainable communities.

Our Mission

• To mobilize resources to provide financial and support services
to the poor, particularly women, for viable productive income
generation enterprises enabling them to reduce their poverty


• To provide financial services predominantly to poor women.

• To create opportunities for self- employment for the
• To train rural poor in simple skills and enable them to utilize the
available resources and contribute to employment and income
generation in rural areas.

MFI loansou
Loan Proposals and their Processing

In the first step, every member who intends to access credit from the
company has to complete the compulsory group training programme
and Group institutionsand
Recognition Test organized by the company.
programme is conducted by the Field Credit Assistant (FCA) or a

comercial banks
designated staff member, authorised by SML.

Primary data is collected in a prescribed format from borrower/member
to comply with the KYC (Know your Customer) norms.

FCA should verify the loan application and completely fill the following
• Date of application
• Borrower identification particulars
• Loan product details
• Loan Amount
• Need for Loan
• Applicable interest rates
• Term of the Loan
• Repayment particulars
• Acceptance by the borrower’s family member / the relevant SHG

The expected date of loan disbursement should be mentioned on the

loan application form and to be intimated to the borrower / member.

Loan appraisal and Terms & conditions

FCA or designated staff of the Company should convey to the

borrower/member the amount of loan sanctioned along with the terms
and conditions including the annualized rate of interest and method of
repayment of the loan.

Disbursement procedure of loans

Authorized staff of SML should verify the Loan application along with all
securities, sureties and approvals, which is applicable as per the
applicable policy of the company.
• Demand promissory Note
• Surety or guarantee

• SHG members/Group acceptance
• Family members’ acceptance
• Acceptance of the terms and conditions by the borrower/member for
rate of interest, processing charges if any and repayment terms

Documentation for Hypothecation or charge creation or any security or

• The acceptance letter
• Letter of confirmation of deposit of security documents

The Company keeps all the documents in the safe custody in the
respective premises by the authorized persons. Loan passbook has to
be given to every borrower/member for each loan. The loan passbook
contains the repayment schedule, effective interest rate and other
processing charges etc. The company gives prior notice of any change
in the interest rate and other charges to the borrower / member.

The company takes a decision whether to recall / accelerate the

payment or performance under the loan agreement / Promissory Note
as agreed with the borrower/member under intimation.

The Role of NGOs

Income ch 44
Non-Government Organizations (NGOs) have emerged as an
integral part of the institutional structure for addressing poverty as
well as rural development, gender equality, environmental
conservation, disaster management, human rights and other social

The NGOs, in order to support social and economic empowerment of

the poor, have vastly widened their activities to include group
formation, micro credit, formal and non-formal education, training,
health and nutrition, family planning and welfare, agriculture and
related activities, water supply and sanitation, human rights and
advocacy, legal aid and other areas.

These organizations mostly follow the target-group strategy under

which the poor with similar socioeconomic interests are organized into
groups to achieve their objectives.

Co-ordinating the role of NGOs

In order to meet the need for a one-stop service to the NGOs, the
Government created the NGO Affairs Bureau in 1990. Located in the
Prime Minister’s Secretariat, the Bureau enables the NGOs to obtain
their registration clearance, approval and permission through a single
agency of the Government within a specified time frame. The aim of
the Bureau is to ensure quality performance of the NGO sector and its
accountability to the state.

With a view to providing a regular forum of dialogue between the

Government and the NGOs for increased mutual understanding and
cooperation, the Government-NGO Consultative Council (GNCC) has
been formed with representatives from the Government, NGOs and the

civil society. The GNCC works as an advisory council toward resolving
issues arising out of Government-NGO interaction and collaboration.

