“Micro Finance in India”

A Project Report Submitted To

University of Mumbai for Partial Completion of The
Degree of
Bachelor of Management Studies
Under Faculty of Commerce
By
DHANASHRI DINESH HALDANKAR
Seat Number-17
Under the Esteemed Guidance Of

Prof. PUNAM SINGH

Mahatma Phule Education Society’s College Of Arts, Science, Commerce & Mgt.

(Affiliated to University of Mumbai)

Mumbai 400012
Maharashtra 2020-2021
 “Micro Finance in India”

A Project Report Submitted To

University of Mumbai for Partial Completion of The
Degree of
Bachelor of Management Studies
Under Faculty of Commerce
By
DHANASHRI DINESH HALDANKAR
Seat Number-17
Under the Esteemed Guidance of

Prof. PUNAM SINGH

Mahatma Phule Education Society’s College Of Arts, Science, Commerce & Mgt.

(Affiliated to University of Mumbai)

Mumbai 400012
Maharashtra
2020-2021
 MAHATMA PHULE EDUCATION SOCIETY’S COLLEGE OF ARTS,
SCIENCE, COMMERCE AND MGT., PAREL, BHOIWADA,
MUMBAI-400012

CERTIFICATE

This is to certify that Miss. DHANASHRI DINESH HALDANKAR has worked and duly completed this

project work for the degree of Bachelor of Management of Studies under the faculty of commerce in

the subject “MICRO FINANCE” and his project entitled “MICRO FINANCE IN INDIA” under my

supervision.

I further certify that the entire work has been done by the learner under my guidance and that no

part of it has been submitted previously for any Degree of any University It is his own work and facts

reported by his personal finding and investigations.

_________________________ __________________________

Prof. PUNAM SINGH DR.SATISH KELSHIKAR

Guidance Teacher Head of Institute

Date of Submission _________________

________________________

Signature of External examiner

 Acknowledgement

To list who all have helped me is difficult because they are numerous and the depth is so
enormous.

I would like to acknowledge the following as being idealistic channels and fresh dimension
in the completion of this project.

I take this opportunity to thank the University of Mumbai for giving me chance to do this
project.

I would like to thank my head of institute Dr. SATISH KELSHIKAR for providing the necessary
facilities require for completion of this project.

I would like to express my sincere gratitude towards my project guide

Prof. PUNAM SINGH Whose guidance and care made the project successful.

I would like to thank my College Library, for having provided various reference books and
magazines related to my project.

Lastly, I would like to thank each and every person who directly and indirectly helped me in
the completion of the project especially my parents and peers who supported me
throughout my project.
 DECLARATION

I the undersigned Miss. DHANASHRI DINESH HALDANKAR hereby, declare that the work
embodied in this project work titled ‘’MICRO FINANCE” form my own contribution to the
research work carried out over under the guidance of Prof. PUNAM SINGH is result of my
own research work and has not been previously submitted to any other University for
any other degree to this or any other university.

Wherever reference has been made to pervious work of others, it has been clearly
indicated as such and included in the bibliography.

I, hereby further declare that all information of this document has been obtained and
presented in accordance with academic rules and ethical conduct.

_________________________________

DHANASHRI DINESH HALDANKAR

Certified by

_______________________

Prof. PUNAM SINGH

Guiding Teacher
 INDEX

SR TITLE PAGE
NO. NO
1 Introduction 01
2 Definition 02
3 What is microfinance 04
4 Evolution of microfinance in India 06
5 Activities in microfinance 12
6 Importance of microfinance 18
7 Microfinance changing the face of 20
poor India
8 Models of microfinance 24

9 Microfinance Product and Services 43

10 Market players of microfinance 49

11 Development of MFIs 62

12 Microfinance and Women 64

Empowerment
13 Women Empowerment and 67
Microfinance different paradigm
14 Empowerment : focus on poor women 74
15 Microfinance and Social Intervention 78
16 Examples of Microfinance 79

17 Suggestions 80

18 Questionnaire 81

19 Survey 83

20 Conclusion 90

21 Bibliography 91
 INTRODUCTION

➢ MICRO FINANCE:-

Micro finance is to supply micro credit to people living in absolute poverty and
has no reach to the conservative and formal financial products. It is an aid to
connect them in productive activities and grow their small businesses. The core
product of microfinance is microcredit.

Micro finance is a category of financial services targeting individuals and small

businesses who lack asses to conventional banking and related services.

Micro finance is a banking service provided to unemployed or low income

individuals or groups who otherwise would have no other access to financial
services.

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 sectors provide microfinance in India, using a range of microfinance
delivery methods. Since the ICICI Bank in India, various actors have endeavoured
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

1
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.

➢ Microfinance Definition:

According to International Labour Organization (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”.

"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

2
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.

Micro finance is an economic development tool whose objective is to assist the

poor to work with their way out of poverty. It covers a range of services which
include, in addition to the provision of credit, many other services such as savings,
insurance, money transfers, counselling, etc.

Microfinance, also called microcredit.

Microfinance generally refers to the provision of basic financial services such as

loans, saving accounts and insurances for low-income but economical active
people. In most instances the term microfinance refers to the provision of small
loans for micro-entrepreneurs.

3
 ➢ WHAT IS MICROFINANCE?
➢ Emergence of Microfinance:
The pioneering of modern microfinance is often credited to Dr.mohammad
Yunus, who began experimenting with lending to poor women in the village of
Jobra, Bangladesh during his tenure as a professor of economics at
Chittagong University in the 1970’s.He involved Grameen Bank in 1983 and won
the Nobel Peace Prize in 2006.

Microfinance emerged in the early 1990’s to provide credit and savings

services to the poor as a possible alternative to conventional bank lending. Many
developing economies have developed and have been providing credit to the poor
through microfinance schemes. It received further boost with involvement of
several non-governmental organizations and microfinance institutions. The UN
year of Micro-credit in 2005 indicated a turning point for Microfinance as the
private sector began to take a more serious interest in what has been considered the
domain of government.
India is home to a growing and innovative sector of microfinance .With a large
portion of the world’s poor , India is likely to have a large potential demand for
microfinance .For this reason, it makes sense to consider the changing face of
microfinance in India, in order to shed light on comparable changes in the field all
over the world.

The World Bank has called South Asia “cradle of microfinance” .The overall
percentage of the poor and vulnerable people with access to financial services
remains small , amounting to less than 20% of poor household in India .Because
of poverty poor people are far away from health insurance but new concept of
health insurance through microfinance has been introduced .Over 82% of
households surveyed 2003 ,did not have any insurance ,and practically none of the
poorest households surveyed had insurance.

4
 ➢ The Origin of Microfinance:

Although neither of the terms microcredit or microfinance were used in the

academic literature nor by development aid practitioners before the 1980s or
1990s, respectively, the concept of providing financial services to low income
people is much older.
While the emergence of informal financial institutions in Nigeria dates back to the
15th century, they were first established in Europe during the 18th century as a
response to the enormous increase in poverty since the end of the extended
European wars (1618 – 1648). In 1720 the first loan fund targeting poor people
was founded in Ireland by the author Jonathan Swift. After a special law was
passed in 1823, which allowed charity institutions to become formal financial
intermediaries a loan fund board was established in 1836 and a big boom was
initiated. Their outreach peaked just before the government introduced a cap on
interest rates in 1843. At this time, they provided financial services to almost 20%
of Irish households. The credit cooperatives created in Germany in 1847 by
Friedrich Wilhelm Raiffeisen served 1.4 million people by 1910. He stated that the
main objectives of these cooperatives “should be to control the use made of money
for economic improvements, and to improve the moral and physical values of
people and also, their will to act by themselves.”
In the 1880s the British controlled government of Madras in South India, tried to
use the German experience to address poverty which resulted in more than nine
million poor Indians belonging to credit cooperatives by 1946. During this same
time the Dutch colonial administrators constructed a cooperative rural banking
system in Indonesia based on the Raiffeisen model which eventually became
Bank Rakyat Indonesia (BRI), now known as the largest MFI in the world.

5
 ➢ EVOLUTION OF MICROFINANCE IN INDIA (1960 TO
TODAY)

Microfinance in India emerged as an effort to reach out to the un-banked, lower

income segments of the population

1960 to 1980 1990 2000

Phase 1: Social Phase 3: Financial

Phase 2: Financial
Banking Inclusion
Systems Approach

1.Nationalization of 1.Peer-pressure 1.NGO-MFIs and

SHGs
private commercial
2.Establishment gaining more
banks
of MFIs, legitimacy

2.Expansion of rural typically of non- 2.MFIs emerging

branch network profit origins as strategic
partners to
diverse entities
3.Extension of interested in
subsidized credit thelow-income
segments

3.Consumer finance
emerged

6
 4.Establishment of 4.Increased policy
Rural
Regional Banks
regulation 5.Increasing
5.Establishment of apex Commercialization
institutions such as
National Bank for
Agriculture and

Rural Development and

Small industries
Development Bank of
India

Phase 1: In the 1960‟s, the credit delivery system in rural India was largely
dominated by the cooperative segment. The period between 1960 and 1990,
referred to as the “social banking” phase. This phase includes nationalization of
private commercial banks, expansion of rural branch networks, extension of
subsidized credit, establishment of Regional Rural Banks (RRBs) and the
establishment of apex institutions such as the National Bank for Agriculture and
Rural Development (NABARD) and the Small scale Industries Development
Board of India (SIDBI).

Phase 2: After 1990, India witnessed the second phase “financial system
approach” of credit delivery. In this phase NABARD initiated the Self Help Group
(SHG) - Bank Linkage Bank Linkage program, which links informal women's
groups to formal banks. This concept held great appeal for nongovernment
organizations (NGOs) working with the poor, prompting many of them to
collaborate with NABARD in the program. This period also witnessed the entry of

7
Microfinance Institutions (MFIs), largely of non-profit origins, with existing
development programs.
Phase 3: In 2000, the third phase in the development of Indian microfinance began,
marked by further changes in policies, operating formats, and stakeholder
orientations in the financial services space. This phase emphasizes on “inclusive
growth” and “financial inclusion.” This period also saw many NGO-MFIs
transform into regulated legal formats such as Non-Banking Finance Companies
(NBFCs). Commercial banks adopted innovative ways of partnering with NGO-
MFIs and other rural organizations to extend their reach into rural markets. MFIs
have emerged as strategic partners to individuals and entities interested in reaching
out to India's low income client segments.

