Micro Financing

MICRO FINANCING
(FOR PRIVATE CIRCULATION ONLY)

2016
PROGRAMME COORDINATOR
Prof. Prashant Ubarhande
COURSE DESIGN AND REVIEW COMMITTEE

Prof. Dalip Mehra Prof. Sudhir Gijre
Prof. Arun Vartak Dr. Swati Oza
Prof. Avinash Nene Dr. N.M. Vechlekar
Dr. Ravi Chitnis Prof. Sudeep Limaye
COURSE WRITERS
Mr. Dalip Mehra Mr. Debajyoti Ghosh Roy
Ms. Sukalpa Chakrabarti Mr. Krishna Kanta Roy
Ms. Rajul Agarwal Mr. Avinash Tripathi
EDITOR
Ms. Kumkum Tripathi
Published by Symbiosis Centre for Distance Learning (SCDL), Pune

July, 2012 (Revision 01, 2014)
Copyright © 2016 Symbiosis Open Education Society

All rights reserved. No part of this book may be reproduced, transmitted or utilised in any form or by any
means, electronic or mechanical, including photocopying, recording or by any information storage or retrieval
system without written permission from the publisher.
Acknowledgement
Every attempt has been made to trace the copyright holders of materials reproduced in this book. Should any
infringement have occurred, SCDL apologises for the same and will be pleased to make necessary corrections
in future editions of this book.
PREFACE
This course has been developed to orient the distance learners towards micro financing. Micro
financing is not a new concept; small microcredit operations have existed since the mid-1700s.
Microfinance is the provision of financial services such as loans, savings, insurance and training to
people living in poverty. It is one of the great success stories in the developing world in the last 30 years
and is widely recognised as a just and sustainable solution in alleviating global poverty. Microfinance
is based on the concept that low-income individuals are capable of lifting themselves out of poverty
if given access to financial services. Over the years, the microfinance sector has expanded its financial
service offerings to better meet client needs. Although much progress has been made, the problem
has not been solved yet and the overwhelming majority of people, who earn less than Rs 50/- a day,
especially in the rural areas, continues to have no practical access to formal sector finance.
Success stories in neighbouring countries, for instance Grameen Bank in Bangladesh, Bank Rakiat
in Indonesia, Commercial & Industrial Bank in Philippines, etc., gave further boost to the concept in
India in the 1980s. India thus adopted the similar model of extending credit to the poorest sector and
took steps to promote micro financing in the country.
This course will help distance learners to measure and analyse the role of micro financing in our
country toward achieving overall objectives of the economy.
Mr. Dalip Mehra

Mr. Debajyoti Ghosh Roy
Ms. Sukalpa Chakrabarti
Mr. Krishna Kanta Roy
Ms. Rajul Agarwal
Mr. Avinash Tripathi
iii
ABOUT THE AUTHORS
Mr. Dalip Mehra is Ex-Deputy General Manager, Bank of Maharashtra. He has academic qualifications
of M.Sc. LL.B CAIIB, DBM. He has written over 37 books on various subjects such as Banking, Risk
Management, Finance, Economics, Law and Management. Two of his books have been recognized
and awarded by Ministry of Finance and Ministry of Agriculture.
Mr. Debajyoti Ghosh Roy is a seasoned education professional, with cross-cultural exposure in
teaching, training, facilitation & consultancy in banking industry (Bank of India) and management
institutes for over 19 years. He is Certified Associate of “The Charted Institute of Bankers” U.K. and
Certified Associate of IIBF, Mumbai. He possesses Diploma in International Banking, Diploma in
Bank Management, M.Sc. and B.Sc.
Ms. Sukalpa Chakrabarti is PhD, UGC -NET, PGMP and M.A. She is Assistant Professor in
Economics at the Symbiosis School of Economics. Her current research interest lies in the broad
area of international political economy and international relations and focuses on debates related to
international diplomacy. Another vital area of her interest is public policy and governance. She has
been teaching across specialisations (UG & PG levels) for over 9 years.
Mr. Krishna Kanta Roy is Assistant Professor in Economics at the Symbiosis School of Economics.
He is qualified as UGC-NET, SET, M.Phil in Economics and Masters in Economics. He has 5 years
of academic experience.
Ms. Rajul Agarwal has completed her CA from The Institute of Chartered Accountants of India. She
has also done her Diploma in Information System Audit and holds AMFI Certification. She has over
10 years of domain experience in Indian Accounting and Taxation.
Mr. Avinash Tripathi is Assistant Professor in SCDL; he has content edited this SLM. He has varied
experience and academic qualifications. He possesses UGC-NET, M.B.A., EPM-IIT(B), M.A.(English),
PGD in Banking & Finance, PGD in Financial Advising and PGD in Higher education. He has more than
12 years of experience in industries and academics. His areas of research interest are Corporate Finance,
e-Financial Services, Market Microstructure, Strategic Management and Corporate Governance.
iv
CONTENTS
Unit
TITLE Page No.
No.
1. Introduction to Microfinance 1 - 18
1.1 Introduction
1.2 Microfinance: Features and Need
1.2.1 Need for Microfinance
1.3 Key Players in the Microfinance System
1.4 The Microfinance Business Model
1.5 Determinants of Interest Rates in Microfinance
1.6 Microfinance Coverage in India
1.6.1 Facts about Microfinance in India
1.7 Product Offering
1.8 Targets of Microfinance
1.9 Challenges Ahead
Summary
Key Words
Self-Assessment Questions
Answers to Check your Progress
Suggested Reading
2. Models of Microfinance 19 - 34
2.1 Introduction
2.2 Microfinance Lending Models
2.3 Microfinance Delivery Models in India
Case Study
Summary
Key Words
Suggested Reading
v
Unit
TITLE Page No.
No.
3. Self-Help Groups 35 - 52
3.1 Introduction
3.2 Emergence of Self-Help Groups
3.3 Understanding Self-Help Groups
3.4 The Self-Help Group Model
3.5 Impact of Self-Help Groups
3.6 Financial Aspects and Sustainability of Self-Help Groups
3.7 SHG–Bank Linkage Programme: An Instrument of Financial
Inclusion
3.7.1 Study Findings on the SHG–Bank Linkage Programme
3.8 Challenges for Self-Help Groups
Summary
Key Words
Suggested Reading
4. Commercial Microfinance 53 - 68
4.1 Introduction
4.2 Characteristics of Commercial Microfinance
4.3 Obstacles to Commercial Microfinance
4.3.1 Constraints to expanding Commercial Microfinance
4.4 Successful Approaches to Commercial Microfinance
4.5 Role of Government in promoting Commercial Microfinance
4.6 Financial Inclusion by Extension of Banking Services
4.7 Lessons from the Commercial Microfinance Model in India
Summary
Key Words
Suggested Reading
vi
Unit
TITLE Page No.
No.
5. Cooperative Microfinance 69 - 80
5.1 Introduction
5.2 History of Cooperative Microfinance
5.3 Structure and Significance
5.4 Types of Cooperative Microfinance
5.5 Strategy
5.6 Support Services
5.7 Issues in Cooperative Microfinance
5.8 Reasons for Slow Progress of Cooperatives
5.9 Recommendations
5.10 Future Prospects
Summary
Key Words
Suggested Reading
6. Client Impact Studies 81 - 108
6.1 Introduction
6.2 Microfinance Business Models
6.3 Client Impact Studies Assumption I
6.4 Client Impact Studies Assumption II
6.5 Client Impact Studies Assumption III
6.6 Client Impact Studies Assumption IV
6.7 Client Impact Studies Assumption V
6.8 Client Impact Studies Assumption VI
6.9 Client Impact Studies Assumption VII
6.10 Client Impact Studies Assumption VIII
6.11 Assessment of Client Impact Studies
6.12 Effectiveness of SHG Bank Linkage in targeting the poor
Summary
Key Words
Suggested Reading
vii
Unit
TITLE Page No.
No.
7. Housing Microfinance 109 - 130
7.1 Introduction
7.2 Housing Microfinance: Meaning
7.3 Housing Microfinance vis-à-vis Micro-Enterprise Loans
7.4 Housing Microfinance vis-à-vis Formal Mortgage Loans
7.5 Advent of Housing Microfinance
7.6 Importance of Housing Microfinance
7.7 Sources of Housing Microfinance
7.8 Underwriting and Funding of Housing Microfinance
7.9 Housing Microfinance Products
7.10 Development of Housing Microfinance Products
7.11 Challenges before Housing Microfinance Institutions
7.12 Constraints faced by Housing Microfinance Institutions
7.13 Commercial Banks and Housing Microfinance Activities
Summary
Key Words
Suggested Reading
8. Development of Microfinance Products 131 - 144

8.1 Introduction
8.2 Product: Meaning
8.3 When should an MFI explore New Product Development
8.4 Process of New Product Development
8.4.1 Phase I: Identification and Preparation
8.4.2 Phase II: Design and Development
8.4.3 Phase III: The Pilot Test
8.4.4 Phase IV: Product Launch and Commercialisation
8.5 Top 10 Lessons for Successful Product Development
Summary
Key Words
Suggested Reading
9. Promoting Women’s Enterprises 145 - 156
9.1 Introduction
9.2 Growth of Women’s Enterprises in India
9.3 Types of Women Entrepreneurs
9.4 Importance of Women Entrepreneurs
9.5 Role of Women Entrepreneurs
9.6 Problems of Women Entrepreneurs
9.7 Promoting Women’s Enterprises
9.7.1 Schemes for Development and Promotion of Women
Entrepreneurs
Summary
Key Words
Suggested Reading
viii
Unit
TITLE Page No.
No.
10. Equitable and Sustainable Development 157 - 168
10.1 Introduction
10.2 Challenges in Equitable Development
10.3 Role of Microfinance in Equitable Development
10.4 Microfinance as a Sustainable Tool
10.5 Sustainability for MFIs
10.6 Dimensions of Sustainability
Summary
Key Words
Suggested Reading
11. Microfinance and Social Entrepreneurship 169 - 180
11.1 Introduction
11.2 Micro and Rural Entrepreneurship and SHGs
11.3 A Historical Perspective of Microfinance
11.4 Strategy for Micro Enterprise Development
11.5 Problems of Rural Microfinance and Entrepreneurs
11.6 Growth of Social Entrepreneurship
Summary
Key Words
Suggested Reading
12. Corporate Values and Micro Financing 181 - 192
12.1 Introduction
12.2 Types of MFIs in India and their Regulatory Framework
12.3 Corporate Values and Micro Financing
12.4 Regulation and Supervision of MFIs in India
12.5 Good Governance and MFIs in India
12.6 Some Key Factors of Good Governance of MFIs in India
12.7 Impact of Good Governance
12.8 Challenges of Good Governance
Summary
Key Words
Suggested Reading
ix
Unit
TITLE Page No.
No.
13. Strategic Issues in Microfinance: Gender, Activism, Scale and 193 - 210
Management
13.1 Introduction
13.2 Gender and Microfinance
13.2.1 Women and Microfinance
13.3 Gender Sensitivity
13.4 Organisational Strategies for Gender Mainstreaming
13.5 Activism and Microfinance
13.6 Scale and Management in Microfinance
Summary
Key Words
Suggested Reading
x
Introduction to Microfinance
UNIT
1
Structure:
1.1 Introduction
1.2 Microfinance: Features and Need
1.2.1 Need for Microfinance
1.3 Key Players in the Microfinance System
1.4 The Microfinance Business Model
1.5 Determinants of Interest Rates in Microfinance
1.6 Microfinance Coverage in India
1.6.1 Facts about Microfinance in India
1.7 Product Offering
1.8 Targets of Microfinance
1.9 Challenges Ahead
Summary
Key Words
Suggested Reading
Introduction to Microfinance 1
Notes
Objectives
----------------------
After going through this unit, you will be able to:
----------------------
●● Appraise the need and importance of microfinance
---------------------- ●● Classify the key enablers of microfinance in India
---------------------- ●● Analyse the microfinance business model and the determinants of
microfinance interest rates
----------------------
●● Describe the various products offered by MFIs and their target
---------------------- customers
---------------------- ●● Identify the challenges faced by the microfinance industry
----------------------
1.1 INTRODUCTION
----------------------
The term microfinance refers to extending the whole range of financial
---------------------- services like savings, credit and micro insurance to micro enterprises and a lot
more to the poorer sections of society whose scale of operation is so small that
---------------------- they are generally excluded from the purview of the existing service providers.
The effectiveness of microfinance is better realised by the deprived sections
----------------------
when their capacities are also enhanced along with access to financial services.
----------------------
Microfinance has become one of the most talked about subject in the past
---------------------- two decades all over the world. In today’s world, microfinance programmes and
institutions have become very important components of all strategies aimed to
---------------------- reduce poverty or promote small enterprise development.
---------------------- Microfinance is defined as a provision of financial services to the global
poor. Typically, it involves supply of financial products and services (mainly
---------------------- credit, but also savings, insurance, remittance and pensions) in token sizes that
---------------------- are much smaller than those prevailing in the mainstream commercial markets.
The returns from microfinance are less volatile and are not majorly impacted by
---------------------- global market trends.
---------------------- The Task Force on Supportive Policy and Regulatory Framework for
Microfinance defines microfinance as: “Provision of thrift, credit and other
---------------------- financial services and products for very small amounts to the poor in rural, semi-
---------------------- urban or urban areas that enables them to raise their income levels and improve
living standards”. Microfinance is a participative model that can address the needs
---------------------- of the poor, especially women members. It envisages the empowerment of the
members by promoting their saving habits and extending bank loans to them.
----------------------
Microfinance came into being around 27 years back with the founding of
---------------------- Grameen Bank in Bangladesh by Professor Mohammed Yunus. It has since then
expanded at a rapid pace across various countries. The main difference between
----------------------
microfinance and the conventional credit disbursal mechanism lies in the concept
---------------------- of joint liability.
2 Micro Financing
1.2 MICROFINANCE: FEATURES AND NEED Notes
Microfinance institutions (MFIs) are guided by the goal of providing better ----------------------
livelihood to the poor. Such institutes are financially sound and profitable and
investors supporting MFIs create a social impact in addition to getting a return ----------------------
on their investment. ----------------------
Microfinance loans serve the low-income population in multiple ways by: ----------------------
• Providing working capital to build businesses. ----------------------
• Infusing credit for smooth cash flows and mitigating irregularity in accessing ----------------------
food, clothing, shelter or education.
----------------------
• Cushioning the economic impact of shocks, such as illness, theft or natural
disasters. ----------------------
----------------------
• Providing an alternative to the loans offered by the local moneylender.
----------------------
The important features of microfinance that make it different from other
forms of financing are: ----------------------
1. It is a tool for empowerment of poor women. Microfinance has helped the ----------------------
women in village to earn livelihood in dignified manner. Their income not
----------------------
only supports their household, but also helps in the overall development of
the village. With their income, they are able to provide good education to ----------------------
their children, nutritious food, better clothes and modern facilities.
----------------------
2. It is essentially for the promotion of self-employment. Microfinance
generates employment in the villages by promoting entrepreneurship and ----------------------
innovation. It has become a major vehicle for promotion of self-employment.
----------------------
3. It is a tool for social change apart from being a financing system. ----------------------
1.2.1 Need for Microfinance ----------------------
The main aim of microfinance is to assist economically excluded communities ----------------------
in achieving greater levels of asset creation and income security at household
and community level. It helps in providing access to financial services and in ----------------------
transfer of financial resources to poor women. They become economically self- ----------------------
reliant and contribute to the well-being of their families and take part is decision-
making. This in turn helps in reducing gender inequality. Microfinance has given ----------------------
an opportunity to the poor women of India to become agents of change. Small
loans can be used by them to start a long chain of economic activity. ----------------------
Microfinance aims to provide credit at reasonable interest rates to those who ----------------------
do not have access to financial services or are not eligible to get credit under the ----------------------
formal system. So, it can be termed as an access to financial services through
an informal formal route, which is more flexible, sensitive and responsive and ----------------------
Notes takes care of the low scale of operations, high turnover of clients and frequency
of transactions.
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
---------------------- Fig. 1.1 Need for Microfinance