Empowerment of Women through DWCRA / SHG Approach

Self-help Groups:
• SHG is a group of rural poor who have volunteered to organise
themselves into a group for eradication of poverty of the
• The members of SHG save regularly and convert their savings
into a common fund known as Group Corpus
• The group agrees to use this common fund and such other funds
that they may receive as a group through a common
• “A small, economically homogeneous and affinity group of
rural/urban poor, voluntarily formed to save and contribute to a
common fund to be lent to its members as per the groups
decision and for working together for social and economic uplift
of Their families and community
• Self-help group (SHG) or a ‘sangha’ is a voluntary association of
people, which functions democratically and accountably, to
achieve the collective goals of the group.
• Organizing disabled persons into ‘sanghas’ unites and makes
them visible in the larger community.
• Members can support one another by sharing information on
the availability of services and resources, help to make
decisions on individual matters, help one another and so on.

Concept of SHG:

Self – Help Group (SHG) is a small voluntary association of poor
people, preferably from the same socioeconomic background. They
come together for the purpose of solving their common problems
through self-help and mutual help. The SHG promotes small savings
among its members. The savings are kept with a bank. This common
fund is in the name of the SHG. Usually, the number of members in
one SHG does not exceed twenty.

The concept of SHG is based on the following principles:

• Self-help supplemented with mutual help can be a powerful
vehicle for the poor in their socioeconomic development;
• Participative financial services management is more responsive
and efficient;
• Poor need not only credit support, but also savings and other
• Poor can save and are bankable and SHGs as clients, result in
wider out reach, lower transaction cost and much lower risk costs
for the banks;
• Creation of a common fund by contributing small savings on a
regular basis;
• Flexible democratic system of working;
• Loaning is done mainly on trust with a bare documentation and
without any security;
• Amounts loaned are small, frequent and for short duration;
• Defaults are rare mainly due to group pressure; and
• Periodic meetings non-traditional savings.

Essential Features of SHGs:

The following are the major essential features to be kept in mind
for successful functioning of SHG’s.

• Group members come together voluntarily.

• Basis of coming together is mutual help.
• Homogenous group.
• Regular interaction among group members
• Group independently takes decision and manages its activities.
• Basis of people coming together is affinity.
• All group members' participation is the process.
• Cooperation and discussion are the cornerstone of its
functioning group maintains its own accounts


• NGOs play the crucial role of facilitators in group formation and
• Quality of group can be influenced by the capacity of facilitator
i.e., NGO
• NGOs also help in training and capacity building of facilitators
being used by DRDAs
• DRDAs may support NGOs or Network of Community
Coordinators who are engaged in the task of initiating and
sustaining the group development process
• Community Coordinator take up the responsibility of managing
10-15 SHGs in a cluster consisting of 4-5 villages with in a
radius of 4-5Kms.

The poor people, on whose shoulders the success of sector is

depending, are also participating in the growth of this sector.
Government is also interested and is closely monitoring the sector

from the policy and regulatory point of view. The sector has also
opened scope for research, training and consultancy. In a holistic
perspective micro-finance is a process of social intermediation and
building social capital.

Process of Social intermediation is an investment that is made

for development of both human resources and institutional capital to
make marginalized groups self-reliant in preparing them to engage in
formal financial intermediation. According to Elaine and Barton23, social
intermediation is a financial intermediation with a capacity building
component, aimed at those sectors of society that lack access to credit
and savings facilities. It can be understood by transformation of
beneficiaries into clients or customers and creation of local institutions
that bridge the gap between the formal financial institutions and
marginalized groups. The concept of social capital is the key
theoretical element in social intermediation, derived from the
anthropological and sociological literature.

It is quite fact that the involvement of banks with grass root

NGOs/SHGs also improves their appreciation of the problems of the
poor in accessing formal credit and brings about change in their
outlook, responsiveness and perception. NGO as financial
intermediation, the success of microfinance is seen in the rural areas.
NGOs can be expected to fast internalize the culture and practice
associated with efficient conduct of the business of microfinance. The
rise of NGOs doing business in microfinance has opened the floodgates
of aid in at least in rural India24.

. Elaine, Edgcomb & Barton, Laura “Social Intermediation and Microfinance Programmes: A Literature
Review”, USA: Micro-Enterprises Best Practices. The SEEP Network. 1998.
. S.B. Verma and Y.T. Pawar, 2005. p.101.