8
 • Microfinance Today:

In the 1970s a paradigm shift started to take place. The failure of subsidized
government or donor driven institutions to meet the demand for financial services
in developing countries let to several new approaches. Some of the most prominent
ones are presented below.
Bank Dagan Bali (BDB) was established in September 1970 to serve low income
people in Indonesia without any subsidies and is now “well-known as the earliest
bank to institute commercial microfinance”. While this is not true with regard to
the achievements made in Europe during the 19th century, it still can be seen as a
turning point with an ever increasing impact on the view of politicians and
development aid practitioners throughout the world. In 1973 ACCION
International, a United States of America (USA) based nongovernmental
organization (NGO) disbursed its first loan in Brazil and in 1974 Professor
Muhammad Yunus started what later became known as the Grameen
Bank by lending a total of $27 to 42 people in Bangladesh. One year later the Self-
Employed Women’s Association started to provide loans of about $1.5 to poor
women in India. Although the latter examples still were subsidized projects, they
used a more business oriented approach and showed the world that poor people can
be good credit risks with repayment rates exceeding 95%, even if the interest rate
charged is higher than that of traditional banks. Another milestone was the
transformation of BRI starting in 1984. Once a loss making institution channelling
government subsidized credits to inhabitants of rural Indonesia it is now the largest
MFI in the world, being profitable even during the Asian financial crisis of 1997 –
1998.
In February 1997 more than 2,900 policymakers, microfinance practitioners and
representatives of various educational institutions and donor agencies from 137
different countries gathered in Washington D.C. for the first Micro Credit Summit.
This was the start of a nine yearlong campaign to reach 100 million of the world
poorest households with credit for self-employment by 2005. According to the
Microcredit Summit Campaign Report 67,606,080 clients have been reached
through 2527 MFIs by the end of 2002, with 41,594,778 of them being amongst
the poorest before they took their first loan. Since the campaign started the average
annual growth rate in reaching clients has been almost 40 percent. If it has
continued at that speed more than 100 million people will have access to Micro
credit by now and by the end of 2005 the goal of the microcredit summit campaign
would be reached.

9
 • 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 selfemployed,
often 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 co-
operatives, 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.

10
 • Role of Microfinance:

The micro credit of microfinance programme was first initiated in the year 1976 in
Bangladesh with promise of providing credit to the poor without collateral ,
alleviating poverty and unleashing human creativity and endeavour of the poor
people. Microfinance impact studies have demonstrated that:

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

2.The use of financial services by low-income households leads to

improvements in household economic welfare and enterprise stability and
growth. By supporting women’s economic participation, microfinance
empowers women, thereby promoting gender-equity and improving
household well-being.

3.The level of impact relates to the length of time clients have had access to
financial services.

11
➢ 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.

12
 • Concept and Features of Microfinance:

1) Loan are given without security.

2) Loans to those people who live Below Poverty Line.
3) Even member of SHG enjoy Microfinance.
4) Maximum limit of loan under Microfinance Rs.1,00,000. The Reserve Bank
of India (RBI) on 2015 allowed Microfinance institutions (MFI) to lend up
to Rs.1 Lakh to small borrowers.
5) The terms and conditions given to poor people are decided by NGO’s.
6) Microfinance is different from Micro credit-under Micro credit, small
amount of loans given to the borrower but under Microfinance besides loans
many other financial services are provided such as a savings A/c, Insurance,
etc. Therefore Microfinance has wider concept as compared to Micro credit.

7) It is a tool for empowerment of the poorest.

8) Delivery is normally through Self Help Groups (SHGs).

13
9) It is essentially for promoting self-employment, generally used for:
a. Direct income generation
b. Rearrangement of assets and liabilities for the household to participate
in future opportunities and Consumption smoothing.

10) It is not just a financing system, but a tool for social change, especially
for women.

11) Because 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. Fix a ceiling

on loan sizes.

14
 • Objectives of Microfinance:

The organisations functioning to encourage microfinance institutions in

different parts of the world decide various objectives to Microfinance .The
important among they are listed as follows:
1) Categories and coordinate networking of grass root level organization.

2) Empower and mainstream women entrepreneurs.

3) Encourage programs for the disabled.

4) Endorsed socio-economic development at the grass root level through

community-based approach.

5) Extend and makes stronger people’s groups called Self Help Groups and
facilitate sustainable development through them.

6) Increase the number of wage days and income at household level.

7) Obtain benefits by dropping expenditure and making use of local resources

as inputs for livelihood activities.

8) Promote sustainable agriculture and ecological sound management of

natural resources.

9) Provide livelihood training to deprived population.

10) Support activities which have community Participation and sharing of

responsibilities.

15
 • Key functions of Microfinance:
Microfinance institutions provide many functions for some of the poorest
people on the planet .At the most basic level, they provide access to cheap capital
.Access to credit can play a pivotal role in economic growth.

1) The primary role of microfinance banks is to provide micro loans to

individuals or groups in need of it .It can be for small transactions and
minimum balances (whether loans, savings, or insurance).
2) Role of microfinance institutions (MFI’s) in serving small enterprise and
providing loans for entrepreneurial activity is worth mentioning.
3) Offers collateral-free loans.
4) Offers group lending.
5) Target poor clients and female clients.
6) Providing market-level interest rates.
7) Simple application processes and provision of services in underserved
communities are key functioning mechanism.

16
• Microfinance approach is based on certain proven truths which
are not always recognized. These are:

1.That the poor are bankable; successful initiatives in micro finance

demonstrate that there need not be a trade-off between reaching the poor
and profitability - micro finance constitutes a statement that the borrowers
are not ,weaker sections‟ in need of charity, but can be treated as
responsible people on business terms for mutual profit .

2. That almost all poor households need to save, have the inherent capacity to
save small amounts regularly and are willing to save provided they are
motivated and facilitated to do so.
3. That easy access to credit is more important than cheap subsidized credit
which involves lengthy bureaucratic procedures - (some institutions in India
are already lending to groups or SHGs at higher rates - this may prevent the
groups from enjoying a sufficient margin and rapidly accumulating their
own funds, but members continue to borrow at these high rates, even those
who can borrow individually from banks).

4. 'Peer pressure' in groups helps in improving recoveries.

17
➢ Importance of Microfinance:

Following are the importance of Microfinance:

1) It allows clients to remain close to their homes, children, filed, livestock and
livelihood .It stops migration of villagers to cities in search of employment.
2) Microfinance is one of the poverty reducing strategy .Microfinance increases
the income and assets of poor.
3) Microfinance institutions mobilize the savings and give returns to small
investors.
4) Due to microfinance the income has increased and with increase in
disposable income the education level and standard of living has amplified
in the rural areas.
5) Health shocks are among the biggest and least predictable forms of
uncertainty that a poor family faces .For households without insurance or
access to credit, periods of poor health may sharply lower consumption in
the short term or decrease investments in very productive assets.
6) Microfinance has created entrepreneurs at village levels .Microfinance made
possible overall development of families and villages.
7) Many entrepreneurs of rural areas have opened cooperative societies with
the help of income generated through funds provided by microfinance
organizations.
8) Many Self Help Group have come into existence with the help of Banks and
grants from Government and they are helping others to build their own
status.
9) Increase competition among the microfinance institutions and indigenous
money lenders and this expanded the option available to poor people with
less interest rates.
10) Provide financial education and credit establishment to low income
entrepreneurs that cannot access traditional forms of credit.

18
• Scope of microfinance in rural development:

With increasing demand for rural finance, and the shortages of

formal sources, the MFI’s have tremendous challenges and
opportunities in microfinance in India:
1) Empowerment of women: Micro financial schemes plays vital
role in increasing women’s participation in economic activities
and decision making .There has been huge growth of
organizations, known as Microfinance Institution’s (MFI’s) in
this field to deal with the micro financial activities.

2) Financial inclusion: SHG’s have been recognized as one efficient

means of empowering women according to the estimates of RBI,
there are over 450 million “unbanked” rural areas.

3) Improving the access to credit: When it comes to rural

development, with the development of the credit infrastructure,
credit flow to the poor and especially to poor women, remained
near the ground.

4) Lend to lender in priority sector approach: Until recently, banks

were happy to lend money to MFI’s who would then on-lend
funds, primarily to poor women across rural India.

5) Support poverty reduction strategy: The Indian government’s

poverty reduction strategy focuses on infrastructure, social
development, especially education and health, and rural
livelihood.

6) Timely financial services at market rates: Traditional finance

institutions rarely lend money to serve the needs of low-income
families and women headed households.

19
 ➢ 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 microfinance customers.
Research across the globe has shown that, over time, microfinance
clients increase their income and assets, increase the number of years
of schooling their children receive, and improve the health and nutrition
of their families.
A more refined model of micro-credit delivery has evolved lately,
which emphasizes the combined delivery of financial services along
with technical assistance, and agricultural business development
services. When compared to the wider SHG bank linkage movement in
India, private MFIs have had limited outreach. However, we have seen
a recent trend of larger microfinance institutions transforming into
Non-Bank Financial Institutions (NBFCs). This changing face of
microfinance in India appears to be positive in terms of the ability of
microfinance to attract more funds and therefore increase outreach.
In terms of demand for micro-credit or micro-finance, there are three
segments, which demand funds. They are:
• At the very bottom in terms of income and assets, are those
who are landless and engaged in agricultural work on a
seasonal basis, and manual 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.

20
 • 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 microenterprises. This segment mainly needs
credit for working capital, a small part of which also serves
consumption needs. This segment also needs term credit for
acquiring additional productive assets, such as irrigation
pump sets, bore wells and livestock in case of farmers, and
equipment (looms, machinery) and work sheds in case of
non-farm workers.
• The third market segment is of small and medium farmers
who have gone in for commercial crops such as surplus
paddy and wheat, cotton, groundnut, and others engaged in
dairying, poultry, fishery, etc. Among non-farm activities,
this segment includes those in villages and slums, engaged
in processing or manufacturing activity, running provision
stores, repair workshops, tea shops, and various service
enterprises. These persons are not always poor, though they
live barely above the poverty line and also suffer from
inadequate access to formal credit.
Well these are the people who require money and with Microfinance it
is possible. Right now the problem is that, it is SHGs' which are doing
this and efforts should be made so that the big financial institutions also
turn up and start supplying funds to these people. This will lead to a
better India and will definitely fulfil the dream of our late Prime
Minister, Mrs Indira Gandhi, i.e. Poverty.

One of the statements 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

21
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.

• Present Scenario of India:

India falls under low income class according to World Bank. It is

second populated country in the world and around 70 % of its
population lives in rural area. 60% of people depend on agriculture, as
a result there is chronic underemployment and per capita income is only
$ 3262. This is not enough to provide food to more than one individual.
The obvious result is abject poverty, low rate of education, low sex ratio
and exploitation. The major factor account for high incidence of rural
poverty is the low asset base. According to Reserve Bank of India,
about 51 % of people house possess only 10% of the total asset of India
.This has resulted low production capacity both in agriculture (which
contribute around 22-25% of GDP) and Manufacturing sector. Rural
people have very low access to institutionalized credit (from
commercial bank).

• Lessons from International experience:

The World Bank estimates that more than 87% of India’s poor
cannot access credit from a formal source and therefore they are not
borrowing at all or have to depend on money lenders who charge
them interest rates ranging from 48% to 120% per annum and
sometimes much higher.
Microfinance uses a tool for eliminating poverty in India
and other developing nations. Microfinance Industry has the huge
potential To grow in future, if this industry grows then one
day we’ll all see the new face of India, both in term of high living
standard and happiness.

22
⚫ The lessons from international finance experience are:
1) The Poor Are Bankable.
2) Micro credit benefits the poor.
3) Penetration of the poorest of the poor is difficult.
4) A realistic Interest rate is vital.
5) Saving Mobilisation strengthens MFI’s.
6) Governance and financial system required strengthening.
7) Strong regulatory framework is essential. 8) No single model of
MFI as such.
9) Most MFI’s require outside funding.
10) Credit alone cannot achieve objectives.