----------------------
Activity 1
----------------------
---------------------- Visit http://www.ssmrae.com/admin/images/002bb5cc80ff9b289253ce9eee

82a73d.pdf and read the research paper titled An Overview of Microfinance
---------------------- in India.
_
----------------------
---------------------- 1.3 KEY PLAYERS IN THE MICROFINANCE SYSTEM

---------------------- We are now aware of what microfinance is, and the important role it plays
in uplifting the poor women of the country. Now, we will look at the key players
---------------------- in the functioning of microfinance. The five most important parties involved in
---------------------- microfinance are:
---------------------- 1. National Bank for Agricultural and Rural Development (NABARD)
---------------------- 2. Reserve Bank of India
---------------------- 3. Self-help groups
---------------------- 4. Microfinance institutions

---------------------- 5. Non-governmental organisations
---------------------- We will discuss in detail and analyse the role played by each of them in the
---------------------- following paragraphs.
4 Micro Financing
1. National Bank for Agricultural and Rural Development (NABARD): Notes
NABARD is the apex institution accredited with all matters concerning
----------------------
policy, planning and operations in the field of credit for agriculture and
other economic activities in rural areas in India. NABARD was established ----------------------
in 1982 as a development bank, for “providing and regulating credit and
other facilities for the promotion and development of agriculture, small scale ----------------------
industries, cottage and village industries, handicrafts and other rural crafts
----------------------
and other allied economic activities in rural areas with a view to promoting
integrated rural development and securing prosperity of rural areas and for ----------------------
matters connected therewith or incidental thereto”. The corporate mission
of NABARD is to make microfinance available to the very poor sections ----------------------
of society through self-help groups (SHGs).
----------------------
NABARD has been extending refinance to banks for lending to SHGs since
----------------------
the SHG-Bank Linkage Programme was launched in 1992 as a modest pilot
test for linking around 500 SHGs with branches of half a dozen banks across ----------------------
the country with the help of a few NGOs. Micro Finance Development and
Equity Fund was created by NABARD with an initial corpus of Rs 100 crore ----------------------
to facilitate and support the orderly growth of the microfinance sector in the
----------------------
country. NABARD also supports various training programmes and capacity
building efforts of clients and stakeholders of the microfinance sector. ----------------------
A high-powered Task Force on Supportive Policy and Regulatory Framework ----------------------

for Microfinance (henceforth referred to as the Task Force) was set up by
NABARD at the instance of RBI. The objectives of the Task Force among ----------------------
others were to come up with suggestions for a regulatory framework that ----------------------
brings the operations of the microfinance institutions into the mainstream,
to access the possible role of self-regulatory organizations and to explore ----------------------
the need for a separate legal framework for microfinance.
----------------------
2. Reserve Bank of India: RBI’s credit and monetary policy attaches
----------------------
importance to the work of NABARD and public sector banks in the area
of microcredit. The banks are urged to provide support to microcredit by ----------------------
associating with the SHGs either directly or through non-governmental
organisations. The microcredit extended by banks is reckoned as part of ----------------------
their priority sector lending, and they are free to device appropriation loan
----------------------
and saving products in this regard.
----------------------
In 2011, RBI constituted a working group on SHGs. . RBI advised the banks
that SHGs, which are engaged in promoting savings among their members, ----------------------
whether registered or unregistered, would be eligible to open savings bank
accounts with banks irrespective of credit facilities they avail from banks. ----------------------
3. Self-help groups: The concept of SHG is the brainchild of Muhammad ----------------------

Yunus, who is the founder of Grameen Bank of Bangladesh. The self- ----------------------
help groups were formed for empowering the poor women of rural
Bangladesh. The process of group formation is initiated by existence of one ----------------------
Notes or more problem areas. Group of people facing similar problem develop
consciousness for it and thereby results in formation of self help group to
---------------------- cater to the problem. Following are the important characteristics of self-help
groups:
----------------------
• The ideal size of an SHG is 10 to 20 members. In a bigger group, members
----------------------
cannot actively participate.
---------------------- • There is no need for the group to be registered.
---------------------- • One member from one family can join the group. In this way, more families
can participate.
----------------------
• The group consists of either only men or only women. Mixed groups are
---------------------- generally not preferred.
---------------------- • Generally, women’s groups are found to perform better.
• Members of this group have the same social and financial background. This
----------------------
helps in better interaction among the members.
---------------------- • Full attendance is compulsory for larger participation.
---------------------- Main functions performed by these self-help groups are as follows:
---------------------- • Savings as a regular and continuous habit with all the members even though
the amount may be small. “Savings first – Credit later” should be the motto
---------------------- of every group member.
---------------------- • Using the savings amount as loans to members. The purpose, amount, rate
of interest, etc. to be decided by the group itself.
----------------------
• Enabling SHG members to get loans from banks and repaying the same.
---------------------- • Discussing and trying to find out solutions to the problem faced by the
members of the group in every meeting.
----------------------
4. Microfinance Institutions (MFIs): Microfinance institutions act as an
----------------------
important conduit for extending financial services to the microfinance sector
---------------------- by raising resources from banks and other institutions. MFIs are allowed
to obtain bulk loans from banks and financial institutions and provide
---------------------- microcredit to SHG members.
---------------------- MFIs can be categorised as:
---------------------- • Non-Government Organisation (NGO)-MFIs: These institutions are
---------------------- registered under the Societies Registration Act, 1860 or The Indian Trusts
Act, 1880. They are not-for-profit entities with a wider development agenda
---------------------- and have been among the first institutions to extend microcredit to SHGs
even before the SHG-Bank linkage programme was conceived.
----------------------
• Cooperative MFIs: These institutions are registered under the state
----------------------
Cooperative Societies Act or Mutually Aided Societies Act or Multi-state
---------------------- Cooperative Societies Act.
6 Micro Financing
• Non-Banking Financial Company (NBFC)-MFIs: Incorporated under Notes
Section 25 of the Companies Act, 1956, NBFCs are working not for profit
but on sound business principles by complementing the efforts of the banking ----------------------
system to extend the outreach of microfinance and help in financial inclusion.
Their motto is to do good business while extending microfinance to the poor. ----------------------
5. Non-governmental Organisations: Non-governmental organisations are ----------------------

involved in promoting SHGs and linking them with the Formal Financial ----------------------
Agencies (FFAs). NGOs perform the following functions:
----------------------
• Organising the poor people into groups.
----------------------
• Training and helping them in organisational, managerial and financial
matters. ----------------------
• Helping them access more credit and linkages with formal financial agencies. ----------------------
----------------------
• Channelising the group effort for various developmental activities.
----------------------
• Helping them in availing opportunities, widening the options available for
economic development. ----------------------
• Helping them in sustaining the group effort independently even after ----------------------
withdrawal of the NGO.
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
Fig. 1.2 Microfinance Industry Structure ----------------------
----------------------
----------------------
Notes
Check your Progress 1
----------------------
---------------------- Fill in the blanks.
---------------------- 1. The corporate mission of NABARD is to make microfinance available

to the very poor sections of society through _______________.
----------------------
2. The main aim of microfinance is to provide credit at reasonable interest
---------------------- rates to those who do not have access to financial services or are not
eligible to get credit under the __________ system.
----------------------
---------------------- 3. Microfinance came into being around 27 years back with the founding
of the ____________ Bank in Bangladesh by Professor Mohammed
---------------------- Yunus.
---------------------- 4. Microfinance is a ______________ model that can address the needs

of the poor, especially women members.
----------------------
5. The term microfinance refers to extending the whole range of financial
----------------------
services from savings to credit to micro __________ to micro
---------------------- ___________.
----------------------
---------------------- 1.4 THE MICROFINANCE BUSINESS MODEL
---------------------- The microfinance business model is designed to address the challenges faced
by the traditional financial services sector in fulfilling the credit requirements of
---------------------- the low-income segment at an affordable and sustainable cost. Most MFIs follow
the Joint Liability Group (JLG) model. A JLG consists of five to ten women
---------------------- who act as co-guarantors for the other members of their group. This strategy
---------------------- provides an impetus for prudent self-selection of reliable and fiscally responsible
co-members. Moreover, the JLG has an inbuilt mechanism that encourages
---------------------- repayment in a timely fashion as issuance of future loans is contingent upon the
prior repayment record of the group.
----------------------
Table 1.1 Metrics of Microfinance Services
----------------------
Metric Amount in India
---------------------- Interest rate charged 25% to 35% p.a.
Interest on debt 12% to 16% (Lower than large MFIs)
---------------------- Operating expenses ratio 6% to 15% depending on the level of efficiency
---------------------- ROA Typically 3% to 5%
Debt/Equity Typically 5 to 8 times
---------------------- ROE 20% to 30%
---------------------- An average initial loan size varies from Rs 5,000 to Rs 6,500 and the
subsequent loan in the range of Rs 10,000 to Rs 12,000 with an interest rate of
---------------------- 25% to 35%. The repayment schedule can be weekly or monthly and the loan
8 Micro Financing
tenure ranges from 6 months to 2 years. Microfinance institutions charge a high Notes
rate of interest from their clients as compared to traditional commercial banks as
the servicing cost of smaller loans is much higher as compared to larger loans. ----------------------
They also provide doorstep service to customers, which further increase their
operating cost. This model generally has an operating expense ratio in the range ----------------------
of 6% to 15% depending upon the efficiency of operations. Their borrowing costs ----------------------
are in the range of 12% to 16% depending upon the track record and size of MFI.
----------------------
This model allows well-run MFIs to achieve a Return on Assets (ROA)
of about 3% to 5% and a Return on Equity (ROE) of as much as 20% to 30%. ----------------------
The portfolio quality of MFIs is much superior to commercial banks, when we
----------------------
compare the total non-performing assets of MFI, which is 180 days past due
of 0.2% to 3% as opposed to 3% to 10% of commercial banks. The important ----------------------
point to note here is that despite nonexistence of security the delinquency rate
is very low. This portfolio quality is driven by the discipline embedded in the ----------------------
JLG model through self-selection of the group members as well as the mutual
----------------------
support informally embedded in the groups in relation to members’ loans.
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
Fig. 1.3 ROA Range-wise Distribution of MFIs
[Source: Microfinance India, State of the Sector Report 2010] ----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
Fig. 1.4 ROE Range-wise Distribution of MFIs ----------------------

[Source: Microfinance India, State of the Sector Report 2010] ----------------------
Notes 1.5 DETERMINANTS OF INTEREST RATES IN
MICROFINANCE
----------------------
The rate of interest on microcredit has always been a topic of debate. Some
---------------------- people think that interest should not be charged on microcredit at all and some are of
---------------------- the view that the MFIs and SHGs are charging a very high rate of interest. Looking
at the segment of society that avails maximum microcredit, let’s identify the key
---------------------- factors that are considered while determining the rate on interest on microcredit.
---------------------- 1. Cost of funds: A large portion of funds available with the MFIs for lending
are sourced from commercial banks. These banks lend at the market interest
---------------------- rates. This financial expense combined with the fees paid on such loans
and deposits taken from public account for almost 23% of the interest rate
---------------------- charged by profitable microfinance institutions.
---------------------- 2. Operating expenses: Personnel and administrative expenses form the
largest component of the interest rate charged by MFIs. This component is
---------------------- as high as approximately 60% of the interest rate charged by sustainable
---------------------- MFIs. The cost of administering large number of small-sized loans is very
high and the door-to-door service provided by MFIs further increases the
---------------------- operating cost. The clients are spread at discrete geographical locations with
poor infrastructure and security. Reaching out to such clients increases the
---------------------- cost for MFIs.
---------------------- 3. Provision for bad debts: Provision for bad debt is often a regulatory
requirement for bank-led MFIs but other types of MFIs realise the importance
---------------------- of creating an emergency fund to provide a cushion against the risk of
---------------------- loan defaults. As a result, portfolio losses account for 6% of interest rates
charged by successful microfinance providers, according to data provided
---------------------- by Microfinance Information Exchange.
---------------------- 4. Tax expenses: Since most MFIs operate as banks they are liable to pay
business tax at a rate higher than that levied for other businesses. The clients
---------------------- are also supposed to pay service tax on their borrowing as an additional fee.
5. Profits: Profit motive is evident and exists in all sorts of businesses, and
----------------------
microfinance is no exception. A reasonable amount of profit is considered
---------------------- while determining the interest rate on microcredit.
6. Credit rating of client: Since most of the clients are poor people and do not
----------------------
have credit rating, the MFIs have to add a risk premium in the interest rate
---------------------- to off-set the risk of default and maintain a risk-adjusted return to investors.
7. Inflation: Inflation has a direct impact on the cash flow and equity levels
----------------------
of the borrowers and has to be factored in interest rates in order to ensure
---------------------- that the real value of funds remain the same.
8. Management competence: By tweaking the business process to improve
----------------------
efficiencies or altering the product design of microloans, managers can lower
---------------------- their operating costs and hence, interest rates.
9. Financial literacy of clients: If clients understand the actual costs they
---------------------- incur, they do a better comparison and negotiate for lower interest rates.
10 Micro Financing
1.6 MICROFINANCE COVERAGE IN INDIA Notes
Approximately 55% of microfinance clients are concentrated in the southern ----------------------
states of Andhra Pradesh, Karnataka, Kerala and Tamil Nadu. There is a very
limited presence of microfinance in North and North East India. Lately, the MFIs ----------------------
have realized that the south market has reached a saturation point and they need
----------------------
to expand their operations in other geographical locations in order to sustain their
growth. ----------------------
----------------------
----------------------
----------------------
----------------------
Fig. 1.5 Region-wise Shares – Client Outreach ----------------------
[Source: Microfinance India, State of the Sector Report, 2010]
----------------------
----------------------
----------------------
----------------------
----------------------
Fig. 1.6 Region-wise Shares – Loan Portfolio ----------------------