23
 ➢ Models of microfinance:
Microfinance Institutions in India have adopted various
traditional as well as innovative approaches for increasing the credit
flow to the organized sector. They can be categorized into six broad
types:

1. Grameen model
2. SHG model
3. Federated SHG model
4. Cooperated model
5. ROSCAs
6. Micro-finance companies (MFCs).

These organizations motivate the poor to join the credit groups,

helps to manage their savings, loan-deposit and recovery process and
may also provide an interest free loan to the group that acts as a start-
up fund. A wide range of microfinance models are working in India.
The main reason behind the existence of these models in India may be
due to geographical size of the country, a wide range of social cultural

24
groups, the existence of different economic classes and a strong NGO
movement.

• Grameen Model:
The classic microfinance model, often referred to as the “Grameen
model” after the pioneering Grameen Bank in Bangladesh, involves 5-
person solidarity groups, in which each group member guarantee the
other members guarantees the other members repayment. If any of the
member fail to repay their loans the other group members must repay
for them or they face losing access to future credit.
Village banking expands the solidarity group concept to a larger
group of 15-30 women or men who are responsible for managing the
loan provide by the MFI (the “external account”), as well as making
and collecting loans to and from each other (the “internal account”). In
India, Self Help Groups (SHGs) operate according to a similar format.
Grameen model is based on the concept of joint liability, Prof.
Muhammad Yunus is the founder of Grameen Bank in Bangladesh.
Today, the most accepted and prevalent Microfinance delivery model
in the world is Grameen model. Because of its high focus on
standardization and discipline many MFIs have accepted the model.
The Grameen model follows a fairly regimented routine. It is very
cost intensive as it involves building capacity of the groups and the
customers passing a test before the lending could start. The group
members tend to be selected or at least strongly vetted by the bank. One
of the reasons for the high cost is that staff members can conduct only
two meetings a day and thus are occupied for only a few hours, usually
early morning or late in the evening. They were used additionally for
accounting work, but that can now be done more cost effectively using
computers. The model is also rather meeting intensive which is fine as
long as the members have no alternative use for their time but can be a
problem as members go up the income ladder The greatness of the
Grameen model is in the simplicity of design of products and delivery.
The process of delivery is scalable and the model could be replicated

25
widely. The focus on the poorest, which is a value attribute of Grameen,
has also made the model a favourite among the donor community.

However, the Grameen model works only under certain assumptions.

As all the loans are only for enterprise promotion, it assumes that all
the poor want to be self-employed. The repayment of loans starts the
week after the loan is disbursed – the inherent assumption being that
the borrowers can service their loan from the ex-ante income.

❖ Following are the objectives of Grameen model:

1) Extending banking facilities to poor men and women.
2) Eliminating exploitation of the poor by money lenders.
3) Creating opportunities for self-employment for the unemployed
group in rural area.
4) Bringing within the fold of an organizational form to the most
disadvantaged people mostly women from the poorest
households where they could understand and manage by
themselves.
5) Reversing the conventional cold vicious circle of low income-
low savings-low investment into a virtuous circle of low income,
injection of credit, investment, more income, more savings,
more investment and more income.

❖ Features of Grameen Model:

According to Mohammad Yunus grameen credit is based on the
ground that the poor have a skills which are underutilised or
unutilised. Grameen credit supports and promotes credit as a human
right and it is targeted at the poor, especially poor women.
1) It is based on trust and not on any collateral or any legally
enforceable contracts. The service is provided at the door step of
the poor based on the principle that the bank should go to the
people.

26
 2) It emphases specially on building social capital through groups
formation and centres, develop qualities of leadership and also
undertakes a process of discussion among borrowers.
3) It also gives immense importance on protection on the
environment and education of children. It also provides
scholarships and student loans for higher education.
4) It constantly strives to increase people’s access to technology,
like mobile phone and solar power for the formation of human
capital.

• Self Help Groups (SHG) Model:

There are two common approaches of microfinance in India. The

Self Help Groups method and the grameen system. An SHG is an
unofficial group of approximately 10-20 members. The members of the
SHG are join for these specific purpose of felicitating saving and credit
services for its members. This is made possible through members
pooling their resources to create a common fund.
The Self Help Group (SHG) movement in India can be regarded as
one of the best financial intermediary systems of the country. Reaching
out beyond simple financial intermediation, it additionally provides the
institutional framework of organising livelihood and non-financial
services as well as social services in accordance with Self-help
principles.
SHG meeting are set to take place at regular intervals and at a
designated time. Group members are drawn from the same social
economic layer and work on the basis of equal participation and
contribution from all members. The groups are chaired by one lead
number member at a time; this role is usually rotated to allow capacity
building for all members. Meetings are structured and accurate and up

27
to date records of all financial transactions, group decisions and actions
are compiled. Once established, SHGs are encouraged to make links
with other SHGs and eventually with financial institutions to allow
access to further financial assistance.
Self- help groups (SHGs) play today a major role in poverty
alleviation in rural India. A growing number of poor people (mostly
women) in various parts of India are members of SHGs and actively
engage in savings and credit (S/C), as well as in other activities
(income generation, natural resources management, literacy, child
care and nutrition, etc.). The S/C focus in the SHG is the most
prominent element and offers a chance to create some control over
capital, albeit in very small amounts. The SHG system has proven to
be very relevant and effective in offering women the possibility to
break gradually away from exploitation and isolation.

❖ 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

28
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. Rs.10 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.

• Federated SHG Model:

Nationally, SHGs supported by their respective Self Help
Promoting Agencies (SHPAs), began organising themselves into
bottom-top, multilevel federation systems. These structures of
cluster-(village) level, block-(sub-district) level and district-level
federation aim to provide support services to their member SHGs
and SHG members respectively. They act as an interface between
SHGs and mainstream institutions. SHG structures were set-up
individually in most cases. Each case followed the specific vision
and policy of the respective SHPA and was in accordance to the
heterogeneous socio-economic environment as well as the different
legal or regulatory framework in the respective states. Consequently,
a wide variation of SHG federation structures and a different
understanding of their role and functions can be found today.
Advanced federation systems and their member SHGs have yet to
solve the issue of achieving and maintaining long-term viability and
sustainability. By combining and proving the experience of the
Indian SHG movement and by including internationally accepted
good cooperative practices, this study aims to provide practical
strategic guidelines for sustainability of SHG structures in India.

29
 • Cooperative model:
Cooperative is very much similar to association and
Community Banks. The only difference is that their structure of
ownership does not include the poor. A co-operative is an
autonomous association of persons belonging to the same local or
professional community. They get voluntarily united in order to
meet their common economic, social, and cultural needs through
a jointly owned and controlled enterprise. Some cooperatives
include member financing and saving activities in their mandate.
Members usually elect officers among themselves who
monitor the administration of the co-operative and all members
participates in major decisions. Member savings and peer
pressure proves to be a key factor since creditworthiness and loan
security are a function of cooperative membership.
Through there is no direct relation between the magnitude
and timing of savings and loans, a special effort is made to
mobilize savings from members. The successful leading
organization using the cooperative form in rural micro finance in
India has been the Cooperative Development Forum (CDF),
Hyderabad. It has relied upon a credit union involving the saving
first strategy. It has built up a network of Women Thrift Groups
(WTGs) and Men Thrift Groups (MTGs). CDF encouraged
members to identify more strongly with their WTG/MTG rather
than with the groups, as WTG/MTG is the primary legal entity
and viable units of operation.
A huge variety of well operating and institutionalized
cooperative systems exist around the world. These are determined
by their specific historical background, political economic and
socio-cultural environment. They have a proven record of
successfully contributing to meet specific economic and social
challenges of their countries. Most of the successful cooperative
systems have the following fundamental features in common:
1. Common cooperative vision, policy and strategy.

30
 2. Co-operative services with respect to member needs and interests
and to economic criteria and market conditions.
3. Wide range of economic activities provided by specialised
cooperatives.
4. Strong decentralised network of cooperative retail banks.
5. Bottom-up structured and controlled integrated system of primary
cooperatives and commonly established secondary institutions.
6. Strict institutional separation between business and other
secondary services.
7. Permanent, systematic, needs-oriented capacity building by
Sector-Own systems/institutions.
8. Sector-Own control and stabilisation, compulsory cooperative
audit.
9. Adequate legal framework with sufficient space for members’
self-regulation; no state interference; level playing field.
10. Viewing themselves as an integrated part of the general economy
and society.

• ROSCAs:
Rotating Savings and Credit Association (ROSCAs) is a well-
known microfinance association widely used in many countries around
the world with long histories. By considering extra profits that such a
system can provide when compared to banking transactions, we
develop optimization problems to achieve an optimal design of a
ROSCA. The basic framework of any ROSCA is as follows:
1. A certain number of participants agree to make a regular meeting
system with a fixed maturity.
2. And at every meeting, each member puts in a fixed amount of
money and the collected pot is then given to one of the members
who have not yet received a pot.

31
3. At the maturity of a ROSCA, i.e., when each member has received
his/her pot exactly once, they either dissolve or restart the system.
We will learn more about developing the Micro finance model
in next unit in this curriculum.

• Micro Finance Companies (MFCs):

Microfinance companies are registered in two regulatory set up:
1. Non-Banking financial companies (NBFC) under reserve bank of
India or companies act. NBFCs Most of this type of institutions
is introduced as individual Microfinance institutions working to
make profits. In the last decade the number Microfinance
companies registered in India had increased quite a few times due
to this sector developed as a business model instead of social
service.

2. Many microfinance companies are registered in our country as

NBFC. NBFCs are collecting savings and utilizing their funds for
loans and other activities. Malegam committee appointed by RBI
to study about regulatory measure of Microfinance recommended
separate structure for Microfinance. The Microfinance
institutions including BASIX, Asmitha, SKS and Janasree
Microfinance Kerala is registered as NBFC. NBFC is working by
forming SHGs and direct lending model exists.

⚫ Some other models of Micro Finance:

1. 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

32
RashtriyaMahilaKosh (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.

Legal Forms of MFIs in India

Types of MFIs Estimate Legal Acts under which
d Registered

Number
*
1. Not for Profit 400 to Societies Registration Act,
MFIs 500 1860 or similar Provincial

a.) NGO – MFIs Acts Indian Trust

Act, 1882
b.) Non-profit 10 Section 25 of the
Companies Companies Act, 1956
2. Mutual Benefit 200 to Mutually Aided
MFIs a.) Cooperative Societies
Mutually Aided Act enacted by State
Cooperative Societies 250 Government
(MACS) and similarly
set up institutions

33
 3. For Profit MFIs 6 Indian Companies Act,
1956
a.) Non-Banking
Financial Reserve Bank of India Act,
Companies (NBFCs) 1934
700 –
Total
800

2. Bank Partnership Model:

This model is an innovative way of financing MFIs. The bank is
the lender and the MFI acts as an agent for handling items of
work relating to credit monitoring, supervision and recovery. In
other words, the MFI acts as an agent and takes care of all
relationships with the client, from first contact to final repayment.
The model has the potential to significantly increase the amount
of funding that MFIs can leverage on a relatively small equity
base.
A sub - variation of this model is where the MFI, as an NBFC,
holds the individual loans on its books for a while before
securitizing them and selling them to the bank. Such refinancing
through securitization enables the MFI enlarged funding access.
If the MFI fulfils the “true sale” criteria, the exposure of the bank
is treated as being to the individual borrower and the prudential
exposure norms do not then inhibit such funding of MFIs by
commercial banks through the securitization structure.

3. Banking Correspondents:
The proposal of “banking correspondents” could take this model
a step further extending it to savings. It would allow MFIs to
collect savings deposits from the poor on behalf of the bank. It
would use the ability of the MFI to get close to poor clients while

34
 relying on the financial strength of the bank to safeguard the
deposits. This regulation evolved at a time when there were
genuine fears that fly-by-night agents purporting to act on behalf
of banks in which the people have confidence could mobilize
savings of gullible public and then vanish with them. It remains
to be seen whether the mechanics of such relationships can be
worked out in a way that minimizes the risk of misuse.

4. Service Company Model:

Under this model, the bank forms its own MFI, perhaps as an
NBFC, and then works hand in hand with that MFI to extend
loans and other services. On paper, the model is similar to the
partnership model: the MFI originates the loans and the bank
books them. But in fact, this model has two very different and
interesting operational features:

• The MFI uses the branch network of the bank as its outlets to
reach clients. This allows the client to be reached at lower cost
than in the case of a stand–alone MFI. In case of banks which
have large branch networks, it also allows rapid scale up. In the
partnership model, MFIs may contract with many banks in an
arm’s length relationship. In the service company model, the
MFI works specifically for the bank and develops an intensive
operational cooperation between them to their mutual
advantage.
• The Partnership model uses both the financial and infrastructure
strength of the bank to create lower cost and faster growth. The
Service Company Model has the potential to take the burden of
overseeing microfinance operations off the management of the
bank and put it in the hands of MFI managers who are focused
on microfinance to introduce additional products, such as
individual loans for SHG graduates, remittances and so on

35
 without disrupting bank operations and provide a more
advantageous cost structure for microfinance.

5. Bank Led Model:

The bank led model was derived from the SHG-Bank linkage
program of NABARD. Through this program, banks financed
Self Help Groups (SHGs) which had been promoted by NGOs
and government agencies.
ICICI Bank drew up aggressive plans to penetrate rural areas
through its SHG program. However, rather than spending time
in developing rural infrastructure of its own, in 2000, ICICI
Bank announced merger of Bank of Madura (BoM), which had
significant presence in the rural areas of South India, especially
Tamil Nadu, with a customer base of 1.9 million and 87
branches. Bank of Madura's SHG development program was
initiated in 1995. Through this program, it had formed, trained
and initiated small groups of women to undertake financial
activities like banking, saving and lending. By 2000, it had
created around 1200 SHGs across Tamil Nadu and provided
credit to them.

6. Partnership Models:
A model of microfinance has emerged in recent years in which a
microfinance institution (MFI) borrows from banks and on-
lends to clients; few MFIs have been able to grow beyond a
certain point. Under this model, MFIs are unable to provide risk
capital in large quantities, which limits the advances from
banks. In addition, the risk is being entirely borne by the MFI,
which limits its risk-taking.
This model aimed at synergizing the comparative advantages
and financial strength of the bank with social intermediation,
mobilization power and infrastructure of MFIs and NGOs.
Through this model, ICICI Bank could save on the initial costs

36
 of developing rural infrastructure and micro credit distribution
channels and could take advantage of the expertise of these
institutions in rural areas. Initially, ICICI Bank started off by
lending to MFIs and NGOs in order to provide the necessary
financial support to their activities. Later, ICICI Bank came up
with a plan where the NGO/MFI continued to promote their
microfinance schemes, while the bank met the financial
requirements of the borrowers.

• THE PLAYERS IN THE MICROFINANCE SECTOR IN

INDIA:
Microfinance industry has a presence in 619 districts in India.
The players in the Microfinance sector can be classified as falling
into three main Groups:
A. The SHG-Bank linkage Model accounting for about 58% of
the outstanding loan portfolio.
B. NBFCs accounting for about 34% of the outstanding loan
portfolio.
C. Others including trusts, societies, etc., accounting for the
balance 8% of the outstanding loan portfolio. Primary
Agriculture Cooperative Societies (PACS) trusts and credit
co-operatives are scattered across the country and there is
no centralized information available about them.

1. Self Help Group(SHG):

Self Help Group (SHG) programme has indeed helped in the

social and economic empowerment of rural poor, especially for
women, time delivering essential and much-needed financial
services at low transaction costs for banks, poor borrowers and
villagers. However, slow progress of graduation of SHG
members, poor quality of group functioning, dropout of members

37
 from groups etc., have also been reported various study findings
in different parts of the country, which need to be taken into
account while designing the road map for the next phase of the
SHG programme.

2. Portfolio securitization:
Securitization is a process under which a lender bundles loans
together and sell them to another financial institutions, freeing up
capital. The risk of the transferred to the buyer in the process.
Financial institutions such as banks buy these portfolios in order
to meet their priority sector lending norms. Loan pools can be
securitized two ways direct assignment or through issuing pass-
through certificates (PTC). Direct assignment involves directly
transferring a bunch of loans to the buyer. In a PTC, the
certificates are issued through a special purpose vehicle (SPV)
and could carry an implicit guarantee by the SPV.
“Securitisation volumes have reduced for microfinance
segment on account of the impact of demonstration. We are
already seeing a pickup in Direct Assignments. PTC volumes
may take some more time to pick up as investors (like mutual
funds) wait for collection trends to stabilize,” said Krishnan
Sitaraman, senior direct, financial sector ratings and structured
finance ratings, at CRISIL Ratings.
Microfinance securitization is generally characterized by
the same process as other securitization products. However,
unlike most other industries, in microfinance the originator, i.e.
the MFI often must also serve as the servicer because the
collection of receivables is contingent upon manual labour and
the maintenance of relationships in often remote locations. But
there is some debate as to whether MFI-based loan bundles are
truly bankruptcy remote.

3. National Rural Livelihood Mission:

National Rural Livelihoods Mission (NRLM) was launched by
the Ministry of Rural Development (MoRD), Government of

38
 India in June 2011. This scheme is focused on promoting self-
employment and organization of rural poor. NRLM is a poverty
alleviation project implemented by Ministry of Rural
Development, Government of India aims at creating efficient and
effective institutional platforms of the rural poor enabling them
to increase household income through sustainable livelihood
enhancements and improved access to financial services.
The Mission of NRLM is to “To reduce poverty by enabling
the poor household to access gainful self-employment and skilled
wage employment opportunities resulting in appreciable
improvement in their livelihood on a sustainable basis, through
building strong and sustainable grassroots institutions of the
poor.”

❖ The core values which guide all the activities under NRLM
are as follows:
1. Inclusion of the poorest, and meaningful role to the poorest in all
the processes.
2. Transparency and accountability of all processes and institutions.
3. Ownership and key role of the poor and their institutions in all
stages planning, implementation, and monitoring.
4. Community self-reliance and self-dependence.

❖ Guiding Principles of NRLM:

The Guiding Principles of NRLM are:
1. Poor have a strong desire to come out of poverty, and they have
innate capabilities.
2. An external dedicated and sensitive support structure is required
to induce the social mobilization, institution building and
empowerment process.
3. Facilitating knowledge dissemination, skill building, access to
credit, access to marketing, and access to other livelihood services
enables them to enjoy a portfolio of sustainable livelihood.

39
 • Impact of Microfinance:
Microfinance in India has grown at a tremendous pace in
recent years, achieving significant outreach amongst the poor as
well as non-poor but low-income household across the country.
Linkages between banks and Self-Help Groups (SHG) supported
by the National Bank for Agricultural and Rural Development
(NABARD), on one hand, and Microfinance institutions (MFIs),
on the other, have emerged as the two most prominent means of
delivering microfinance services in India. Growth in terms of
outreach across both models has been very high.
The microfinance institutions (development and regulation)
2012 has passed to design interventions that increase the impact of
Microfinance on borrowers, lenders, company and other institutions.
Further, bank officials do not have sufficient interest to go beyond
their routine job, so that the aggressive drive for financial inclusion
is attained. These problems are overcome in the Microfinance
institutions model. With more stable regulatory environment which
provide steady availability of funds, improving profitability with
comfortable asset quality and capital adequacy and relatively lesser
Impact of concentration risk. Financial inclusion has been
recognized as a priority goal of the Microfinance sector and efforts
were made in this report to identify the critical areas of interventions
for greater success of the initiatives in the future.

MFIs could play a significant role in facilitating inclusion, as they

are uniquely positioned in reaching out to the rural poor. Many of
them operate in a limited geographical area, have a greater
understanding of the issues specific to the rural poor, enjoy
greater acceptability amongst the rural poor and have flexibility
in operations providing a level of MFIs. An attempt is made in
the following table to capture the various forms of MFIs.

40
Type of Non profit Mutual benefit For profit
entity
Association Society under Cooperative Association
societies which can be just a of person
Registration savings and credit
Act 1860 co-
operative or be
further licensed as
cooperative bank

Trust Charitable trust Mutual benefit Association

under trust of person
Indian Trusts
Act 1920
Company Section 25 Mutual Benefit Company
under Indian Company (Sec 620A Nidhi which is
companies Company) further
Act,1956 either an
NBFC or a
bank

41
• Microfinance and Poverty Assessment Tools:
One of the main causes of poverty in rural India is back of
access to financial resources and productive assets. In response to
the high poverty levels, in India, the government and the private
sector have endorsed different efforts to aid the poor. Some of the
strategies undertaken improve the gradual commercialization of
agriculture. This has played a significant role in increasing
outcomes for the rural poor. Rural finance is critical to the
enhancement of economic outcomes for individuals in India. This
is because it increase their ability to produce agricultural
commodities for sale. During the last decade, the union and state
governments has considered microfinance as a tool to meet the
financial service requirements of the poor. It has framed policies
that enable the increased access to financial services for the poor.
Series of measure are introduced for the same. The following
have been the significant initiatives:
1) Appointed a committee to study about regulatory measures
to implement for smooth functioning of MFIs. (Malegam
Committee).
2) Emergence of SIDBI Foundation for Micro-Credit as a
financier of Microfinance institutions (MFIs).
3) Encouraging National Bank for Agricultural and Rural
Development (NABARD) to set targets for the self-help
group (SHG)-Bank linkage programme.
4) Exempting non-profit companies doing microfinance from
registering as an NBFC.
5) Including leading to SHGs as a part of priority sector
targets.
6) Permitting the establishment of local area banks (now
withdrawn).
7) Setting up of the Rashtriya Mahila Kosh to re-finance
microfinance activities of NGOs.
8) The close linkage built by DWCRA schemes.

42
➢ MICROFINANCE-PRODUCT AND SERVICES:
H
• Products and services of Microfinance:
In developing countries, Microfinance has played a very
important role. By providing credit facilities and making cash
available to the underprivileged people helps them to prosper and
capitalization various business opportunities. It not only helps
such people to grow in their respective areas but also represent
the state in the global market.

• Objectives: The objectives of products and services of

Microfinance is as follows:
1. The primary objective of microfinance programs is to
eliminate poverty in the economy.
2. To empower women with new ideas and technology for
income generation.
3. To widen the financial markets by providing various
financial and non-financial services to the poor.