[Source: Microfinance India, State of the Sector Report, 2010]
----------------------
1.6.1 Facts about Microfinance in India ----------------------
Here are five facts about the MFI sector in India.
----------------------
• India is the single largest microfinance market in the world, with some
120 million homes with no access to financial services, estimates CRISIL ----------------------
Research. MFIs are mostly concentrated in India’s southern states, serving
about 70 million people. ----------------------
• Outstanding loans total more than $2.6 billion (approximately Rs. 11700 ----------------------
crores) estimates Sa-Dhan, an association of MFIs. Most microfinance loans
in India are in the range of 5,000-20,000 rupees to buy livestock, sewing ----------------------
machines, or set up small shops.
----------------------
• According to CRISIL Research, there are more than 3,000 MFIs and NGO-
MFIs, of which about 400 have active lending programmes. The top 10 MFIs ----------------------
account for nearly three-fourths of loans outstanding.
• The Indian government in 2006 allowed MFIs to act as banking ----------------------
correspondents, lending money and accepting deposits. ----------------------
• The microfinance market has grown at an average annual rate of nearly 80%
over the last few years. ----------------------
Notes 1.7 PRODUCT OFFERING
---------------------- So far, the main focus of microfinance institutions has been to provide credit
to serve a variety of needs as shown in the table below. There has been limited
---------------------- product innovation as the sector’s primary focus was on refining its business
model and gaining scale to become financially sustainable. Till now this single
----------------------
product model has been able to bring remarkable growth to the sector. The growth
---------------------- can be sustained through product innovation and diversified service offerings,
which will help them to attract and retain greater number of customers with a
---------------------- variety of needs.
---------------------- Table 1.2 Products offered by MFIs
---------------------- Product Purpose
Existing Microenterprise/Small Working capital/Business start-up
---------------------- products business loan
Agricultural loan Crop/Farm related
----------------------
Livestock loan Dairy/Poultry
---------------------- General Consumption
New/Niche Education loan Academic/Vocational
---------------------- products Home loan Home improvement/New home
---------------------- The current clientele of the sector have varying needs for basic products and
services and the microfinance institutions have been identifying these needs and
----------------------
taking concrete steps towards expanding their product base. Let us now discuss
---------------------- the range of services, apart from credit, being offered by MFIs.
---------------------- 1. Savings: The microfinance industry focusses on the most important need
to provide access to a savings mechanism in line with commercial banks,
---------------------- which in turn enhances the economic security of the poor. As per RBI
regulations, NBFC-MFIs cannot currently accept interest-bearing deposits
---------------------- unless they provide the service through a Section 25 business correspondent
---------------------- conduit. The main drawback of this system is that it prohibits the conduit
from charging any fee to execute this function and limits its reach within a
---------------------- limited radius of the bank branch. MFIs are lobbying the RBI to relax these
regulations to allow NBFCs to operate as business correspondents, charge
---------------------- an extra fee for the deposit-taking service and delimit the geographical
---------------------- reach of their operations. These changes would not only make deposits a
viable commercial product, but also allow MFIs to offer it to a broader set
---------------------- of clients.
---------------------- 2. Insurance: MFIs have realized the importance of insurance in serving as
a security, which can reduce the negative impact on an emergency. If the
---------------------- single earning member gets affected by an emergency situation it can have
an impact on the entire household, if not covered by insurance. Many MFIs
----------------------
have now started providing micro insurance to its clients. The most common
---------------------- insurance offerings are health insurance and accidental death insurance.
Many institutions also link the credit product with insurance product wherein
---------------------- the availability of credit is contingent on the client availing insurance. The
12 Micro Financing
main rationale behind packaging the two products is, firstly it makes the Notes
client aware of the benefits of insurance and secondly, it insures the loan
against crisis. ----------------------
3. Remittance: There has been a sharp rise in migration of domestic labour ----------------------
in India and the migrants need a fast, low-cost, convenient, safe and widely
accessible money transfer service. MFIs provide remittance services by ----------------------
establishing their presence in migrant destination to channel remittances
----------------------
back to the community in the migrants’ area of origin or by establishing a
tie-up with another MFI, bank or money transfer company in the area of ----------------------
origin. With technological advancements, alternative channels and payment
mechanisms will further be developed to provide remittance services to ----------------------
clients.
----------------------
4. Non-financial products: Microfinance clients have many needs, such as
healthcare, education as well as livelihood requirements, which if met, can ----------------------
enhance their income, employment potential or quality of life. The existing ----------------------
relationship of MFIs with this population segment makes it easier for them
to provide these services. Though the MFIs do not want to deviate from their ----------------------
core business, they can act as conduits and allow other agents to provide these
services to their clients. The microfinance industry is experimenting with ----------------------
various models, which can be used to provide non-financial services to their ----------------------
clients. For Example, BASIX, a livelihood promotion institution established
in 1996, working with over a 3.5 million customers, over 90% being rural ----------------------
poor households and about 10% urban slum dwellers. BASIX works in
17 states − Andhra Pradesh, Karnataka, Orissa, Jharkhand, Maharashtra, ----------------------
Madhya Pradesh, Tamil Nadu, Rajasthan, Bihar, Chattisgarh, West Bengal, ----------------------
Delhi, Uttarakhand, Sikkim, Meghalaya, Assam and Gujrat, 223 districts and
over 39,251 villages. It has a staff of over 10,000 of which 80% are based in ----------------------
small towns and villages. BASIX offers a host of alternative services to its
clients. Beyond the basket of credit and other financial products and services, ----------------------
BASIX also provides low-income customers with livelihood services, ----------------------
including agricultural and business development consulting services, to
help microfinance clients use their loans more effectively. Apart from this, ----------------------
MFIs are also offering services like low-cost healthcare, education and
vocational training. Spandana, a leading MFI, for example, is currently ----------------------
developing comprehensive low-cost healthcare delivery model focused ----------------------
on the healthcare needs of women and children. BASIX has launched a
vocational training academy to impart education in rural development and ----------------------
management to potential job seekers from low-income communities.
----------------------
Activity 2 ----------------------
----------------------
Visit a nearby lending institution and enquire with the officials about their
microfinance services. ----------------------
----------------------
Notes 1.8 TARGETS OF MICROFINANCE
---------------------- The underlying reason behind the success of microfinance in India is its
capability to fulfil the critical needs of its target audience, the low-income
---------------------- population, which thus far remained unaddressed by the traditional financial
services sector.
----------------------
---------------------- The Indian population can be divided into four categories based on household
income levels. The rich who make up about 1.6 crores with a per annum earning
---------------------- of more than Rs. 17 lacs. The middle class comprises of 16 crores and has an
annual income between Rs. 3.4 lacs to 17 lacs. The aspirers make up nearly 35.9
---------------------- crores and have an annual income between Rs. 1.5 lacs to 3.4 lacs. Lastly, the
---------------------- deprived segment, the prime target of the microfinance industry, comprises 68.4
crores of the population and have an annual income below 1.5 lacs. [ Source:
---------------------- CRISIL Research.]
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
Fig. 1.7 Categories of Indian Population
---------------------- The formal Indian financial system has failed to reach the deprived segment,
---------------------- leaving approximately 135 million households entirely unbanked. India ranks
second in the world, after China, in terms of size of unbanked population. The
---------------------- microfinance sector targets the poorer portion of the aspirer segment and the mid
to richer portion of the deprived segment. The industry has thus far been able
---------------------- to create a service model and products that are suitable to these segments and
---------------------- these services and products have proven successful in affecting improvements
in the clients’ economic status.
----------------------
Following are the main reasons behind the failure of the formal financial
---------------------- system in reaching such a large segment of Indian population:
---------------------- • The fixed and variable costs of servicing low-income households is very
---------------------- high resulting in high delivery cost for relatively small transactions.
---------------------- • Majority of low-income population is located in rural areas, which are

geographically remote and inaccessible. This section of population finds
---------------------- it very expensive to visit bank branches as they have to compromise their
wages for the time spent to visit the banks.
----------------------
14 Micro Financing
• The cost of operating a branch in a remote location is financially unfeasible Notes
due to the low volume and high cost dynamic.
----------------------
• Low-income households are not interested in the same products that are
usually utilised by the rest of the population because they have different ----------------------
immediate needs, lower financial capacities and variable income streams.
----------------------
• The low-income population is often illiterate and lacks financial knowledge, ----------------------
making it nearly impossible for them to even contemplate availing existing
financial services, which provide no ancillary support to mitigate these ----------------------
challenges.
----------------------
• In the absence of access to formal financial services, the low-income segment
has traditionally relied on local moneylenders to fulfil their financial needs. ----------------------
While this money is readily available, it is often exorbitantly priced at 60% ----------------------
to 100% annual yields and forces the borrowers into a classic debt trap,
entrenching them in poverty. Credit from moneylenders has not traditionally ----------------------
acted as a tool for business expansion or enhancement of quality of life, but
rather as a lifeline for immediate consumption or healthcare needs. ----------------------
----------------------
Check your Progress 2 ----------------------
Fill in the blanks. ----------------------
----------------------
1. Majority of low-income population is located in _____________, which
are geographically _________ and inaccessible. ----------------------
2. The underlying reason behind the success of microfinance in India is its
----------------------
__________ to fulfil the _____________ of the low-income population,
which thus far remained unaddressed by the _________ financial ----------------------
services sector.
----------------------
3. Microfinance clients have many needs, such as _____________,
education and ________________. ----------------------
----------------------
1.9 CHALLENGES AHEAD ----------------------
Recent years have seen a significant advancement in the field of microfinance ----------------------
in India as well as globally. The concept of SHG-based microfinance has
proved to be very successful in many parts of India and has graduated from an ----------------------
experiment to a widely accepted paradigm of rural and developmental financing
in India. However, there are still many challenges, which pose questions on the ----------------------
sustainability of this growth. Following are the key challenges faced by the Indian ----------------------
microfinance industry:
----------------------
• Lack of appropriate legal structure to support structured growth of
microfinance operations. ----------------------
Notes • Difficulty in finding adequate levels of equity to enable new entities to
leverage loan funds.
----------------------
• Limited access to low interest rate loan funds.
---------------------- • Difficulty in attracting and retaining professional and committed human
resources.
----------------------
• Need for design of apt MIS including user-friendly software for tracking
---------------------- accounts and operations.
---------------------- • Lack of adequate loan for different segments.
---------------------- • Inability to innovate, adapt and grow.

• To bring out a compendium of small and micro enterprises for microfinance
---------------------- clients.
---------------------- • Difficulty to identify and prepare a panel of locally available trainers.
---------------------- • Inability to train the trainers.
---------------------- • Lacking the capacity to provide backward linkages or create support

structures for marketing.
----------------------
However, so far the evidence points to the several benefits of microfinance.
---------------------- In particular, empowerment of women and the inculcation of financial training
and discipline amongst the poor will undoubtedly have long-term socio-economic
---------------------- benefits. The principles of self-help and microcredit thus hold the key to economic
---------------------- and socio-cultural freedom for India’s millions of poor opening the gates of a
hitherto untapped reservoir of human enterprise.
----------------------
---------------------- Activity 3
----------------------
Visit http://www.nabard.org/pdf/md.pdf and read the article Microfinance in
---------------------- India: Sectoral Issues and Challenges.
----------------------
Summary
----------------------
---------------------- • Microfinance is defined as a provision of financial services to the global

poor involving supply of financial products and services (mainly credit,
---------------------- but also savings, insurance, remittance and pensions) in token sizes that are
much smaller than those prevailing in the mainstream commercial markets.
----------------------
• Microfinance came into being around 27 years back with the founding of
---------------------- Grameen Bank in Bangladesh by Professor Mohammed Yunus.
---------------------- • Microfinance serves low-income population by providing working capital
for business, reducing economic impact of shocks, such as illness, theft or
---------------------- natural disasters and most importantly by providing an alternative to loans
offered by local moneylenders.
----------------------
16 Micro Financing
• The five most important parties involved in microfinance are National Bank Notes
for Agricultural and Rural Development (NABARD), Reserve Bank of India,
different self-help groups, microfinance institutions and non-governmental ----------------------
organisations.
----------------------
• The microfinance business model is designed to address the challenges faced
by the traditional financial services sector in fulfilling the credit requirements ----------------------
of the low-income segment at an affordable and sustainable cost.
----------------------
• Various factors like cost of funds, high operating expenses, bad debts,
taxes, profit have to be considered while determining the interest rate of ----------------------
microcredit.
----------------------
• Approximately 55% of microfinance clients are concentrated in the southern
states of Andhra Pradesh, Karnataka, Kerala and Tamil Nadu. ----------------------
• Credit is primarily the main product being offered by MFIs but off late they ----------------------
have started offering other financial services like insurance, remittance and
savings and a variety of non-financial services like health care, vocational ----------------------
training, employment generation, etc. ----------------------
• The microfinance sector targets the poorer portion of the aspirer segment
and the mid to richer portion of the deprived segment. ----------------------
• The microfinance market has grown at an average annual rate of nearly 80% ----------------------
over the last few years.
----------------------
• Appropriate legal structure, access to loan funds, retaining human resource,
ability to train the trainers still remain as challenges for the microfinance ----------------------
industry.
----------------------
Keywords ----------------------
• Microfinance: Extending the whole range of financial services like savings, ----------------------
credit and micro insurance to micro enterprises to the poorer sections of
society. ----------------------
• NABARD: The apex institution accredited with all matters concerning ----------------------
policy, planning and operations in the field of credit for agriculture and
other economic activities in rural areas in India. ----------------------
• NGO-MFIs: Not-for-profit entities to extend microcredit to self-help groups. ----------------------
Self-Assessment Questions ----------------------
1. What do you mean by the term microfinance? What are the key characteristics ----------------------
of microfinance that distinguish it from commercial lending? ----------------------
2. If you have to start a self-help group, what factors will you keep in mind
and what innovative product will you offer to attract more clients? ----------------------
3. Elaborate the microfinance business model being followed in India. What ----------------------
are the peculiarities of this model?
----------------------
Notes 4. What are the most important factors considered while determining interest
rate on microcredit?
----------------------
5. What are the main reasons for the failure of the traditional financial system
---------------------- in reaching the majority of Indian population? How microfinance has been
able to overcome these challenges?
----------------------
6. What are the major challenges being faced by the microfinance industry?
----------------------
----------------------
----------------------
Fill in the blanks.
----------------------
1. The corporate mission of NABARD is to make microfinance available to
---------------------- the very poor sections of society through self-help groups.
---------------------- 2. The main aim of microfinance is to provide credit at reasonable interest rates
to those who do not have access to financial services or are not eligible to
---------------------- get credit under the formal system.
---------------------- 3. Microfinance came into being around 27 years back with the founding of
the Grameen Bank in Bangladesh by Professor Mohammed Yunus.
---------------------- 4. Microfinance is a participative model that can address the needs of the poor,
---------------------- especially women members.
5. The term microfinance refers to extending the whole range of financial
----------------------
services like savings, credit and micro insurance to micro enterprises.
---------------------- Check your Progress 2
---------------------- 1. Majority of low-income population is located in rural areas, which are

geographically remote and inaccessible.
---------------------- 2. The underlying reason behind the success of microfinance in India is its
---------------------- capability to fulfil the critical needs of the low-income population, which
thus far remained unaddressed by the traditional financial services sector.
----------------------
3. Microfinance clients have many needs, such as healthcare, education and
---------------------- livelihood requirements.
----------------------
Suggested Reading
----------------------
1. http://www.dochas.ie/Shared/Files/2/MicroFinance_literature_review.pdf
---------------------- 2. http://www.microfinancegateway.org/gm/document-1.9.43423/05.pdf
---------------------- 3. www.microfinanceindia.org (Microfinance India, The State of the Sector
Report 2010)
---------------------- 4. www.nabard.org/
---------------------- 5. www.iibf.org
18 Micro Financing
Models of Microfinance
UNIT
2
Structure:
2.1 Introduction
2.2 Microfinance Lending Models
2.3 Microfinance Delivery Models in India
Case Study
Summary
Key Words
Suggested Reading
Models of Microfinance 19
Notes
Objectives
----------------------
----------------------
●● Differentiate among the different models of delivering microcredit
---------------------- ●● Discuss the key microfinance models
---------------------- ●● Appraise the different microfinance delivery models used in India
----------------------
---------------------- 2.1 INTRODUCTION

----------------------
In the previous unit, we had an overview of microfinance, the various
---------------------- products offered by them, their business model and challenges faced by them. We
will now emphasise on the working of the microfinance industry and understand
---------------------- the various models of microfinance.
---------------------- Microfinance itself is a credit lending model, and within this lending model
there exists many subcategories, which are termed as microfinance lending
----------------------
models. The basic difference in all the models lies in their source of funds and
---------------------- the way the money is channelised.
----------------------
2.2 MICROFINANCE LENDING MODELS
----------------------
There are various lending models based on different parameters.The
---------------------- parameters may be formation of association, guarantees by banks, creation of
community banks, formation of cooperatives, credit finance, etc. The various
---------------------- lending models are discussed below.
---------------------- 1. Association model/Self-help group model: An association is formed when
the poor in the target community get together to provide microfinance and
----------------------
related services to themselves. The formation of association can be based
---------------------- on gender, religion, political or cultural orientation of its members. In some
countries, a legal body can also form an association and enjoy advantages
---------------------- like collection of fees, insurance, tax breaks and other protective measures.
They generate capital and function as intermediaries between banks, MFIs
----------------------
and its members.
----------------------
Self-Help Groups (SHGs) are small informal groups comprising 10−20
---------------------- persons. The composition of membership is mostly exclusively male
or exclusively female. The members are self-selected with a liberty to
---------------------- choose their group depending on their level of affinity with other potential
---------------------- members. The group meets regularly at an appointed time and place and
carries out its financial transactions of savings and credit. The members
---------------------- themselves determine the roles and norms of the group. Non-Governmental
Organisations (NGOs) provide them with support services, training and
---------------------- develop linkages.
20 Micro Financing
2. Bank guarantees: Bank guarantees are used to obtain commercial loans Notes
from banks. The guarantee can be external, from a government agency or in
the form of a donation or it can be generated internally from the savings of ----------------------
the members. Under this model, a donor or a government agency guarantees
microloans made by a microfinance institution or a commercial bank to ----------------------
an individual or group of borrowers. The guaranteed funds can be used ----------------------
for various purposes like loan recovery and insurance claim. There are
several international and UN organisations, which are involved in creating ----------------------
international guarantee funds and banks and NGOs can subscribe to it to
lend or start micro credit programmes. ----------------------
----------------------
3. Community banking: The formal version of associations can be termed
as community banks. These banks are generally created by people of a ----------------------
particular community with the intention of improving their standard of living
by creating more employment. The whole community is considered one ----------------------
unit and semi-formal and formal institutions are established which provide
----------------------
microfinance services. Usually NGOs and other similar organisations take
the responsibility of forming such institutions. They also educate their ----------------------
community members in various financial activities. Such institutions may
also have savings component and other income-generating projects included ----------------------
in their structure. It is also possible for a community bank to be part of a larger
----------------------
community development programme, which uses finance as inducement for
action. ----------------------
4. Cooperatives: A cooperative can be defined as an autonomous association ----------------------
of persons united voluntarily to meet a common need of members through
a jointly owned and democratically controlled enterprise. The need can be ----------------------
social, cultural or economic. The cooperatives can also include member ----------------------
financing and savings in their portfolio. The distinguishing feature of a
cooperative as compared with other models of microfinance is that the ----------------------
ownership structure does not include the poor. A group of middle and upper
class individuals usually creates a cooperative to offer microfinance services ----------------------
to the poor. ----------------------
5. Credit unions: Under the concept of credit union, the members of a target ----------------------
community gather their money and provide loans to one another at low
interest rates. Credit unions are small in size and are not profit oriented ----------------------
as compared to community banks. Sustainability is the only factor that
influences interest rates. It is a member-driven self-help financial institute ----------------------
comprising members, who share some common bond, for example, people ----------------------
working for the same employer, belonging to the same church, labour union
or social fraternity. The membership is free for all and a democratic approach ----------------------
is used to elect directors and committee members.
----------------------
6. Grameen model: The Grameen model emerged from the poor-focussed
----------------------
grassroots institution, Grameen Bank, started by Prof. Mohammed Yunus
in Bangladesh. Under this model, a bank unit is established with a field ----------------------
Notes manager and number of bank workers who cover an area of 15 to 22
villages depending upon the size of the villages. The manager and workers
---------------------- of the bank visit the different villages under them in order to familiarise
themselves with the local environment in which they will be operating. In
---------------------- this process, they also identify prospective clients and give the villagers an
---------------------- overview of the various services being offered by them, purpose, function
and mode of operation of the bank. Groups of five prospective borrowers are
---------------------- formed, but initially only two of them become eligible for loan. The bank
closely observes the group for a period of one month to see if the members
---------------------- are conforming to the bank rules. The other three members of the group
---------------------- become eligible for loan only if the first two members repay their interest
and principal regularly for a period of fifty weeks. These restrictions imposed
---------------------- by the banks create a substantial group pressure on each individual to keep
his record clear. Hence, this collective responsibility of the group serves as
---------------------- collateral for the loan.
----------------------
7. Group model: The basic philosophy of the group model lies in the fact that
---------------------- the individual shortcomings and weaknesses are overcome by collective
responsibility and security afforded by formation of group of individuals.
---------------------- The group so formed by the coming together of individual members can
be used for a number of purposes like educating and awareness building,
----------------------
collective bargaining, building peer pressure, etc.
----------------------
8. Non-banking finance companies (NBFCs): The NBFCs have emerged
---------------------- as the nearest substitute for those MFIs who want to go for the for-profit
route. Since getting registered as a bank is costly and the idea of local area
---------------------- bank has not been pursued beyond the initial approvals, the NBFC route is
---------------------- increasingly being chosen by profit-driven MFIs. They can also enter the
capital markets. Since the poor are bankable and lending to them can be
---------------------- commercially viable, it is not necessary to depend on low cost funds to lend
to them. Secondly, since the amounts required are huge, the financial markets
---------------------- are the only way to mobilize resources. This would mean mobilizing debt
---------------------- at market rates of interest. The for-profit NBFC route is currently the best
way to operate in the capital markets. For regulatory purposes, NBFCs are
---------------------- classified into three categories:
---------------------- i. Those accepting public deposits.

---------------------- ii. Those not accepting public deposits but engaged in financial business.
---------------------- iii. Core investment companies with 90% of their total assets as investments
---------------------- in the securities of their group/holding/subsidiary companies.
---------------------- 9. Individual model: This is the simplest credit lending model under which
micro loans are given directly to the borrower. This does not involve
---------------------- formation of any group or generation of peer pressure for repayment.
The individual model is, in many cases, a part of a larger “credit plus”
----------------------
22 Micro Financing
programme, where other socio-economic services, such as skill development, Notes
education and other outreach services are provided.
----------------------
10. Intermediary model: As the name suggests there is an intermediary between
the lender and the borrower. The intermediary plays a very important role ----------------------
of generating credit awareness and education amongst the borrowers. They
----------------------
also induce the borrowers to start saving so that their credit worthiness
can improve and they become attractive for lenders. The level of activities ----------------------
could be on international and national level and can be as small as regional,
local and individual level. These intermediaries can be anyone from NGOs, ----------------------
individual lenders, commercial banks, international donors, etc.
----------------------
11. Non-governmental organisations: NGOs are one of the key players in ----------------------
micro credit and over the past few years they have played varied roles
of intermediaries, trainers, guides , investors, etc. They create awareness ----------------------
of micro credit within the community, provide resources and tools for
micro credit, help in identifying good practices in micro credit and create ----------------------
opportunities to learn about the principles and practices of micro credit. ----------------------
The NGOs use various mediums like publications, seminars, workshops
and training programmes to achieve these goals. ----------------------
12. Peer pressure: Peer pressure means the use of moral and other linkages ----------------------
between borrowers and project participants to ensure participation and
repayment in micro credit programmes. A peer can be a fellow member in ----------------------
the borrower group or a community leader, NGO, bank officer, etc. In case ----------------------
the peer is a fellow member of the borrower group, pressure can be applied
by not allowing credit to other group members till the initial borrower repays ----------------------
in a timely manner for a defined time period. In other cases, pressure can be
applied by frequent visits to the defaulters, through community meetings ----------------------
where they are identified and requested to comply, etc. ----------------------
13. Rotating savings and credit associations (ROSCAs): ROSCAs are ----------------------
formed by a group of individuals, who come together, form a group and
make regular cyclical contributions to a common fund, which is given as ----------------------
lump sum to one member in each cycle. If, for example, there is a group of
----------------------
10 members and each member contributes Rs 1,000 per month, then each
month Rs 10,000 gets collected and it is given to any one member of the ----------------------
group. Thus, a member lends money to other members through his regular
monthly contributions. After having received the lump sum amount when ----------------------
it is his turn, i.e., borrow from the group, he then pays back the amount in
----------------------
regular/further monthly contributions. Decision on who will receive the lump
sum is done by consensus, by lottery, by bidding or other agreed methods. ----------------------
The benefit of this model is matching of a client’s cash flows with the loan, ----------------------
the ability to structure the deal without interest rates, and the absence of
overhead costs. ----------------------
----------------------
Notes 14. Village banking: Village banks are community-based credit and savings
associations. It typically includes 25 to 50 low-income individuals who
---------------------- are seeking to improve their lives through self-employment activities. The
members themselves run the banks, choose their members, elect officers,
---------------------- frame rules and regulations, provide credit and collects repayments and
---------------------- savings. The initial capital for loans may come from outside sources. The
loans are usually backed by moral collateral.
----------------------
----------------------