• Needs for products and services of Microfinance: The basic

idea of microfinance is to make available financial services to low
income population. The main aim is to enable low income group
to make better their day to day life, setting up businesses, securing
livelihood and protect themselves from financial risks:
1. Financial independence: Financial independency can be
achieved by the underprivileged people if proper funds and
services in regards to finance is made available to them.
2. Indulge in varied activities: Microfinance helps the
borrower to get involved in various activities of the
institutions from time to time.
3. Uneducated group of people: With the help of various
products and services of MFI, the people who missed out
their employment and job opportunities due to lack of
finance for education can also be catered to.

43
4. Unskilled labour: Unskilled labours are those who have
limited skills and they are offered with less paid work. They
have limited qualification such as high school or diploma or
no qualification like construction worker, domestic help,
security worker, etc.
5. Poor agriculturists: Normally agriculturist are not much
paid as compare to hard work they put in. They do not have
sufficient funds
to purchase a land for sowing crops and thus they have to
depend on landlords for renting land.
6. Migrants: There are also many people who are originally
from rural India who move to urban areas for alternative
sources of employment apart from agriculture. They get into
fields such as cooking, construction, restaurant,
housekeeping, etc. and earn low incomes.

44
 • Types of Microfinance: There are various products and
services of microfinance offered:
1. Micro Credit: A small sum of money which is provided to
individuals or groups, without standard securities, against interest
and in local currency is called as micro credit. Micro Credit helps
in the cash flow management by fulfilling the needs of the
company for its working capital, providing emergency loans by
way of risk management and acquiring new assets by providing
fixed assets loans.
2. Micro Savings: Excess income can be saved in the form of assets
like jewellery or livestock in many developing countries which is
known as Micro Savings. It helps low group people to sell these
assets during the time of emergency, education or small
investment needs. Thus, micro savings provides the following:
a) It helps to keep the assets secured from losses
like theft, fire or any other untoward incidences.
b) It is a mean to finance the micro loans provided
by MFIs.
c) It accepts deposits from Micro Savings clients
which is available in limited MFIs.
3. Micro Insurance: Microfinance insurance is similar to the
conventional insurance. The scope of coverage is limited and
therefore requires lesser insurance premium. In developing
countries, threat in relation to survival is higher to low income
group due to death of the breadwinner due to diseases, accidents,
natural calamities or extreme weather conditions. Thus, health
and life insurance along with insurance protection against natural
catastrophes or extreme weather conditions is offered primarily.
4. Transaction Services; Microfinance transaction services are
generally benefited to the group of people who have migrated
from places and they want to remit part of their income to the
family back home.
The Microfinance products and services mentioned above are
offered as a single product and also as combined products. For example,

45
farmers can take a micro insurance policy against drought which will
cover microcredit which they have taken to purchase high-quality
seeds. The insurance policy in this case protects them against
repayment of loan in situation of poor harvesting.

• 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 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,

46
 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. ApniMandi:
Another innovation is that of The Punjab Mandi Board, which
has experimented with a, farmer market to provide small
farmers located in proximity to urban areas, direct access to
consumers by elimination of middlemen. This experiment
known as "ApniMandi" 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 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. ApniMandi scheme provides self-employment to
producers and has eliminated social inhibitions among them
regarding the retail sale of their produce.

• Commercial banks as Microfinance Vehicles:

Commercial banks recently have stepped into the realm of
microfinance.
They have taken tentative but very important steps toward distributing
Microfinance loans to the poor. One advantage of these institutions is
that they bring in the risks management practices that they regularly
use in their commercial operations risk management practices that
they regularly use in their commercial operations. The other important
aspect they bring in is the professional credit appraisal practices that
are used in their normal operations. These important features
combined with a mission to provide the poor entrepreneurs well

47
enhance the social lives and they can their business effectively with
proper access to credit. In some cases, successful microfinance NGOs
have transformed themselves into for profit commercial banks
(BancoSol of Bolivia is a prime example of a microfinance NGO that
has successfully transformed itself into a for-profit commercial bank).
This transformation from a not-for profit institution into for-profit
organization has increased the focus of these organizations on
financial self-sufficiency. This transformation has been possible
because commercial banks have entered this arena bringing in key
concepts like self-sufficiency, proper credit appraisal and risk
management practices. But there are some issues that have to be dealt
with by the banks before embarking on the Microfinance journey.
They are:
1. Banks Outreach

2. Clarity in objectives

Banks outreach is one of the most crucial aspects that must be

critically examined by them before entering into microfinance sector.
One reason for it is that most of the commercial banks have little or
no rural presence with rare exceptions such as India, where rural
banking was a priority and there is a significant presence of
commercial banks in the rural areas. They have to decide whether to
start their own branches in rural areas if they do not have any or
partner with other banks or other microfinance institutions in order to
get a foothold in the rural finance sector. The other issue that has to be
resolved is the clarity in the bank in dealing with its microfinance
operations. They have to decide whether it will be completely
independent operation or it will be part of their existing rural banking
framework. For example, ICICI bank’s microfinance operation is a
completely independent operation and it does not have any link with
its commercial banking operation.

48
 ➢ Market players of Microfinance:
Microfinance sector is composed of market players at various levels:
1. MFIs and their customer at the micro-level,
2. Supporting infrastructure such as credit rating, credit scoring,
3. Certification institutes at the middle-level i.e. level between micro
and macro,
4. Regulators and supervisory authorities at the macro-level.

• Microfinance Institution:
Microfinance Institutions are those institutions which have
microfinance as their main function. Offering of microfinance
service to the low group or under privileged people is the main
aim of MFIs. Microfinance Institutions exist in a various sizes
and different organizational and legal forms. They can also be
differentiated as per the product categories which they are
permitted to offer, methodologies applied such as individual
loans vs. group loans, their vision and mission as well as the
sources of their funding. Its scope ranges from small village
financial institutions with low number of customers large MFIs
with a nationwide or even transnational branch network.
MFIs can be differentiated according to their legal form and the
associated scopes of regulation as follows:
• Commercial banks which serve microfinance customers as an
additional customer segment;
• Micro banks specialized in serving Microfinance customers;
• MFIs licensed as non-bank financial institution(NBFC); •
Cooperatives and non-governmental organizations(NGOs);
• Savings and credit unions and self-help groups.
Those MFIs which have to access international capital in the
form of loans, guarantees and/or grants are frequently at the centre of
the

49
International discussion. They only represent a comparatively small
segment of the microfinance sector. MFIs predominant proportion is
not linked to the International financial market rather they become a
part of their local financial system.
More recent players in the Microfinance sector are mostly in
partnership with MFIs which includes mobile communication
providers, which offer mobile banking services.
Microfinance institutions are perhaps one of the most important
vehicles to reach the rural poor. These institutions can act as very
important tool to provide the rural entrepreneurs with micro-loans,
which will help them to start their own businesses and sustain them.
One advantage that these institutions have over other financial
services delivery vehicles is the focus. While NGOs have to straddle
with various non-financial and financial services activities and
commercial bank with other operations. MFIs can solely focus on
providing the financial service to the poor since the very objective of
starting this kind of institution is to provide financial services in the
rural areas. There are many examples of MFIs that has done some
stellar work in this area such as ACCION International, BancoSol and
Grameen Bank. This institutions have helped many people in
enhancing their lives and achieving a decent social status in the
societies that they are living in. The key advantages that they have
over the other forms of microfinance are:
• Focus is solely on providing financial services.
• It can provide whole gamut of services from loans to
insurance.
However, it has also some advantages like sustainability of these
institutions. Most of the MFIs including Grameen bank are still donor
supported organization and many of them still depend on outside
funds for their survival. Only some have like BancoSol have made
successful transition from donor supported financially self-sustained
organization.

50
Apart from these there are several other important mechanisms through
while microfinance is provided like mutual community groups,
regional woman group like Development of Women and Child in Rural
Area (DWCRA) and other local organizations. However, they have not
played a significant role in the microfinance movement till now and
they can play a major role in providing rural financial services in the
long run.

51
• Role of Microfinance Institutions:
Exiting and aspiring small business owners are provided with
small loans by Microfinance lenders. Those loans help such
people with sufficient funds which they fail to access from
traditional financing and thereby get an opportunity to earn a
higher income and also provide jobs to their local people.

1. Financial Stability: MFIs plays one of the largest roles in

providing means to low income and poor families so that they
can become financially stable. Small loans help such people to
grab the opportunity to earn sufficient income in order to pay for
the needs of food, shelter and basic medical facility.
2. Job creation: MFIs help in creating employment opportunities
by providing microfinance loans to the people living in the rural
area that needs of the local communicating where jobs are
scarce. This also helps in enhancing the economic growth of
rural sectors.
3. Global poverty: Microfinance supporters believe that in order to
break the cycle of poverty in the current generation, low income
and poor families must be provided with the opportunity for
long-term financially stability through these small loans. It will
help and work toward ending global poverty for future
generations as well.
4. Development of Micro Enterprise: The main constraint
hindering the development of small businesses is identified as
lack of access to finance. MFI thus started financing micro
enterprise without any collateral and thus assisted micro
enterprise to develop and contribute to the nation’s economy.
5. Bridging the gap: As commercial banks provide loans for a
collateral security to people or institutions which are financially
stable, the poor people hinder to approach them. MFIs help to

52
 bridge this gap by providing loans without any collateral
securities.
6. Economic development: Microfinance provides a broad range of
financial services such as deposits, loans, payment services,
money transfer, and insurance to poor and low-income
households and, their micro enterprises which help in the overall
economic development of rural sector.
The microfinance sector constantly focuses on understanding the
needs of the poor and on providing better ways of delivering services
that align their requirements, developing the most efficient and
effective mechanism to deliver finance to the poor. Efficiency has
been improved due to continuous efforts made towards automation of
operation for accelerating the growth rate of microfinance sector.

• Goals of MFIs:
1. To provide for access to financial and support services so as to
improve the quality of life of the poor;

2. To make emphasis on developing sustainable communities,

thereby becoming a viable financial institutions;

3. In order to provide financial and support services to the poor

particularly women, by mobilizing resources;

4. Putting emphasize on learning and evaluating several areas that

helps people to move out of poverty faster;

5. Self-employment opportunities should be created for the

underprivileged;

53
 6. Imparting simple skills in poor rural people and enable them to
use the available resources and also to contribute to
employment and income generation in rural areas.