---------------------- 1. Under the __________, a bank unit is established with a field manager
and number of bank workers who cover an area of 15 to 22 villages
---------------------- depending upon the size of the villages.
---------------------- 2. The ___________ can be external, from a government agency or in the
---------------------- form of a donation or it can be generated internally from the savings of
the members.
----------------------
---------------------- Activity 1
----------------------
Based on your understanding of different credit lending models of
---------------------- microfinance, locate a microfinance credit organisation in your vicinity and
---------------------- elaborate the model followed by the organisation.
----------------------
2.3 MICROFINANCE DELIVERY MODELS IN INDIA
----------------------
The non-availability of credit and banking facilities to the poor and
---------------------- underprivileged segments of the society has always been a major concern in India.
Accordingly, both the Government and the Reserve Bank have taken several
----------------------
initiatives, from time to time, such as nationalisation of banks, prescription
---------------------- of priority sector lending norms and concessional interest rate for the weaker
sections. However, it was realised that further direct efforts were required
---------------------- to address the credit needs of the poor. In response to this requirement, the
microfinance movement started in India with the introduction of the SHG-Bank
----------------------
Linkage Programme (SBLP) in the early 1990s. At present, there are two models
---------------------- of microfinance delivery in India: the SBLP model and the MFI model. The SBLP
model has emerged as the dominant model in terms of number of borrowers and
---------------------- loans outstanding. In terms of coverage, this model is considered the largest
microfinance programme in the world. The Reserve Bank, the National Bank
----------------------
for Agricultural and Rural Development (NABARD) and the Small Industries
---------------------- Development Bank of India (SIDBI) have taken a range of initiatives to provide
a momentum to the microfinance movement in India. The various microfinance
---------------------- models in use in India are discussed below.
24 Micro Financing
SHG-Bank Linkage Programme Notes
Under the SHG–Bank Linkage Programme banks provide credit in bulk ----------------------
to the SHGs, which in turn lend to its members. Under this arrangement, each
participant has a role to play: ----------------------
• The SHGs are expected to facilitate collective decision-making by the poor ----------------------
and provide doorstep banking to its members.
----------------------
• Banks act as wholesalers of credit and provide resources to SHGs.
----------------------
• The NGOs act as agencies to organise the poor, build their capacities and
----------------------
facilitate the process of empowering them.
----------------------
This arrangement is advantageous to all the participants. The banks benefit
by way of reduction in transaction cost, by way of reduction in work related ----------------------
to appraisal, supervision and monitoring of loans. SHGs have access to larger
quantum of resources as compared to their limited corpus generated through thrift. ----------------------
The amount of credit given by banks to SHGs is in proportion to the savings
----------------------
mobilised by the group and could vary from 1:1 to 1:4. The SHG is free to decide
the interest rate at which it wants to lend to its members along with the purpose ----------------------
of the loan.
----------------------
We will cover the SHG–Bank Linkage Programme in detail in Unit 3.
----------------------
The SHG–Bank Linkage Programme has been very successful since its
inception in India in 1992. It has mainly benefitted the marginal farmers, landless ----------------------
labourers, artisans and craftsmen, and small businessmen in the rural areas. The
----------------------
main advantages of the programme are:
• Timely repayment of loans to banks. ----------------------
• Reduction in transaction costs both of the poor and the banks. ----------------------
• Doorstep “savings and credit” facility for the poor. ----------------------
• Exploitation of the untapped business potential of the rural areas. ----------------------
Under SBLP, the following three different models have emerged: ----------------------
1. Model I: In this model, SHGs are promoted, guided and financed by banks. ----------------------
2. Model II: In this model, SHGs are promoted by NGOs/government agencies ----------------------
and financed by banks. ----------------------
3. Model III: In this model, SHGs are promoted by NGOs and financed by ----------------------
banks using NGOs/formal agencies as financial intermediaries.
----------------------
Model I: SHGs promoted, guided and financed by banks.
----------------------
Under this model, an SHG is promoted, guided and financed by banks. Banks
provide credit to SHG at an interest rate decided by the bank, and the SGH in ----------------------
Notes turn mobilises its savings with the bank. The amount of credit provided by the
bank to an SHG can vary based on the amount of savings mobilised by SHG.
---------------------- Once the credit is received by the SHG, it provides loans to the group members
at an interest rate decided by the group members. The group members continue
---------------------- to mobilise their savings with the SHG.
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
Fig. 2.1 SHG Model I
----------------------
Model II: SHGs promoted by NGOs/government agencies and financed by
---------------------- banks.
---------------------- Under this model, the flow of credit and savings between the bank and an SHG
at one place and an SGH and its members at another place remains the same as
---------------------- under Model I. The only difference is this model is the presence of NGOs, which
---------------------- provide support and linkage services to the bank as well as the SHG. They act as
agencies to organise the poor, help in building their capacity and empower them.
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
Fig. 2.2 SHG Model II
----------------------
Model III: SHGs promoted by NGOs and financed by banks using NGOs/
---------------------- formal agencies as financial intermediaries.
26 Micro Financing
Under this model, the SHG is promoted by the NGO and banks provide Notes
finance to the NGO. Hence, the NGO acts as a financial intermediary between
the bank and the SHG. The SHG mobilises its savings with the NGO, which in ----------------------
turn provides credit to the members of the SHG. The individual members of the
group continue to mobilise their savings with the SHG. ----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
Fig. 2.3 SHG Model III
----------------------
Model II has emerged as the most popular model under SBLP. Commercial
banks, cooperative banks and the regional rural banks have been actively ----------------------
participating in SBLP. ----------------------
Microfinance Institution Approach
----------------------
While the SBLP model remains the most widely used model of microfinance
----------------------
in India, the MFI model has also gained momentum in the recent past. The MFI
model in India is characterised by a diversity of institutional and legal forms. ----------------------
We have covered the different forms of MFIs in Unit1.
----------------------
Bank Partnership Model
----------------------
Banks can use MFIs as their agents for handling credit, monitoring,
supervision and recovery. In this model, the bank is the lender and the MFI acts ----------------------
as an agent for handling items of work relating to credit monitoring, supervision
and recovery, while the borrower is the individual. The MFI takes care of all ----------------------
relationships with the client, from first contact through final repayment. ----------------------
Another variation of this model is where the MFI, an NBFC, holds the
----------------------
individual loans on its books for a while, before securitising them and selling
them to the bank. Such refinancing through securitisation provides the MFIs a ----------------------
greater funding access.
----------------------
Banking Correspondents
----------------------
In January 2006, the Reserve Bank permitted banks to utilise the services
of NGOs, MFIs (other than NBFCs) and other civil society organisations as ----------------------
Notes intermediaries in providing financial and banking services with the use of business
facilitators and banking correspondents. The BC model allows banks to do cash
---------------------- transactions at a location much closer to the rural population, thus addressing
the last mile problem. The BC model uses the MFI’s ability to get close to poor
---------------------- clients – a necessity for savings mobilisation from the poor – while relying on the
---------------------- financial strength of the bank to safeguard the deposits. Banks are permitted to
engage retired bank employees, ex-servicemen and retired government employees
---------------------- as business correspondents (BCs).
----------------------
----------------------

1. The ___________, the ________________ and the ____________ have
----------------------
taken a range of initiatives to provide a momentum to the microfinance
---------------------- movement in India.
---------------------- 2. At present, there are two models of microfinance delivery in India: the
________ model and the ______ model.
----------------------
3. The non-availability of ______ and _______ facilities to the poor
---------------------- and underprivileged segments of the society has always been a major
---------------------- concern in India.
----------------------
---------------------- Activity 2
---------------------- Locate an NGO in your vicinity and find out how and to what extent it
---------------------- supports an SHG. Also figure out the flow of credit and savings amongst the
bank, the NGO and the SHG and its members.
----------------------
---------------------- Case Study

----------------------
Let us further try to understand one of the models – Group Model (also
---------------------- known as Federation Model) with the help of a case study .This case study reflects
the structure, sources of funds and way of functioning of Boond Bachat Sangh
---------------------- located at Kulgaon.
---------------------- Evolution of the Federation
---------------------- Rashtriya Mahila Kosh was not ready to provide loans to those people who
were living below poverty line and who did not have BPL certificates certified by
---------------------- CDO. The complexity of the loaning procedure and an urge for an independent
---------------------- source led to the formation of a federation on 30 September, 2002.
----------------------
28 Micro Financing
Objectives Notes
• To inculcate the habit of saving in poor women ----------------------
• To bring them out of the clutches of the moneylender
----------------------
• To provide loans to manage household cash flow crisis during emergencies
----------------------
• To provide loans for income-generation activities
----------------------
• To provide business development and business upgradation services
----------------------
• To make sure the loans are available to the poor
----------------------
Federation Management Model
----------------------
Number of SHGs enrolled by the federation was 170. The federation
is currently promoted by the NGO Shramik Bharti. SHGs are divided into ----------------------
four clusters on the basis of geographical area. Each cluster had three main ----------------------
representatives
----------------------
• Leader
----------------------
• Secretary
----------------------
• Federation representative
----------------------
Leader and Secretary were largely responsible for looking after the work
pertaining to the SHGs. At the cluster level one representative from each SHG ----------------------
meets once in a month on a fixed date. Out of these representatives members ----------------------
are chosen which look after the working of the cluster and hence represent the
cluster as a whole. Since the federation was divided into four clusters there were ----------------------
a total of twenty members which represent the federation advisory committee.
----------------------
Out of twenty members two were selected by voting who represented the
board, which altogether comprises of five members. The other three members ----------------------
are the Chairperson Trustee and two persons chosen by the Chairperson Trustee
----------------------
himself.
----------------------
Status Pre-Federation
When the federation was not formed the source of money to the members ----------------------
of the SHGs was through: ----------------------
• Inter loaning among members. ----------------------
• Through financial institutions like SIDBI, HUDCO, RMK (Rashtriya Mahila ----------------------
Kosh) established by World Bank.
----------------------
Of these the major source were the financial institutions esp. RMK which
charged 6% rate of interest on the loans given. Another 1.5% was charged for ----------------------
the training purpose.
----------------------
Notes Financial Modelling
---------------------- Saving
An SHG had following two kinds of saving:
----------------------
• Compulsory
----------------------
• Surplus
----------------------
A compulsory saving of Rs.1000 per annum is supposed to be deposited
---------------------- with the federation.
---------------------- If there is any surplus the SHG also deposits the surplus.
---------------------- On both kinds of savings the SHGs are paid an interest of 6% per month.
Saving of SHG pre federation was Rs.3083 per SHG whereas saving of
----------------------
SHG post federation was Rs.12676 per SHG per annum
---------------------- Loan Distribution Model
---------------------- The loan granted to a SHG was 8 to 10 times the compulsory saving of that
particular SHG. For example if an SHG is 10 years old then the compulsory saving
----------------------
of that SHG will be 10×1000=10,000 Rs. Hence the maximum loan granted to
---------------------- that SHG will be 10×10000=Rs.1.0 lakh.
---------------------- The loan sanctioned to the SHG is at the rate of 12%.The SHG in turn lend
this to its member at the rate of 18%.
----------------------
On repayment of loan the SHGs are entitled for fresh loan.
---------------------- When a SHG is not capable of providing loan to its member then it
---------------------- approaches the federation. The SHG fills the form on behalf of the member who
wants the loan. The form entails the details of the loan like purpose of loan,
---------------------- amount etc. The loan is sanctioned by the cluster members who approve the loan
on the guarantee of the SHG. The loan repayment will be on behalf of the SHG.
----------------------
At last 2 members out of the 5 chosen members should be present at the time
---------------------- of sanctioning the loan. The document is then sent to the Sr. Group Organizer
who endorses the same by verifying the loaning status and track record of that
----------------------
SHG.
---------------------- The loan repayment is splitted according to the amount of loan in instalments
---------------------- as follows:
---------------------- For loan up to Rs.5000 the maximum instalments fixed are 10.
For loan from Rs.5000-Rs.10000 the amount of repayment was Rs.500/
----------------------
month
---------------------- For loan greater than Rs.10000 a maximum of 20 instalments is fixed
---------------------- Interest Analysis
---------------------- One-third of the interest received on loaning the SHGs was used for the
30 Micro Financing
general working of the federation like stationary, rent, stock, training, and Notes
auditing. The part saved was distributed as profit.
----------------------
Loaning Status
----------------------
Direct loaning is not being done by the financial institutions to the federation.
Instead the loan is given to the NGO promoting the federation. 15% of the ----------------------
applications for loan were for meeting medical needs,8% for repayment of
existing loans, 20% for social purposes like marriage etc, 20% of the applications ----------------------
were for consumption purposes like house repairing etc, where as 38% of the
----------------------
loan is used for income generation activities.
----------------------
Efficiency and Sustainability Indicator
Operational Cost Ratio (OCR) is defined as the cost incurred by the federation ----------------------
in maintaining a loan portfolio of Rs.100. OCR on analysis was found to be 9.3% ----------------------
Operational Self-Sufficiency (OSS) is defined as the ratio of operational ----------------------
expenses over operational income.
----------------------
OSS on analysis was found to be 190%
----------------------
Constraints and Issues
----------------------
Lack of proper infrastructure for conducting meetings. Extreme weather
condition during summer and winter acting as a impediment in regular holding ----------------------
of meetings.
----------------------
Federation was not capable of providing extension services due to lack of
leadership. ----------------------
No marketing interventions. Federation was not involved in marketing ----------------------
of products produced by SHGs. This would have gone a long way in attaining
sustainability of federation as well as SHGs. ----------------------
Questions ----------------------
Based on your understanding of the above case study, answer the following ----------------------
questions:
----------------------
1. How did the SHG Federation Model help to increase the savings of the
SHGs? ----------------------
----------------------
2. Elaborate the loan disbursement and repayment model followed by the
federation. ----------------------
3. Based on your understanding, suggest areas of improvement of the federation ----------------------
and also suggest ways to improve those areas.
----------------------
4. Which other MF model can be an alternative to group model for the above
----------------------
case considering the structure, sources of funds and way of functioning of
Boond Bachat Sangh? ----------------------
Notes Summary
---------------------- • The basic difference in all the models lies in their source of funds and the
way the money is channelised.
----------------------
---------------------- • An association is formed when poor in the target community get together
to provide microfinance and related services to themselves.
----------------------
• Under bank guarantee model a donor or a government agency guarantees
---------------------- microloans made by microfinance/commercial bank to an individual or
group of borrowers.
----------------------
• Community banks are generally created by people of a particular community
----------------------
with the intention of improving their standard of living by creating more
---------------------- employment.
---------------------- • A cooperative can be defined as an autonomous association of persons united

voluntarily to meet a common need of members through a jointly owned
---------------------- and democratically controlled enterprise.
----------------------
• Under the concept of credit union, the members of a target community
---------------------- gather their money and provide loans to one another at low interest rates.
---------------------- • Under the Grameen model, groups of five prospective borrowers are formed
but initially only two of them become eligible for loan. Others in group get
---------------------- loan upon successful repayment by initial borrowers.
---------------------- • Rotating Savings and Credit Associations (ROSCAs) are formed by a group
---------------------- of individuals who come together, form a group and make regular cyclical
contributions to a common fund, which is given as lump sum to one member
---------------------- in each cycle.
---------------------- • Village banks are community-based credit and savings associations. It
typically includes 25 to 50 low-income individuals who are seeking to
----------------------
improve their lives through self-employment activities.
----------------------
---------------------- Keywords
---------------------- • Association: An association is formed when the poor in the target community
get together to provide microfinance and related services to themselves.
----------------------
• Cooperative: An autonomous association of persons united voluntarily to
----------------------
meet a common need of members through a jointly owned and democratically
---------------------- controlled enterprise.
---------------------- • Credit union: A non-profit, member-driven self-help financial institute, who