• Supporting Infrastructure:
Over the years, a supporting infrastructure for MFIs exists and has
further developed. It supported MFIs in provision and further
development of products and services, making improvement in
quality of products and enables transparency, and optimizes the
governance structure, management and strategy of micro financial
Institutions. It includes credit rating and credit scoring agencies,
microfinance rating agencies, and training and certification
institutes. In addition, Micro Financial Institutions offer their
members knowledge exchange platforms and also represent their
interests in relation to third parties such as supervisory authorities.
Financial Institutions and banks: Microfinance has been attractive
to the lending agencies because of demonstrated sustainability and of
low costs of operation. Institutions like SIDBI and NABARD are
hard-nosed bankers and would not work with the idea if they did not
see a long term engagement – which only comes out of sustainability
(That is economic attractiveness). On the supply side, it is also true
that it has all the trappings of a business enterprise, its output is
tangible and it is easily understood by the mainstream. This also
seems to sound nice to the government, which in the post
liberalization era is trying to explain the logic of every rupee spent.
That is the reason why microfinance has attracted mainstream
institutions like no other developmental project. Perhaps the most
important factor that got banks involved is what one might call the
policy push. Given that most of our banks are in the public sector,
public policy does have some influence on what they will or will not
do. In this case, policy was followed by diligent, if meandering,

54
promotional work by NABARD. The policy change about a decade
ago by RBI to allow banks to lend to SHGs was initially followed by
a seven-page memo by NABARD to all bank chairmen, and later by
sensitization and training programmes for bank staff across the
country. Several hundred such programmes were conducted by NGOs
alone, each involving 15 to 20 bank staff, all paid for by NABARD.
The policy push was sweetened by the NABARD refinance scheme
that offers much more favourable terms (100% refinance, wider
spread) than for other rural lending by banks. NABARD also did
some system setting work and banks lately have been given targets.
The canvassing, training, refinance and close follow up by NABARD
has resulted in widespread bank involvement.

Moreover, for banks the operating cost of microfinance is perhaps

much less than for pure MFIs. The banks already have a vast network
of branches. To the extent that an NGO has already promoted SHGs
and the SHG portfolio is performing better than the rest of the rural (if
not the entire) portfolio, microfinance via SHGs in the worst case
would represent marginal addition to cost and would often reduce
marginal cost through better capacity utilization. In the process the
bank also earns brownie points with policy makers and meets its
priority sector targets.
It does not take much analysis to figure out that the market for
financial services for the 50-60 million poor households of India,
coupled with about the same number who are technically above the
poverty line but are severely under-served by the financial sector, and
is a very large one. Moreover, as in any emerging market, though the
perceived risks are higher, the spreads are much greater. The
traditional commercial markets of corporates, business, trade, and
now even housing and consumer finance are being sought by all the
banks, l adding to price competition and wafer thin spreads. Further,
bank-groups are motivated by a number of cross-selling opportunities
in the market, for deposits, insurance, remittances and eventually

55
mutual funds. Since the larger banks are offering all these services
now through their group companies, it becomes imperative for them
to expand their distribution channels as far and deep as possible, in
the hope of capturing the entire financial services business of a
household.
Finally, both agri-input and processing companies such as EID Parry,
fast moving consumer goods (FMCG) companies such as Hindustan
Levers, and consumer durable companies such as Philips have
realized the potential of this big market and are actively using SHGs
as entry points. Some amount of free-riding is taking place here by
companies, for they are using channels which were built at a
significant cost to NGOs, funding agencies and/or the government.
On the whole, the economic attractiveness of microfinance as a
business is getting established and this is a sure step towards
mainstreaming. We know that mainstreaming is a mixed blessing, and
one tends to exchange scale at the cost of objectives. So it needs to be
watched carefully.

56
 • Central banks, regulatory and supervisory
authorities and ministries:
Central banks, regulatory and supervisory authorities and
Ministries determine the conditions of framework of an inclusive
and stable (micro) finance sector. Their work includes alignment of
regulatory enhancement with current events as well as the
monitoring of the market on continuous basis. This framework will
help to guide the overall development of the microfinance sector
and also determines which products and services to be offered by
the various types of MFIs.

• Investors: Investors include national investors and also

supranational organizations such as the World Bank, regional
development banks as well as national development
organizations. From a point of view of development policy,
the topic of micro insurance is frequently delegated to a
different sector than other microfinance services.
Micro insurance is included under the development topic of
Social Security, while micro finance and financial system
development are allocated to the Economic Development
field.
There is also a support of International NGOs to the
microfinance sector in developing and emerging countries,
through partnerships with local Micro Financial Institutions.
There are private and institutional financial investors who are
on the donor side.

• International knowledge platforms:

There are various organizations which have developed
knowledge platforms or established expert networks in order to
enable exchange knowledge, improve the information on and also
transparency of the microfinance sector. These include the
Consultative Group to assist the Poor (CGAP) and the

57
Microfinance Gateway as regards microfinance in general as well
as the Micro insurance Network in the field of Micro Insurance.
Information on the microfinance sector can also be found
on the websites of International, regional, and National
development agencies, other non-governmental organizations
(NGOs) as well as some banks and insurance companies.

• Designing Microfinance Models:

Micro finance institutions are the oldest financial
institutions in the world. MFIs have adapted to the changes
with the time, and have started using various credit lending
models. In India, different methods are used for providing
microfinance services. A total of 14 models are existing in
India. They include association’s bank guarantees, community
banking, co-operatives, credit unions, Grameen, group,
individual, intermediaries, NGOs, peer pressure, ROSCAs,
small business, and village banking models.
In reality, the models are loosely connected with each other
and changes in their legal forms, in the channels and delivery
methods, governance structure, approach with regards to
sustainability and also in their approach to microfinance where
their funds are coming from, and how the fund is governed.

• Association or Group Model:

In order to offer microfinance services such as micro
savings, microcredit, micro insurance, etc. an association is
formed by the poor in the target community. Associations or
groups can be comprised of youth, or women; they can form
around political or religious or cultural issues; can create
support structures for microenterprises and other work based
issues. It gathers capital and intermediaries between banks,
MFIs and its members.
Example: Self Help Groups. In some countries, an association
can be a legal body that has certain advantages such as fees

58
collection, insurance, tax holiday and other protective measures.
This model has 10-20 members who make regular savings in
common funds on a mutually decided frequency. These groups
are linked to a financial institutions for getting credit after the
successful working of such a group for some months.
The financial institutions issue loan in the name of group
which is considered responsible for repayment. The group itself
selects its members before acquiring a loan. Loans are granted
to selected member of the group first and then to the rest of the
members.
Group members are jointly accountable for the repayment
of each other loans and usually meet weekly to collect
repayments. To ensure repayment, peer pressure and joint
liability world very well. The entire group will be disqualified
and will not be eligible for further loans, even if one member of
the group becomes a defaulter.

• Community Banking Model:

Community banking model treats the whole community as
one unit. It normally establishes institutions, generally semi-
formal or formal through which microfinance is dispensed.
Such institutions are usually formed by extensive assistance
from NGOs and other organizations who also trains the
community members in various financial activities of the
community bank, closely related to the village banking
model. These institutions may have components of savings
and other income-generating projects included in their
structure. In many cases, community banks also become a
part of larger community development programmes.
It uses finance as a motivation for action. Village banks
are community-based credit and savings associations,
normally consist of 25 to 50 low-income individuals. Such

59
 groups are continuously seeking to improve their lives
through self-employment activities.

• Intermediary Model:
The intermediary plays a crucial role of generating
awareness of credit and creating awareness among the
borrowers including, in some cases, starting savings
programmes. These activities will lead towards raising the
credit worthiness of the borrowers to a level which is
sufficient enough to make them attractive to the lenders.
The links which is developed by the intermediaries could
cover funding, programme links, training and education,
research. Such activities can take place at varied levels from
international and national to regional, local and individual
level.
Intermediaries could be individual lenders,
microenterprise / Micro credit programmes, NGOs and
commercial banks. Lenders could be government agencies,
commercial banks, international donors, etc. Most of the
models mentioned have some form of organizational or
operational intermediary dealing directly with microcredit, or
non-financial services. Agents receive incentives in monetary
as well as non-monetary basis for recommendations.
• Individual Banking Model:
Many MFIs have experienced that the traditional group based
lending (GBL) model involves too much of restrictions and thereby
not universally applicable. As a result, many institutions have started
to switch towards other alternative models which include group based
loans with individual liabilities where repayment is still weekly
during a group meeting, or by simply switching to a model that
extends an individual liability loan.

60
 Over the past few years, the shift towards individual loans has
been remarkable. The current estimates suggest that about half of
microfinance institutions are individual liability lenders. Therefore, it
is not fair to generalize that microfinance is solely based on a group
lending methodology.
In Individual lending method, MFIs provide loans to an
individual as per his or her own personal credit worthiness. Individual
lending is more preferable with clients who generally require bigger
amount of loans and have the capacity to give guarantee and can
generate sufficient comfort to the MFI. MFIs generally base their
decision on personal knowledge of the client, his or her reputation
among peers and society, client’s income sources and business
position.
It is most successful for longer, urban-based, production-
oriented businesses. The formal financial institutions like Commercial
banks, Regional rural banks and Co-operative banks adopt
predominantly individual banking based model for lending to
unorganized sector compromising both farm and non-farm sector.

• Mixed or multiple model:

Some MFIs started with the grameen model but with the
passage of time they got converted into the Self Help Group model.
After conversion into SHG also, they were involved in Grameen
type lending and smaller groups. They are a mix of SHG and
Grameen model. For the provision of microfinance, many MFIs
have adopted multiple models. For the provision of microfinance,
many MFIs have adopted multiple models. It was observed that for
disbursement of microfinance, NGO based, MFIs are using the SHG
model. According to the SHGs and Grameen model offer economies
of transaction cost of MFIs, but at the cost members time because
the unit of dealing is “Group” rather than individual. In contrary,
MFIs offering individual loans incur higher transaction costs for
serving their borrowers.

61
➢ DEVELPOMENT OF MFI:
During the last decade, the union and state governments has
considered microfinance as a tool to meet the financial service
requirements of the poor. It has framed policies that enable the
increased access to financial services to the poor.

• Measures introduced in India for development of MFI:

Series of measure are introduced for the same. The following
have been the significant initiatives:
1. Appointment a committee to study about regulatory
measures to implement for smooth functioning of MFIs.
2. Emergence of SIDBI Foundation for Micro-credit as a
financier of microfinance institutions (MFIs).
3. Encouraging National Bank for agriculture and Rural
Development (NABARD) to set targets for the self-help
group (SHG) Bank linkage programme.
4. Exempting non-profit companies doing microfinance from
registering as an NBFC.
5. Including lending to SHGs as a part of priority sector
targets.
6. Permitting the establishment of local area banks (now
withdrawn).
7. Setting up of the Rashtriya Mahila Kosh to re-finance
microfinance activities of NGOs.
8. The close linkage built by DWCRA schemes.
9. The initiatives of various state governments in promoting
schemes such as Swa-Shakti (Gujarat), Velugu (Andhra
Pradesh), Kudumbasree (Kerala) etc.
10. The pronouncement of the Reserve Bank of India
(RBI) from time to time such as routing some poverty
oriented schemes such as the Swarnajaynti Gram Swarozgar
Yojana (SGSY) through SHGs.

62
 ➢ Business facilitator and Business Correspondent model:
In 2006, permitted banks to appoint business facilitators and
business correspondents. Business facilitators can only promote
the business of the bank whereas business correspondents can
undertake wide scope of activities. It includes disbursal of small
value credits, collection of small value deposits, sale of micro
insurance, pension and other third party products as well as
receipt and delivery of small value remittance and other payment
instruments.
As per RBI guidelines, banks are encouraged to use
intermediaries, such as NGOs, farmers clubs, cooperatives, community
based organizations, IT enabled rural outlets of corporate entities, post
offices, insurance agents, well-functioning panchayats, village
knowledge centres, Agri clinics/Agri business centres, Krishi Vigyan
Kendras as business facilitator.

63
 ➢ MICROFINANCE AND WOMEN
EMPOWERMENT:

Women as micro and small entrepreneurs have increasingly become

the key target group for micro finance programs. Consequently,
providing access to micro finance facilities is not only considered a
pre-condition for poverty alleviation, but also considered as a strategy
for empowering women. In developing countries like INDIA micro
finance is playing an important role, promoting gender equality and is
helping in empowering women so that they can live quality life with
dignity.
The study conducted by FINCA Client Poverty Assessment conducted
in 2003 revealed that of the interviewed clients 81 percent were

64
women, and it was found that food security was 15 percent higher
among their village banking clients than non-clients. The report also
showed clients to have 11 percent more of their children e rolled in
school with an 18 percent increase in h althcare benefits. Clients‟
housing security was reported as 18 percent higher than non-clients.
The assessment concluded that microfinance improved the wellbeing
of women clients and their families. Microfinance has a positive
effect on the empowerment of women by creating an “empowerment
indicator”.
These indicators can be based on the following factors:

• Mobility Economic security- enables poor women in making

them economic agents of change by increasing their income and
productivity.
• Ability to make small purchases.
• Ability to make larger purchases.
• Involvement in major household decisions.
• Relative freedom from domination within the family.
• Political and legal awareness.
• Involvement in political campaigning and protests.
• To access to markets and information
• They become more confident.
• They get a better control of the resources.
• They can confront systemic gender inequalities

65
⚫ BEIJING CONFERENCE 1995 HAD IDENTIFIED
CERTAIN INDICATORS OF WOMEN EMPOWERMENT
Important among them are as follows:

• Increase in self-esteem, individual and collective confidence

• Increase in articulation, knowledge and awareness on health,
nutrition reproductive rights, law and literacy
• Increase and decrease in personal leisure time and time for
child care.
• Increase on decrease of workloads in new programmes
Change in roles and responsibility in family & community.
• Visible increase on decrease in violence on women and girls;
Responses to, changes in social customs like child marriage,
dowry, discrimination against widows.

• Visible changes in women's participation level attending

meeting, participating and demanding participation
• Increase in bargaining and negotiating power at home, in
community and the collective
• Increase access to and ability to gather information
• Formation of women collectives Positive changes in social
attitudes Awareness and recognition of women's economic
contribution within and outside the household.

66
 ➢ WOMEN’S EMPOWERMENT AND MICRO
FINANCE: DIFFERENT PARADIGMS:
Concern with women’s access to credit and assumptions about
contributions to women’s empowerment are not new. From the early
1970s women’s movements in a number of countries became
increasingly interested in the degree to which women were able to
access poverty-focused credit programmes and credit cooperatives. In
India organizations like Self- Employed Women’s Association
(SEWA) among others with origins and affiliations in the Indian
labour and women’s movements identified credit as a major constraint
in their work with informal sector women workers.
a) Feminist Empowerment Paradigm:
The feminist empowerment paradigm did not originate as a Northern
imposition, but is firmly rooted in the development of some of the
earliest micro-finance programmes in the South, including SEWA in
India. It currently underlies the gender policies of many NGOs and
the perspectives of some of the consultants and researchers looking at
gender impact of microfinance programmes (e.g. Chen 1996,
Johnson, 1997).
Here the underlying concerns are gender equality and women’s
human rights. Women’s empowerment is seen as an integral and
inseparable part of a wider process of social transformation. The main
target group is poor women and women capable of providing
alternative female role models for change. Increasing attention has
also been paid to men's role in challenging gender inequality.
Micro-finance is promoted as an entry point in the context of a wider
strategy for women’s economic and socio-political empowerment
which focuses on gender awareness and feminist organization. As
developed by Chen in her proposals for a sub sector approach to
micro credit, based partly on SEWA's strategy and promoted by
UNIFEM, microfinance must be:

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Part of a sectorial strategy for change which identifies opportunities,
constraints and bottlenecks within industries which if addressed can
raise returns and prospects for large numbers of women. Possible
strategies include lining women to existing services and
infrastructure, developing new technology such as labour-saving food
processing, building information networks, and shifting to new
markets, policy level changes to overcome legislative barriers and
unionization.
Based on participatory principles to build up incremental knowledge
of industries and enable women to develop their strategies for change
(Chen, 1996). Economic empowerment is however defined in more
than individualist terms to include issues such as property rights,
changes intra household relations and transformation of the macro-
economic context. Many organizations go further than interventions at
the industry level to include gender-specific strategies for social and
political empowerment. Some programmes have developed very
effective means for integrating gender awareness into programmes
and for organizing women and men to challenge and change gender
discrimination. Some also have legal rights support for women and
engage in gender advocacy. These interventions to increase social and
political empowerment are seen as essential prerequisites for
economic empowerment.

b) Poverty Reduction Paradigm:

The poverty alleviation paradigm underlies many NGO integrated
poverty targeted community development programmes. Poverty
alleviation here is defined in broader terms than market incomes to
encompass increasing capacities and choices and decreasing the
vulnerability of poor people. The main focus of programmes as a
whole is on developing sustainable livelihoods, community

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development and social service provision like literacy, healthcare and
infrastructure development. There is not only a concern with reaching
the poor, but also the poorest. Although term 'empowerment' is
frequently used in general terms, often synonymous with a multi-
dimensional definition of poverty alleviation, the term 'women's
empowerment is often considered best avoided as being too
controversial and political.

c) Financial Sustainability Paradigm:

The financial self-sustainability paradigm (also referred to as the
financial systems approach or sustainability approach) underlies the
models of microfinance promoted since the mid-1990s by most donor
agencies and the Best Practice guidelines promoted in publications by
USAID, World Bank, UNDP and CGAP.
The ultimate aim is large programmes which are profitable and fully
self-supporting in competition with other private sector banking
institutions and able to raise funds from international financial
markets rather than relying on funds from development agencies. The
main target group, despite claims to reach the poorest, is the
„bankable poor': small entrepreneurs and farmers. This emphasis on
financial sustainability is seen as necessary to create institutions
which reach significant numbers of poor people in the context of
declining aid budgets and opposition to welfare and redistribution in
macroeconomic policy.
These paradigms do not correspond systematically to any one
organizational model of micro-finance. Micro-finance providers with
the same organizational form e.g. village bank, Grameen model or
cooperative model may have very different gender policies and/or
emphases and strategies for poverty alleviation. The three paradigms
represent different “discourses‟ each with its own relatively

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consistent internal logic in relating aims to policies, based on different
underlying understandings of development. They are not only
different, but often seen as, incompatible discourses‟ in uneasy
tension and with continually contested degrees of dominance. In
many programmes and donor agencies there is considerable
disagreement, lack of communication and/or personal animosity and
promoted by different stakeholders within organizations between staff
involved in micro-finance (generally firm followers of financial self-
sustainability), staff concerned with human development (generally
with more sympathy for the poverty alleviation paradigm and
emphasizing participation and integrated development) gender lobbies
(generally incorporating at least some elements of the feminist
empowerment paradigm). What is of concern in current debates is the
way in which the use of apparently similar terminology of
empowerment, participation and sustainability conceals radical
differences in policy priorities. Although women’s empowerment
may be a stated aim in the rhetoric of official gender policy and
program promotion, in practice it becomes subsumed in and
marginalized by concerns of financial sustainability and/or poverty
alleviation.

• Micro Credit and Women's Empowerment:

Before 1990's, credit schemes for rural women were almost
negligible. The concept of women's credit was born on the
insistence by women oriented studies that highlighted the
discrimination and struggle of women in having access to credit.

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 However, there is a perceptible gap in financing genuine credit
needs of the poor especially women in the rural sector.
There are certain misconceptions about the poor people that
they need loan at subsidized rates of interest on soft terms, they
lack education, skills, capacity to save, credit-worthiness and
therefore are not bankable. Nevertheless, the experiences of
several SHGs (self-help groups) reveal that rural poor are
actually efficient managers of credit and finance. Availability
of timely and adequate credit is essential for them to undertake
any economic activity rather than credit subsidy. The
Government measures have attempted to help the poor by
implementing different poverty alleviation programmes but
with little success. Since most of them are target-based
involving lengthy procedures for loan disbursements, high
transaction costs, and lack of supervision and monitoring.
Banks often suffer from poor repayment leading to a high level of
nonperforming assets NPAs (non-performing assets).

Since the credit requirements of the rural poor cannot be adopted on

project lending approach as it is in the case of organized sector, there
emerged the need for an informal credit supply through SHGS. The
rural poor with the assistance from NGOs have demonstrated their
potential for self-help to secure economic and financial strength.
Various case studies show that there is a positive correlation between
credit availability and women's empowerment.
Microfinance refers to the provision of financial services to low-
income clients, including consumers and the self-employed.
Microfinance programmes are currently being promoted as a key
strategy for simultaneously addressing both poverty alleviation and
women's empowerment. Where financial service provision leads to
the setting up or expansion of microenterprises there are a range of
potential impacts including:

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 • Increasing women's income levels and control over income
leading to greater levels of economic independence
• Access to networks and markets giving wider experience of the
world outside the home, access to information and possibilities
for development of other social and political roles.

• Enhancing perceptions of women's contribution to household

income and family welfare, increasing women's participation in
household decisions about expenditure and other issues and
leading to greater expenditure on women's welfare.

The term micro finance is of recent origin and is commonly used in

addressing issues related to poverty alleviation, financial support to
micro entrepreneurs, gender development etc. There is, however, no
statutory definition of micro finance. The taskforce on supportive
policy and Regulatory Framework for

Microfinance has defined microfinance as “Provision of thrift, credit

and other financial services and products of very small amounts to the
poor in rural, semi-urban or urban areas for enabling them to raise their
income levels and improve living standards”. The term “Micro”
literally means “small”. But the task force has not defined any amount.
However as per Micro Credit Special Cell of the Reserve Bank Of
India , the borrowable amounts up to the limit of Rs.25000/- could be
considered as micro credit products and this amount could be gradually
increased up to Rs.40000/- over a period of time which roughly equals
to $500 – a standard for South Asia as per international perceptions.

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The term micro finance sometimes is used interchangeably with the
term micro credit. However while micro credit refers to purveyance of
loans in small quantities, the term microfinance has a broader meaning
covering in its ambit other financial services like saving, insurance etc.
as well. The mantra “Microfinance” is banking through groups. The
essential features of the approach are to provide financial services
through the groups of individuals, formed either in joint liability or co-
obligation mode.

The other dimensions of the microfinance approach are:-

• Savings/Thrift precedes credit

• Credit is linked with savings/thrift
• Absence of subsidies
• Group plays an important role in credit appraisal, monitoring and
recovery.

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 • EMPOWERMENT FOCUS ON POOR WOMEN:
Women have been the vulnerable section of society and
constitute a sizeable segment of the poverty struck population.
Women face gender specific barriers to access education health,
employment etc. Micro finance deals with women below the
poverty line. Micro loans are available solely and entirely to this
target group of women. There are several reason for this:
Among the poor , the poor women are most disadvantaged –they
are characterized by lack of education and access of resources,
both of which is required to help them work their way out of
poverty and for upward economic and social mobility. The
problem is more acute for women in countries like India, despite
the fact that women’s labour makes a critical contribution to the
economy. This is due to the low social status and lack of access
to key resources. Evidence shows that groups of women are
better customers than men, the better managers of resources. If
loans are routed through women benefits of loans are spread
wider among the household. Since women’s empowerment is
the key to socio economic development of the community;
bringing women into the mainstream of national development
has been a major concern of government. The ministry of rural
development has special components for women in its
programmes.