gather their money and provide loans to one another at low interest rates..
----------------------
32 Micro Financing
Notes
----------------------
1. Explain any five microfinance lending models with examples.
----------------------
2. What do you understand by the term ROSCA? Explain the functioning of
this model with the help of a suitable example. ----------------------
3. What are the key features of SHG–Bank linkage programme? What factors ----------------------
have lead to the success of this programme in India?
----------------------
4. How does the SHG–Bank Linkage model benefit banks and SHGs?
----------------------
Answers to Check your Progress ----------------------
----------------------
----------------------
Fill in the blanks.
1. Under the Grameen Model, a bank unit is established with a field manager ----------------------
and number of bank workers who cover an area of 15 to 22 villages ----------------------
depending upon the size of the villages.
----------------------
2. The bank guarantee can be external, from a government agency or in the
form of a donation or it can be generated internally from the savings of the ----------------------
members.
----------------------
Fill in the blanks.
----------------------
1. The Reserve Bank, the National Bank for Agricultural and Rural Development
----------------------
and the Small Industries Development Bank of India have taken a range of
initiatives to provide a momentum to the microfinance movement in India. ----------------------
2. At present, there are two models of microfinance delivery in India: the SBLP ----------------------
model and the MFI model.
----------------------
3. The non-availability of credit and banking facilities to the poor and
underprivileged segments of the society has always been a major concern ----------------------
in India. ----------------------
----------------------
Suggested Reading
----------------------
1. http://www.rbi.org.in/scripts/PublicationsView.aspx?Id=10932
----------------------
2. http://www.articlesbase.com/loans-articles/status-of-different-micro-
----------------------
finance-models-in-india-2302626.html
----------------------
Notes 3. http://www.edarural.com/documents/IMAR/Chapter%202%20MFI%20
models%20&%20practice.pdf
----------------------
4. http://www.bwpi.manchester.ac.uk/resources/Working-Papers/bwpi-
---------------------- wp-6008.pdf
---------------------- 5. http://www.givewell.org/files/Cause1-2/Independent%20research%20
---------------------- on%20microfinance/GFUSA-MicrofinanceImpactWhitepaper-1.pdf
---------------------- 6. www.ccsenet.org/journal/index.php/ijef/article/
---------------------- 7. www.nabard.org
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
34 Micro Financing
Self-Help Groups
UNIT
3
Structure:
3.1 Introduction
3.2 Emergence of Self-Help Groups
3.3 Understanding Self-Help Groups
3.4 The Self-Help Group Model
3.5 Impact of Self-Help Groups
3.6 Financial Aspects and Sustainability of Self-Help Groups
3.7 SHG–Bank Linkage Programme: An Instrument of Financial Inclusion
3.7.1 Study Findings on the SHG–Bank Linkage Programme
3.8 Challenges for Self-Help Groups
Summary
Key Words
Suggested Reading
Self-Help Groups 35
Notes
Objectives
----------------------
----------------------
●● Analyse the concept, need and importance of self-help groups
---------------------- ●● Explain the functions of SHGs
---------------------- ●● Analyse the SGH model
---------------------- ●● Examine the impact of SHGs in various fields
●● Discuss the impact of the SHG–Bank Linkage Programme on the
---------------------- microfinance industry
---------------------- ●● Identify the challenges faced by SHGs
----------------------
3.1 INTRODUCTION
----------------------
In the previous units, we have learnt the important role played by self-help
---------------------- groups (SHGs) in facilitating microfinance. They represent a unique approach to
financial intermediation. These groups help in the development of women who
---------------------- are members of these groups by providing access to low-cost financial services
---------------------- and encouraging them to manage and develop the group on their own. SHGs are
formed and supported usually by Non-Governmental Organisations (NGOs) or
---------------------- (increasingly) by government agencies. These groups are linked to banks and
wider development programmes and they provide many social and economic
---------------------- benefits. SHGs enable women to increase their savings and access credit which
---------------------- banks are increasingly willing to lend. SHGs can also be community platforms
from which women become active in village affairs, stand for local election or
---------------------- take action to address social or community issues, such as abuse of women,
alcohol, dowry system, schools, water supply, etc.
----------------------
The rise of SHGs and the more formal SHG federations coupled now with
---------------------- the SHG-Bank Linkage Programme (SBLP) has made these groups a dominant
---------------------- provider of microfinance in addition to microfinance institutions (MFIs). The
policy environment in India has been extremely supportive for the growth of the
---------------------- microfinance sector in India. The SHG-Bank Linkage Programme has provided
opportunity to small SHGs to increase their capital base and provide credit to
---------------------- more members and bigger projects. As on March 2015, there are approximately
---------------------- 73.18 lakh SHGs in India.
---------------------- 3.2 EMERGENCE OF SELF-HELP GROUPS

----------------------
It is difficult to identify any date as the date of inception of self-help groups
---------------------- in India. There has been a practice of small groups coming together to form a
saving and credit organisation in rural areas of India. Initially, the NGOs played
---------------------- an important role in developing the SHG model and implementing it to give it a
formal structure. In the 1980s, the policymakers realised the importance of these
----------------------
36 Micro Financing
groups and worked with banks and development organisations to promote these Notes
savings and credit groups. The simple structure of SHGs helped in spreading the
movement across the nation. ----------------------
In the 1990s, the state governments and the NGOs realised that the SHGs ----------------------
are not just financial intermediaries but they work on wider social and political
issues as well. The spread of SHGs led to the formation of SHG federations, ----------------------
which are more sophisticated forms of organisations that involve several SHGs ----------------------
forming Village Organisations (VOs) or cluster federations and then ultimately
higher- level federations. Many of these SHG federations are registered as ----------------------
societies, mutual benefit trusts and mutually aided cooperative societies.
----------------------
----------------------
Fill in the blanks.
1. ______________ help in the development of women who are members ----------------------
of these groups by providing access to low-cost financial services and ----------------------
encouraging them to manage and develop the group on their own.
----------------------
2. SHGs are formed and supported usually by ______________ or
(increasingly) by ____________ agencies ----------------------
3. The ___________ Linkage Programme has provided opportunity to ----------------------

small SHGs to increase their capital base and provide credit to more ----------------------
members and bigger projects
----------------------
3.3 UNDERSTANDING SELF-HELP GROUPS ----------------------
Self-help groups help their members to cope with a wide variety of common ----------------------
problems. Let us try to understand their functioning, resources, abilities, etc.
----------------------
What they do?
----------------------
All SHGs have a written mission statement, which mentions the details of
common problems faced by its members and what the group will do to cope with ----------------------
this problem. The following are the basic functions performed by the self-help
----------------------
groups:
----------------------
1. Social support: When people facing the same problems come together and
share their problems, it provides a lot of social support. They feel that they ----------------------
are not alone and together they can solve it.
----------------------
2. Financial support: The self-help groups encourage the habit of savings
amongst their members and provide them credit from their cumulative ----------------------
savings. With the support of banks the lending capacity of SHGs has
----------------------
increased substantially which has led to increased financial support to their
members. ----------------------
Self-Help Groups 37
Notes 3. Practical information: SHGs provide access to professional services and
resources available to their members in order to solve and cope with their
---------------------- common problem.
---------------------- 4. Education: One of the most important roles played by SHGs is educating
the members, especially women. The groups not only educate the members
----------------------
but also encourage them to take up jobs like bookkeeping and other similar
---------------------- jobs.
---------------------- 5. Advocacy: SHGs advocate addressing problems or deficiencies that exist

in the larger society and which the members cannot resolve within their
---------------------- group. Historically, these groups are the seeds for the development of many
---------------------- long-standing health foundations, societies, and movements dealing with
various illnesses, disabilities, and health concerns.
----------------------
How they do?
----------------------
The question now arises how the SHGs manage to perform these functions.
---------------------- They follow some specific principles and group dynamics, which help them in
achieving their mission. These are as under:
----------------------
1. The helper therapy principle: The principle states “those who help others
---------------------- are themselves helped”. This is the driving principle of most of the SHGs.
---------------------- 2. Positive role models: Those who have gone through a particular problem
---------------------- demonstrate to new members that success or recovery is possible. Their
example and actions often provide the needed encouragement and hope that
---------------------- is otherwise not available.
---------------------- 3. Accessibility: Since there is no fee to join an SHG, they are more accessible.
Many groups also have convenient meeting sites in the community, at times
----------------------
that are more convenient than most professional services. This encourages
---------------------- more and more people to join the group.
---------------------- 4. Pooling of knowledge and resources: When different members come

together to form a group their knowledge and experience also get shared
---------------------- with the group members.
---------------------- 5. Empowerment: The members feel empowered by taking a more active role
---------------------- in the group.
---------------------- 6. Normalisation: This is a very important factor, which builds a lot of positive
energy amongst the group members. When people see and meet others facing
---------------------- the same problems and some even worse than them, they feel normal. They
feel that they are not the only ones facing this problem and start thinking
----------------------
positively.
----------------------
7. Options and alternatives: The group members come together and do
---------------------- the brainstorming to find out the options and alternatives to cope with the
38 Micro Financing
problem. Where previously a new member was despairing, thinking they had Notes
no options, other members often provide a range of strategies and solutions,
based on their own experiences. ----------------------
----------------------
Activity 1
----------------------
Visit any SHG working in a nearby village, and list some of the social objectives ----------------------
achieved by that self-help group.
----------------------
----------------------
3.4 THE SELF-HELP GROUP MODEL
----------------------
Structure of a self-help group
----------------------
A self-help group is generally formed by a group of 10−20 people, usually
women, from a similar class or region, who come together to form a saving ----------------------
and credit organisation. The group provides small interest-bearing loans to its ----------------------
members from their pooled financial resources. The main focus of this group is
to inculcate the habit of savings amongst its members. They designate members ----------------------
from the group to take care of the terms and conditions of loans, accounting and
administering loan, etc. ----------------------
SHG federation ----------------------
As discussed earlier, an SHG federation is a formal structure comprising ----------------------

several clusters or VOs to form an apex body or SHG federation. The grouping
----------------------
of these clusters is done based on their geographical location.
At the cluster and federation level there are exchange of ideas, inter-group ----------------------
borrowings, cost sharing and discussion on common interests. As a result, each ----------------------
SHG, which is a part of cluster and federation gets the following key benefits
from the federation: ----------------------
• Stronger political and advocacy capabilities. ----------------------
• Knowledge and experience sharing. ----------------------
• Economies of scale. ----------------------
• Larger capital base. ----------------------
----------------------
The following diagram representing the structure of SHG federation will
give a better understanding of the concept. ----------------------
----------------------
----------------------
----------------------
Self-Help Groups 39
Notes
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
---------------------- Fig. 3.1 Structure of SHG Federation

---------------------- The formation of SHG federations has played a major role in the expansion
of SHGs in India. However, there are some drawbacks to it as well. Since it
---------------------- is a formal group of informal common interest groups, it faces many internal
constraints. Poor self-governance, loopholes in systems and processes, poor
----------------------
management quality are few of the constraints associated with these federations.
---------------------- The cost of registration is also very high and comes to around Rs 7,000 per SGH
member. These constraints can be overcome by external assistance in terms of
---------------------- technology and governance. Several NGOs provide these services and are helping
to bridge this gap.
----------------------
SHG–Bank linkage programme
----------------------
The Bank Linkage Programme has played a major role in delivering
---------------------- financial services to the poor in a sustainable manner. The SHG–Bank Linkage
Programme commenced as a pilot programme during 1992 to link 500 SHGs
---------------------- with banks. This programme has grown exceptionally over the last two decades
---------------------- and over 97 million rural households have now access to rural savings through
74.62 lakh SHGs linked to different banks. [Source: Status of Micro Finance in
---------------------- India 2010−11, NABARD]
---------------------- The pilot project was launched by NABARD after extensive consultations
with the Reserve Bank of India, commercial banks and NGOs with the following
---------------------- objectives:
---------------------- • To evolve supplementary credit strategies for meeting the credit needs of
the poor by combining the flexibility, sensitivity and responsiveness of the
---------------------- informal credit system with the strength of technical and administrative
capabilities and financial resources of the formal credit institutions.
----------------------
• To build mutual trust and confidence between the bankers and the rural poor.
----------------------
• To encourage banking activity, both on the thrift as well as on credit sides,
---------------------- in a segment of population that the formal financial institutions usually find
difficult to cover.
----------------------
40 Micro Financing
The linking of SHGs with the financial sector was good for both sides. The Notes
banks were able to tap into a large market, namely the low-income households,
transactions costs were low and repayment rates were high. The SHGs were able ----------------------
to scale up their operations with more financing and they had access to more
credit products. ----------------------
Impact of SHG–Bank linkage programme ----------------------
The SHG–Bank Linkage Programme has made a huge and long-lasting ----------------------
impact in the history of microfinance. The major impacts are as under:
----------------------
• Reduction in poverty through increase in income, thereby helping the poor
----------------------
to build assets and reduce vulnerability.
----------------------
• Helped households to approach the SHGs for providing funds for education.
This has resulted in better school participation and low dropout rates. ----------------------
• Women empowerment by helping them to contribute to household income, ----------------------

thereby giving them better control on decisions affecting their lives.
----------------------
• Reduced child mortality, improved maternal health and ability of the poor
----------------------
to combat disease through better nutrition, housing and health, especially
among women and children. ----------------------
• Considerable reduction on dependency on local moneylenders and other ----------------------
non-institutional sources.
----------------------
• Facilitated significant research into the provision of financial services for
----------------------
the poor and helped in building capacity at the SHG level.
----------------------
• Finally, it has offered space for different stakeholders to innovate, learn and
replicate. As a result, some NGOs have added micro insurance products ----------------------
to their portfolios. A couple of SHG federations have experimented
with undertaking livelihood activities and grain banks have been built ----------------------
successfully into the SHG model in the eastern region of India. SHGs in
----------------------
some areas have employed local accountants for keeping their books, and
use of IT applications are now being explored by almost all SHGs for better ----------------------
Management Information Systems (MIS), accounting and internal controls.
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
Self-Help Groups 41
Notes
----------------------

1. The basic functions performed by the self-help groups are ________,
----------------------
__________, practical information, education and __________.
----------------------
2. The ___________ is a formal structure under which 15−20 SHGs come
---------------------- together to form a cluster or village organisation, which has one or two
representatives from each self-help group.
----------------------
3. Poor _________, loopholes in ________________, poor __________
---------------------- quality are few of the constraints associated with SHG federations.
----------------------
---------------------- Activity 2
----------------------
“Getting associated with a federation gives many benefits to an SHG.” Do you
---------------------- agree with the statement?
----------------------
----------------------
3.5 IMPACT OF SELF-HELP GROUPS
---------------------- The spread of self-help groups has been successful in spreading the outreach
of financial services to the poor. Apart from the financial benefits there are many
---------------------- non-financial areas, such as social security and gender dynamics, which have
benefitted from the SHG movement. Let us briefly discuss the non-financial
---------------------- benefits from self-help groups.
---------------------- 1. Political: SHGs have been actively involved in the government including
---------------------- Panchayati Raj Institutions (PRIs), local assemblies or Lok Sabha. As
discussed earlier, empowerment of women is one of the main focusses of the
---------------------- SHG movement and the same is reflected in their increased involvement in
public affairs. However, participation of women in politics is still very low
---------------------- but research says that those women who stood for elections, 70% of them
---------------------- had won their seats. The female contribution to civil issues ranges from
issue of ration cards, laying of pucca roads, building of school, ensuring
---------------------- appointments in vacant positions in schools and health centres, recovery of
river bank lands from encroachers and laying of drinking water pipes.
----------------------
The SHGs work both as a financier and as an inspirer for its members. Women
---------------------- in rural India have developed greater language and financial skills through
---------------------- the SHG movement, which in turn has helped in building their confidence
to engage the world. Also, the SHGs sometimes finance the campaign of
---------------------- their members who stand for election.
---------------------- Apart from empowering individual members, SHGs play a powerful political
42 Micro Financing
role as a group as well. The leaders of SHGs are often invited to attend and Notes
speak at local village meetings.
----------------------
2. Social harmony: The Indian society is demarcated by a hierarchical caste
system that discriminates against those at the bottom. Social harmony can ----------------------
be defined as the equality and integrity of relationships between different
----------------------
social groups. Generally, the SHGs consist of the following social groups:
----------------------
• Schedule Caste (SC)
• Scheduled Tribe (ST) ----------------------
• Minorities (MN) ----------------------
• Backward Caste (BC)
----------------------
• Other Caste (OC)
----------------------
SHGs can be formed with members from an exclusive social group or it can
be a mix of members from different social groups. Majority, almost two- ----------------------
thirds of SHGs, are single caste groups as they are formed on the principles
of neighbourhood proximity and affinity groups. Usually people of the same ----------------------
caste stay together and they tend to join a common group. Government also ----------------------
gives subsidies to groups belonging to the same caste in order to promote
a particular caste or group. ----------------------
The trend is now moving to participation from different castes in a group ----------------------
and is being promoted by NGOs. In some cases, cross-caste participation
----------------------
has been kept as a mandatory condition by NGOs for a SHG to join a
programme. This helps in increased interaction between people of different ----------------------
social groups thereby creating a bond between them. It has helped women
from different castes and sub-castes to come together in village meetings, ----------------------
thereby increasing their confidence and reducing prejudices.
----------------------
3. Social justice: Social justice is the presence of moral and ethical conduct ----------------------
in areas that are historically typified with backward and abusive customs.
SHGs have helped in solving disputes between members and community at ----------------------
large on various occasions. These instances include initiating legal action,
arbitration, divorce and others. The traditional dispute resolution mechanism ----------------------
in villages was a very lengthy process and was typically dominated by ----------------------
men. Now, there are instances of women, SHG members, being involved
in resolving disputes. ----------------------
Issues that can be dealt through a specific action (preventing bigamy, ----------------------
obtaining compensation, marriage of an orphan girl or a separated woman)
are more successful with the action having an immediate result. Private ----------------------
behavioural problems (domestic violence or sexual abuse) are far more ----------------------
difficult to address successfully.
----------------------
There are many instances of social injustices that are not recognized, as
people are very used to them and consider it a norm. The SHGs provide ----------------------
Self-Help Groups 43
Notes guidance to members and create awareness on such issues so that the
members can come out of these situations.
----------------------
4. Community: Being a group-based organisation of members of similar caste
---------------------- and geography, the community resources that are shared are impacted by
the SHG. Women in SHGs can work together to address issues that affect
----------------------
not only their own members, but others in the larger community. Improving
---------------------- community services like water supply, health care, education, veterinary care,
village road, etc; controlling sale and consumption of alcohol; contributing
---------------------- finance and labour for new infrastructure and protecting natural resources
are some of the community actions taken by SHGs.
----------------------
---------------------- The most common action taken by SHGs is the attempt to close down local
liquor outlets. Alcoholism – and the accompanying problems of domestic
---------------------- violence against women, the drain on household finances, impaired health
– is an aspect, which in many villages rouses anger and despair amongst
---------------------- women. Dealing with this issue is a major struggle, as they have to fight
---------------------- against not only behavioural syndrome, but also against institutional and
business elements, which have a vested interest in continuing to sell alcohol
---------------------- and make money out of it.
---------------------- Therefore, SHGs can act as a director of community development. A women-

based organisation taking a leading role in the betterment of the society has
---------------------- monumental impacts on the local community. Gender dynamics begins to
---------------------- change in instances such as these.
---------------------- 5. Livelihood: Livelihood, meaning a persons’ economic activity, is an area

that is vitally important to SHGs. The loans given by SHGs to their members
---------------------- are intended to improve their livelihoods so that they can receive greater
and steadier cash flows. The main sources of livelihood in rural areas are
----------------------
agriculture farming, animal husbandry, dairy and various other goods and
---------------------- services activities. SHGs provide funds to their members to start a business
thereby creating a source of income and improving livelihood. SHGs have
---------------------- also been successful in creating employment for its members by innovating
new means of livelihood apart from defining the old ones.
----------------------
---------------------- Traditionally, in the Indian villages only men used to earn livelihood for the
family, but now with the help of SHGs women are also getting involved in
---------------------- various activities thereby contributing to family income.
----------------------
3.6 FINANCIAL ASPECTS AND SUSTAINABILITY OF
---------------------- SELF-HELP GROUPS
----------------------
Sustainability
---------------------- An assessment of financial status depends on good quality records and
---------------------- preparation of standardised statements. SHGs do not prepare their financial
44 Micro Financing
statements regularly. This is more prevalent in small SHGs where members give Notes
an approximate figure of savings and loans outstanding but have no clue of loan
outstanding to banks and the profit or loss incurred during a given time period. ----------------------
The group members are actively involved in loan decision-making, but they are
not well versed with the financial status of their SHGs. ----------------------
Wherever financial statements are prepared by SHGs regularly, most of them ----------------------
earn sufficient profits to maintain the value of SHG members’ capital. Under the ----------------------
SHG−Bank Linkage Programme the groups are eligible to get loan up to four
times their savings. This means as the savings of groups increases, they have ----------------------
increased access to funds through the banking system. Each group has its own
credit absorption capacity depending upon the individual capacities of group ----------------------
members and local investment options. ----------------------
Recordkeeping
----------------------
The records of SHGs can be maintained either by SHG office bearers who
----------------------
are locally recruited bookkeepers and are paid a small monthly honorarium by
the SHG, or by unpaid non-members. These unpaid non-members are usually ----------------------
relatives of leaders or other well-wishers. Trend shows that paid bookkeepers
maintain records in a more organised way as compared to unpaid members. ----------------------
SHGs should maintain a system of internal verification as well as external ----------------------

audits. Generally, all SHGs have a verification system but there is a big question
mark on the effectiveness of these systems. However, with the increase in ----------------------
computerisation this problem is being taken care of to some extent. As the ----------------------
volume of transactions increases the recordkeepers find it difficult to manage.
As we have already seen that members of SHGs are generally illiterate, they ----------------------
cannot contribute much in recordkeeping and have to rely on outsiders for it.
Maintaining necessary back up is also a problem regularly faced by SHGs. ----------------------
Equity ----------------------
All members of a SHG save the same amount of money at each meeting. ----------------------
However, this does not mean that each member has equitable access to credit. ----------------------
Since all members of SHG are not economically equal and have different credit
repayment and absorption capacity, the group members allocate credit according ----------------------
to individual demand and capacity. Access to equal credit to all members is
preferred by some SHGs as it makes accounting very easy and leaves no room ----------------------
for disputes and bias. In many situations, a group leader tries to take benefit of ----------------------
his position and take a disproportionate share of the available credit.
----------------------
Defaults and recoveries
----------------------
There is a two-stage recovery process for loan repayment by SHGs. The
members first repay to the SHG and then the SHG repays to the bank. The SHG ----------------------
borrowings are governed by the concept of social collateral where all the members
of the group are responsible for ensuring loan repayment. In many cases, group ----------------------
members make repayment on behalf of the defaulter. The group members exert
----------------------
Self-Help Groups 45
Notes pressure on the defaulter to pay by holding discussions within the group, giving
warning, imposing fine and in worst cases taking possession of the defaulter’s
---------------------- assets.
---------------------- The escalation metric varies from case to case and whether the defaulter is
facing a genuine problem in repayment and the type of relationship the member
---------------------- has with the group. If there is a pressure to ensure repayment as a group to access
---------------------- a further bank loan, then cases of defaults are escalated to the highest level to
ensure recovery.
----------------------
SHGs have to maintain a fine balance while dealing with cases of defaults.
---------------------- They need to explore options to assist the defaulter so that the culture of repayment
is maintained. Various options, such as adjusting savings for loan repayment,
---------------------- loan rescheduling and matching cash flows, are used by the group to help the
defaulter in making payment of his loan.
----------------------

----------------------
State True or False.
----------------------
1. The SHGs work both as a financier and as an inspirer for its members.
----------------------
2. SHGs should maintain a system of internal verification as well as external
---------------------- audits.
----------------------
3. All members of SHG are economically equal.
----------------------
---------------------- Activity 3
----------------------
Meet an SHG working in a nearby village and discuss the process of book-
---------------------- keeping being followed by the SHG. What suggestions would you give to
improve that process?
----------------------
---------------------- 3.7 SHG–BANK LINKAGE PROGRAMME: AN

INSTRUMENT OF FINANCIAL INCLUSION
----------------------
---------------------- We have covered the concept and impact of the SHG–Bank Linkage
Programme earlier in this unit. Since this programme played a major role in the
---------------------- growth of microfinance in India, we are going to cover it in detail in this section.
---------------------- Loans: The total loan outstanding of SHGs already credit linked as on 31st
March 2015 was Rs 39,375.30 crore. As much as 83.3% of SHGs already linked
---------------------- to banks are exclusive women groups – one of the most distinguishing features
of the microfinance sector in the country. Around 53.4% of total rural households
----------------------
are members of the SHG–Bank Linkage Programme.
----------------------
46 Micro Financing
Notes
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
Fig. 3.2 SHG–Bank Linkage Programme – Number of SHGs
Savings: The total number of savings-linked SHGs stands at 73.18 lakh ----------------------
with a total saving account balance of Rs. 8217.25 crore as on 31st March 2013. ----------------------
Regular savings made by the members are utilised mainly for internal lending
within the group and only the balance is kept in the savings bank account of ----------------------
the group with the banks. The extent of internally mobilised savings utilised for
lending is over Rs 16,500 crore while the gross savings by all the members is ----------------------
around Rs 23,500 crore and gross savings per SHG is over Rs 31,300. ----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
Fig. 3.3 SHG–Bank Linkage Programme – Amount of Savings and ----------------------

Credits
----------------------
Credit linkage with banks: During 2012−13 fresh loans to the extent of
Rs.20, 585.36 crore were extended to 12.20 lakh SHGs. ----------------------
Recovery performance of banks loans to SHGs: The Non-Performing ----------------------

Assets (NPAs) of banks against loans to SHGs averages to around 4.72% of the
----------------------
total portfolio. There has been an increase in the NPAs over a period of time. The
main reason for increase in the NPAs is the decline in recovery performance of ----------------------
SHGs.
----------------------
Self-Help Groups 47
Notes 3.7.1 Study findings on the SHG–Bank linkage programme
---------------------- NABARD has been conducting regular studies on the functioning of the
SHGs through reputed institutions to gain insight into the functioning of the
---------------------- groups. Major findings of these studies are:
---------------------- • SHGs have helped reduce dependence on local moneylenders to the extent
of 66%.
----------------------
• Majority of the SHGs had written rules (around 88%) and the rest had oral
---------------------- rules.
----------------------
• Bankers continue to take long time to provide the first loan to SHGs and
---------------------- only few groups were able to get loans after six months.
---------------------- • While NGOs and government departments provided skill training to the
SHG members, bankers as Self-Help Promoting Institutions (SHPIs) were
---------------------- not very proactive in providing vocational training to members.
---------------------- • The training given by SHPIs was not sufficient to make the members suitable
---------------------- for income-generating activities.
---------------------- • Banks gave loans to SHGs to the extent of 1−3 times of their savings though
the actual requirement is much higher.
----------------------
• The SHGs depend heavily on SHPIs (NGOs, Anganwadi workers in case
---------------------- of government-sponsored groups) for bookkeeping and the quality of
---------------------- bookkeeping suffers a lot on exit of the agencies.
---------------------- • The maintenance of books is normally being externalised and it was regular
in 83% cases when maintained by outsiders. Only 54% books were updated
---------------------- when books were maintained by SHGs themselves.
---------------------- • There is laxity in enforcing group disciplines like regular attendance and
regular savings in the meetings.
----------------------
---------------------- • Asset creation out of SHG loans is seen in about 28% cases while in other
cases loans are used for consumption/purchase of utility items.
----------------------
• Loans to individual members range from Rs 10,000 to Rs 20,000 in majority
---------------------- cases.
---------------------- • Competition amongst various SHPIs and emphasis on achieving targets also
resulted in multiple memberships by SHG members.
----------------------
----------------------
3.8 CHALLENGES FOR SELF-HELP GROUPS
----------------------
Objectives of promoting SHGs differ. Even with social objectives, SHG
---------------------- has a financial base in the form of savings, lending and borrowings. This base
48 Micro Financing
should have effective and transparent management and guidelines. There Notes
is a need for clear guidelines and effective recordkeeping for microfinance
transactions. ----------------------
The incomes of the members joining the group are not only low but variable ----------------------
as well. The SHGs need to provide more flexibility to cater to varying and seasonal
cash flow in the form of allowing varying deposit amounts and frequency. Access ----------------------
to credit and repayment norms should also be aligned to cash flow pattern on ----------------------
a case-to-case basis. Also in areas of accounting, decision-making and social
action it is likely that the poorer the women (or some of the women) in an SHG, ----------------------
the more careful and sustained the promotion and guidance needs to be.
----------------------
Recordkeeping at group level is one of the weakest aspects of SHG
functioning. We all recognise the fact that good bookkeeping is critical for the ----------------------
survival of SHG. Good quality of bookkeeping means completeness, accuracy,
----------------------
up-to-date information and transparency. The records should be simple and user-
friendly and MIS should be maintained on a regular basis. Financial literacy and ----------------------
communication skills amongst the group members are also a challenge faced
by SHGs. Of late, some SHGs have developed expertise in bookkeeping and ----------------------
are providing their service to other SHGs on a contract basis. This is a more
----------------------
cost- effective solution as compared to manpower training and keeping records
in each group separately. ----------------------
Achievement of social objectives is one of the main motives of SHGs. There ----------------------
is a huge challenge involved in women having the right to speak out and take
a stand in still very traditional, patriarchal societies. The related reason is that ----------------------
social objectives too require a strategic approach, persistence and follow-up. The
----------------------
problems to be addressed should by picked up specifically and strategically as
and when they arise. ----------------------
External credit creates a problem for SHGs. These groups have been the ----------------------
victim of politics in the form of targets for the SHG−Bank Linkage Programme.
There has been a trend of pushing loans on SGHs leading to a supply driven ----------------------
approach. The amount and timing of such loans should depend on members’
capacities. Different groups have different credit absorption and repayment ----------------------
capacity and this should not be assumed to be the same for all groups. ----------------------
Policies on defaults and dropouts do not clearly state how to deal with ----------------------
defaults and dropouts. There is a need for clear guidelines and regular monitoring
of internal recoveries as part of regular trouble shooting. The norms for leaving ----------------------
SHGs and sharing excessive surplus should also be clear.
----------------------
Summary ----------------------
• SHGs are linked to banks and several development programmes and they ----------------------
provide many social and economic benefits.
----------------------
• The rise of SHGs and more formal SHG federations coupled with the SHG− ----------------------
Self-Help Groups 49
Notes Bank Linkage Programme have made this a dominant form of microfinance
in addition to microfinance institutions.
----------------------
• Providing social and financial support, advocacy, information and education
---------------------- to members are the main functions of SHGs.
---------------------- • The principle of helper therapy, easy accessibility and pooling of knowledge
---------------------- and resources help in achieving the objectives of SHGs.
---------------------- • A SHG federation is a formal structure under which 15−20 SHGs come
together to form a cluster or a Village Organisation (VO), which has one or
---------------------- two representatives from each self-help group.
---------------------- • The linking of SHGs with the financial sector was good for both sides.
The banks were able to tap into a large market, namely the low-income
----------------------
households, transactions costs were low and repayment rates were high.
---------------------- The SHGs were able to scale up their operations with more financing and
they had access to more credit products.
----------------------
• Reduction in poverty, large credit base for SHGs, women empowerment,
---------------------- reduction of dependency on moneylenders are some of the impacts of the
---------------------- SHG–Bank Linkage Programme.
---------------------- • Apart from empowering individual members, SHGs play a powerful political
role as a group as well. The leaders of SHGs are often invited to attend and
---------------------- speak at local village meetings.
---------------------- • SHGs have helped women from different castes and sub-castes to come
together in village meeting, thereby increasing their confidence and reducing
----------------------
prejudices.
----------------------
• SHGs can act as a director of community development.
----------------------
• The loans given by SHGs to their members are intended to improve their
---------------------- livelihoods so that they can receive greater and steadier cash flows.
---------------------- • The records of the SHG can be maintained either by SHG office bearers who
---------------------- are locally recruited bookkeepers and are paid a small monthly honorarium
by the SHG or by unpaid non-members.
----------------------
• There is a two-stage recovery process for loan repayment by SHGs. The
---------------------- members first repay to the SHG and then the SHG repays to the bank.
---------------------- • Transparency in management, variable incomes of members, poor record-
keeping, forced external credit, barriers in achieving social objectives, lack
----------------------
of policies on managing defaults and dropouts are the major challenges
---------------------- faced by SHGs.
----------------------
50 Micro Financing
Keywords Notes
----------------------
• Self-help group: A group generally formed by a group of 10−20 people,
usually women, from a similar class or region, who come together to form ----------------------
a saving and credit organisation.
----------------------
• SHG federation: A formal structure comprising several clusters or VOs to
form an apex body or SHG federation. ----------------------
• Village organisation: Several SHGs together form village organisations.. ----------------------
----------------------
• Social justice: The presence of moral and ethical conduct in areas that are
historically typified with backward and abusive customs. ----------------------
----------------------
----------------------
1. Explain the need and importance of self-help groups in the context of Indian
economy. ----------------------
2. What are the main functions of SHGs? ----------------------