Funds are earmarked as “Women’s component” to ensure flow of

adequate resources for the same.

Besides SwarnagayantiGrameenSwarazgarYojona (SGSY), Ministry

of Rural Development is implementing other scheme having women’s
component .They are the Indira Awas Yojona (IAJ), National Social
Assistance Programme (NSAP), Restructured Rural Sanitation
Programme, Accelerated Rural Water Supply programme (ARWSP)
the (erstwhile) Integrated Rural Development Programme (IRDP), the

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(erstwhile) Development of Women and Children in Rural Areas
(DWCRA) and the JowaharRozgarYojana (JRY).

• MICRO FINANCE INSTRUMENT FOR WOMEN’S

EMPOWERMENT:
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) – Bank Linkage
Programme, aimed at providing a cost effective mechanism for
providing financial services to the “unreached poor”.
Based on the philosophy of peer pressure and group savings as
collateral substitute , the SHG programme has been successful
in not only in meeting peculiar needs of the rural poor, but also
in strengthening collective self-help capacities of the poor at the
local level, leading to their empowerment. Micro Finance for the
poor and women has received extensive recognition as a
strategy for poverty reduction and for economic empowerment.
Increasingly in the last five years , there is questioning of
whether micro credit is most effective approach to economic
empowerment of poorest and, among them, women in
particular. Development practitioners in India and developing
countries often argue that the exaggerated focus on micro
finance as a solution for the poor has led to neglect by the state
and public institutions in addressing employment and livelihood
needs of the poor. Credit for empowerment is about organizing
people, particularly around credit and building capacities to
manage money. The focus is on getting the poor to mobilize
their own funds, building their capacities and empowering them
to leverage external credit. Perception women is that learning to
manage money and rotate funds builds women’s capacities and
confidence to intervene in local governance beyond the limited
goals of ensuring access to credit. Further, it combines the goals
of financial sustainability with that of creating community

75
 owned institutions. Before 1990‟s, credit schemes for rural
women were almost negligible. The concept of women’s credit
was born on the insistence by women oriented studies that
highlighted the discrimination and struggle of women in having
the access of credit. However, there is a perceptible gap in
financing genuine credit needs of the poor especially women in
the rural sector. There are certain misconception about the poor
people that they need loan at subsidized rate of interest on soft
terms, they lack education, skill, capacity to save, credit
worthiness and therefore are not bankable. Nevertheless, the
experience of several SHGs reveals that rural poor are actually
efficient managers of credit and finance. Availability of timely
and adequate credit is essential for them to undertake any
economic activity rather than credit subsidy. The Government
measures have attempted to help the poor by implementing
different poverty alleviation programmes but with little success.
Since most of them are target based involving lengthy
procedures for loan disbursement, high transaction costs, and
lack of supervision and monitoring. Since the credit
requirements of the rural poor cannot be adopted on project
lending app roach as it is in the case of organized sector, there
emerged the need for an informal credit supply through SHGs.
The rural poor with the assistance from NGOs have
demonstrated their potential for self-help to secure economic
and financial strength. Various case studies show that there is a
positive correlation between credit availability and women’s
empowerment

A real life Examples:-

Lakshmi, a 22-year-old school dropout, lived in a remote village of
Tamil Nadu. Instead of getting married and starting a family like any
other village girl of her age in India, she wanted to set up on her own
business. Lakshmi started an Internet kiosk in her village, offering

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services like e-mail, Internet chat and tips on health and education.
The kiosk was partially financed by ICICI Bank and was set up in
association with n-Logue Communications.
Latha, a 29-year-old married woman with three children borrowed
Rs.18000 to set up a small provision store in Kothaipalli, a small
village, in the north of Andhra Pradesh. Within a year, she started
earning Rs.3500 a month from the store. With this money, she was
able to provide her children a good education at a local private school.
She was a part of a self -help group in Andhra Pradesh which received
financial assistance from ICICI Bank. These are reallife examples to
illustrate how the micro-lending initiatives of ICICI Bank affected the
lives of poor women in India.

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 ➢ Microfinance and social intervention:
There are currently a few social interventions that have been combined with
micro financing to increase awareness of HIV/AIDS. Such interventions like
the "Intervention with Microfinance for AIDS and Gender Equity" (IMAGE)
which incorporates micro financing with "The Sisters-for-Life" program a
participatory program that educates on different gender roles, gender-based
violence, and HIV/AIDS infections to strengthen the communication skills and
leadership of women. "The Sisters-for-Life" program has two phases; phase one
consists of ten one-hour training programs with a facilitator, and phase two
consists of identifying a leader amongst the group, training them further, and
allowing them to implement an action plan to their respective centres.
Microfinance has also been combined with business education and with other
packages of health interventions. A project undertaken in Peru by Innovation
for poverty action found that those borrowers randomly selected to receive
financial training as part of their borrowing group meetings had higher profits,
although there was not a reduction in "the proportion who reported having
problems in their business". Pro Mujer, a non-governmental organisation
(NGO) with operations in five Latin American countries, combines
microfinance and healthcare. This approach shows, that microfinance can not
only help businesses to prosper; it can also foster human development and
social security. Pro Mujer uses a "one-stop shop" approach, which means in
one building, the clients find financial services, business training,
empowerment advice and healthcare services combined.
According to technology analyst David Garrity, Microfinance and Mobile
Financial Services (MFS) have provided marginal populations with access to
basic financial services, including savings programs and insurance policies.

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➢ Examples of Micro-finance:
The microfinance project of "saving up" is exemplified in the slums of the
south-eastern city of Vijayawada, India. This microfinance project functions as
an unofficial banking system where Jyothi, a "deposit collector", collects money
from slum dwellers, mostly women, in order for them to accumulate savings.
Jyothi does her rounds throughout the city, collecting Rs5 a day from people in
the slums for 220 days, however not always 220 days in a row since these
women do not always have the funds available to put them into savings. They
ultimately end up with Rs1000 at the end of the process. However, there are
some issues with this microfinance saving program. One of the issues is that
while saving, clients are actually losing part of their savings. Jyothi takes
interest from each client—about 20 out of every 220 payments, or Rs100 out of
1,100 or 8%. When these slum dwellers find someone they trust, they are
willing to pay up to 30% to someone to safely collect and keep their savings.
There is also the risk of entrusting their savings to unlicensed, informal,
peripatetic collectors. However, the slum dwellers are willing to accept this risk
because they are unable to save at home, and unable to use the remote and
unfriendly banks in their country. This microfinance project also has many
benefits, such as empowering women and giving parents the ability to save
money for their children's education. This specific microfinance project is an
example of the benefits and limitations of the "saving up" project.
The microfinance project of "saving through" is shown in Nairobi, Kenya which
includes a Rotating Savings and Credit Associations or ROSCAs initiative. This
is a small scale example, however Rutherford (2009) describes a woman he met
in Nairobi and studied her ROSCA. Everyday 15 women would save 100
shillings so there would be a lump sum of 1,500 shillings and every day 1 of the
15 women would receive that lump sum. This would continue for 15 days and
another woman within this group would receive the lump sum. At the end of the
15 days a new cycle would start. This ROSCA initiative is different from the
"Saving up" example above because there are no interest rates affiliated with the
ROSCA, additionally everyone receives back what they put forth. This initiative
requires trust and social capital networks in order to work, so often these
ROSCAs include people who know each other and have reciprocity. The
ROSCA allows for marginalized groups to receive a lump sum at one time in
order to pay or save for specific needs they have.

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 Suggestions
• There is considerable scope for development of microfinance in India since
there is enormous unmet demand for financial services in this sector.

• There is an urgent need to streamline the procedure for applying, seeking and
releasing of microfinance. The procedural difficulties are one of the major
problems, which have denied the needy groups, the financial benefits of the
banks.

• In order to ensure proper utilisation of the credit, there is an urgent need to

introduce availability of consumption credit from the formal channel.

• The need is to sensitize bank staff towards the needs, constraints and
inhibitions of the microfinance client’s.

• There is a need to evolve new products by the banks commensurate with the
requirements of rural, semi-urban and urban people.

• The customer contract programmes especially for the people living before
poverty line be organised to disseminate the information of various schemes
and financial needs of these groups.

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 QUESTIONNAIRE FOR A STUDY ON MICRO FINANCE
IN INDIA

1. Age?
10-20 yrs.
21-30 yrs.
31-40 yrs.
40 and above

2. Are you aware about micro-finance?

Yes
No

3. If yes, does, microfinance provides better services than traditional bank

services?
Yes
No

4. Mostly for what purpose you take loan through microfinance?

Small business
Service activity
Personal activity
Household
Other: _________

5. How much loan you have taken?

Less than 10,000
11,000-50,000
51,000-1, 00,000
More than 1, 00,000

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6. Do borrowers get effective benefits of microfinance loan?
Yes
No
Maybe

7. Do you feel that you become more self-dependant after taking the loan
through microfinance?
Yes
No
Maybe

8. Do you have easy access to the microfinance services?

Yes
No
Maybe

9. Have you ever heard about SHG?

Yes
No
10. Does the SHGs have provided any training for effective use of loan?
Yes
No
Maybe
11. What are the income levels of microfinance users?
Rs.1, 000-Rs.3, 000
Rs.3, 001-Rs.5, 000
Rs.5, 001-Rs.8, 000
Rs.8, 000 and above
12. Do borrowers can fulfil their requirements with the loan amount?
Yes
No
Maybe
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13. Are borrowers satisfied with microfinance activities?
Yes
No
Maybe

SURVEY

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 CONCLUSION
Microfinance activities can give them a means to climb out of poverty.
Microfinance could be a solution to help them to extend their horizon and
offer them social recognition and empowerment. Numerous traditional and
informal system of credit that was already in existence before micro finance
came into vogue. Viability of micro finance needs to be understood from a
dimension that is far broader- in looking at its long-term aspects too.

A conclusion that emerges from this account is that micro finance can
contribute to solving the problems of inadequate housing and urban services
as an integral part of poverty alleviation programmes. The challenge lies in
finding the level of flexibility in the credit instrument that could make it match
the multiple credit requirements of the low income borrower without
imposing unbearably high cost of monitoring its end use upon the lenders. A
promising solution is to provide multipurpose lone or composite credit for
income generation, housing improvement and consumption support.
Consumption loan is found to be especially important during the gestation
period between commencing a new economic activity and deriving positive
income.

India is the country where a collaborative model between banks, NGOs, MFIs
and Women’s organizations is furthest advanced. It therefore serves as a
good starting point to look at what we know so far about „Best Practice‟ in
relation to micro-finance for women’s empowerment and how different
institutions can work together.

It is clear that gender strategies in micro finance need to look beyond just
increasing women’s access to savings and credit and organizing self-help groups
to look strategically at how programmes can actively promote gender equality
and women’s empowerment.

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 BIBLIOGRAPHY

WEBSITES:
• www.google.com
• www.wikipedia.com
• www.investopedia.com
• www.slideshare.net

REFERANCE BOOKS:
• Financial rural development

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