3. What are the key principles that help SHGs to achieve their objectives? ----------------------
4. Explain the SHG model prevalent in India. ----------------------
5. Elaborate the impact of SHGs on:
----------------------
i. Politics
----------------------
ii. Social harmony
iii. Community ----------------------
iv. Livelihood ----------------------
6. What are the highlights of the SHG–Bank Linkage Programme? ----------------------
7. Explain the role played by SHGs in bringing social justice in the community.
----------------------
8. Elaborate the impact of the SHG–Bank Linkage Programme on various
sections of the Indian economy. ----------------------
9. What are the major challenges faced by SHGs? ----------------------
----------------------
----------------------
----------------------
Fill in the blanks.
----------------------
1. Self-help groups help in the development of women who are members
of these groups by providing access to low-cost financial services and ----------------------
encouraging them to manage and develop the group on their own.
----------------------
Self-Help Groups 51
Notes 2. SHGs are formed and supported usually by Non-Governmental Organisations
(NGOs) or (increasingly) by government agencies.
----------------------
3. The SHG-Bank Linkage Programme has provided opportunity to small
---------------------- SHGs to increase their capital base and provide credit to more members
and bigger projects.
----------------------

Fill in the blanks.
----------------------
1. The basic functions performed by the self-help groups are social support,
----------------------
financial support, practical information, education and advocacy.
----------------------
2. The SHG federation is a formal structure under which 15−20 SHGs come
---------------------- together to form a cluster or village organisation, which has one or two
representatives from each self-help group.
----------------------
3. Poor self-governance, loopholes in systems and processes, poor management
---------------------- quality are few of the constraints associated with SHG federations.
----------------------
----------------------
---------------------- 1. True
---------------------- 2. True
---------------------- 3. False
----------------------
Suggested Reading
----------------------
---------------------- 1. www.microfinanceindia.org, Microfinance India, State of the Sector Report

2010.
----------------------
2. www.nabard.org, Status of Micro Finance in India 2010−11.
----------------------
3. http://www.apmas.org/pdf%5CGTZ_NCAER.pdf
----------------------
4. http://www.igidr.ac.in/money/mfc_10/K.B.Rangappa.pdf
----------------------
5. http://www.microfinanceindia.org/download_reports/suman_bery.pdf
----------------------
----------------------
----------------------
----------------------
----------------------
52 Micro Financing
Commercial Microfinance
UNIT
4
Structure:
4.1 Introduction
4.2 Characteristics of Commercial Microfinance
4.3 Obstacles to Commercial Microfinance
4.3.1 Constraints to expanding Commercial Microfinance
4.4 Successful Approaches to Commercial Microfinance
4.5 Role of Government in promoting Commercial Microfinance
4.6 Financial Inclusion by Extension of Banking Services
4.7 Lessons from the Commercial Microfinance Model in India
Summary
Key Words
Suggested Reading
Commercial Microfinance 53
Notes
Objectives
----------------------
----------------------
●● Explain the concept of commercial microfinance
---------------------- ●● Understand the characteristics and obstacles to commercial
---------------------- microfinance
●● Assess the problems faced by commercial MFIs and how they cope
---------------------- with them
---------------------- ●● Identify the steps taken by RBI for financial inclusion
---------------------- ●● Discuss the recent commercial microfinance crisis in India and the
lessons learnt from it
----------------------
----------------------
4.1 INTRODUCTION
---------------------- We have seen in the previous units how the microfinance industry has
grown over the years through various microcredit programmes. Today it covers
---------------------- a wide range of products and services, from credit and savings to insurance
and remittances and many other non-financial services. The main focus of
---------------------- microfinance has been to provide access to financial services to those who are
---------------------- excluded from the formal financial system.
Most of the bankers were of the opinion that microfinance is not a genuine
---------------------- option and can never be profitable. The bankers perceived that the small
---------------------- microfinance clients are risky since they do not have stable viable business to
generate even cash flows neither do they have collateral to guarantee their loans.
---------------------- It was also believed that the operating cost of small loans would be very high.
Hence, the modern banking institutions stayed away from microfinance.
----------------------
Of late, many commercial banks in developing countries have begun
---------------------- to explore the microfinance market by relaxing their previous tough lending
conditions and have entered the microfinance sector with more favourable
----------------------
approaches.
---------------------- Commercial microfinance broadly refers to microfinance services provided
by commercial organisations that are part of the formal financial system like
----------------------
banks and non-bank financial institutions. Microfinance professionals all over
---------------------- the world are increasingly considering the commercialisation of microfinance to
be the application of market-based principles to microfinance or the expansion
---------------------- of profit-driven microfinance operations.
----------------------
4.2 CHARACTERISTICS OF COMMERCIAL MICROFINANCE
----------------------
The following are the key characteristics of commercial microfinance:
----------------------
• A professional, business-like approach towards the administration and
---------------------- operation of Microfinance Institutions (MFIs).
54 Micro Financing
• Developing diversified, demand-driven microfinance products and services Notes
and applying cost-recovery interest rates.
----------------------
• Thrust toward achieving operational and financial self-sufficiency by
increasing cost recovery and efficiency, as well as expanding outreach. ----------------------
• Use of commercial sources of funds; for example, non-subsidised loans from ----------------------
apex organisations (wholesale lending institutions) or commercial banks, ----------------------
voluntary savings, investor equity or other market-based funding sources.
----------------------
• Operation as a for-profit, formal financial institution that is subject to
prudential regulation and supervision and able to attract equity investment. ----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
Fig. 4.1 Key Stages in Commercialisation of an MFI ----------------------
4.3 OBSTACLES TO COMMERCIAL MICROFINANCE ----------------------
----------------------
Even though the financial market policy environment has improved
substantially, banks are still reluctant to enter the rural market. Six major obstacles ----------------------
have been identified which discourage banks from engaging in microfinance
activities: ----------------------
• Lack of commitment from bank management resulting in treatment of ----------------------

microfinance as a second-class activity.
----------------------
• Organisational design and difficulty in integrating microfinance activities
with conventional large-scale banking. ----------------------
• Peculiarities of microfinance market, e.g., short-term loan, group- based ----------------------

lending, simple, fast, no collateral, low minimum balance savings accounts,
----------------------
etc. that do not match with the conventional financial technologies.
----------------------
• Lack of specialised staff training.
• The need to reduce costs and/or increase interest rates. ----------------------
• Banking regulations, such as legal reserve requirements, loan classification ----------------------

and provisioning. ----------------------
Notes 4.3.1 Constraints to expanding Commercial Microfinance
---------------------- The constraints to expansion of commercial microfinance can be divided

into two categories. The first set contains constraints, which are peculiar to the
---------------------- rural sector and challenges present in rural financial intermediation. The second
set contains the general constraints present in the financial markets that have an
---------------------- impact on micro financing as well. Before we go through the rural market specific
---------------------- constraints, let us first understand the general constraints.
General constraints in financial markets
----------------------
These are the country-level constraints that impact the financial sector as a
----------------------
whole thereby affecting the efficiency of rural financing as well. These constraints
---------------------- are:
---------------------- • Unsound macroeconomic policy and management.

• Restrictive financial policies like interest rate controls.
----------------------
• Insufficient institutional capacity amongst MFIs to reach high levels of
---------------------- penetration in a sustainable manner.
---------------------- • Underdeveloped legal system, especially with respect to property rights
resulting in weak collateralisation of claims and inadequate contract
---------------------- enforcement mechanisms.
---------------------- • Improper prudential regulations and supervision of financial intermediaries.
---------------------- • Politics, corruption, poor governance are other factors, which increase risk.
---------------------- Additional challenges of rural financial markets
---------------------- The rural population is mostly dependent on agriculture and related activities
for earning their livelihood. There are some specific characteristics of rural
---------------------- financing which pose a challenge for the financiers. These are:
---------------------- • Low savings, small average loan size, less density of population increases
the operating cost per loan.
----------------------
• Lack of infrastructure in the form of transport, communication and electricity,
----------------------
lack of education and health services are the dominant features of rural areas.
---------------------- Their integration with complementary markets is also very low resulting in
highly fragmented financial markets. The financiers have limited option of
---------------------- risk diversification, and information barriers further increase their problems.
---------------------- • Financial risk is further enhanced due to heavy dependency on agriculture,
---------------------- which is seasonal and prone to natural disasters. A change in the yield or
price of the produce can have an impact on the cash flow of the borrowers
---------------------- thereby affecting the loan repayment schedules.
---------------------- It is for the above reasons that the formal financial institutions like commercial
banks have avoided financing in the rural areas. These specificities increase the
---------------------- transaction cost and risk thereby posing questions on sustainability. The micro
56 Micro Financing
entrepreneurs are unable to get cost-effective business financing, which forces Notes
them to be dependent on short-term credit from moneylenders who charge very
high rate of interest. Thus, they are not able to benefit from their investment and ----------------------
contribute to economic growth.
----------------------
----------------------
----------------------
1. Commercial microfinance broadly refers to microfinance services
provided by commercial organisations that are part of the informal ----------------------
financial system like banks and non-bank financial institutions.
----------------------
2. Most of the bankers were of the opinion that microfinance is a genuine
option and can be profitable. ----------------------
3. One of the major obstacles, which discourage banks from engaging in ----------------------
microfinance activities is lack of commitment from bank management
resulting in treatment of microfinance as a second-class activity. ----------------------
----------------------
Activity 1 ----------------------
Search on the Internet and find out the main characteristics that distinguish ----------------------
commercial microfinance from the conventional micro credit. ----------------------
----------------------
4.4 SUCCESSFUL APPROACHES TO COMMERCIAL
MICROFINANCE ----------------------
The extent of penetration of commercial microfinance in rural areas depends ----------------------

upon two major factors: ----------------------
• Extent of availability of economic opportunities for micro entrepreneurs
in rural areas. ----------------------
• Ability of commercial MFIs to develop demand-driven products and services ----------------------

and implement cost-effective mechanism for managing risk.
----------------------
Let us discuss some of the approaches to commercial microfinance.
----------------------
1. Rural group lending: Commercial MFIs have to opt for some indirect
alternatives to enter into the rural market in the absence of proper risk ----------------------
mitigation instruments like collateral and insurance. The most widely used
and well-worked alternative is joint liability contracts or group lending. Some ----------------------
of the prerequisites for successful group lending are regular meetings, high
----------------------
degree of social cohesion and loan size within mutual insurance capacity
of group. As we have covered in the previous units, social pressure created ----------------------
by joint liability groups encourages people to pay in time and also provides
security to the financier who is lending without collateral. ----------------------
Notes 2. Rural individual lending: Commercial MFIs can offer tailor-made loan
products to meet the demand of individual rural customers. By offering
---------------------- demand-driven loan products, they have been successful in attracting
significant farm-based and agriculture-related micro enterprises and
---------------------- households. Features like minimum savings deposit balance, flexible
---------------------- repayment schedule, loan based on projected agricultural produce, etc, make
it an attractive offer for the micro entrepreneurs and the flexibility ensures
---------------------- timely repayment to the MFI.
---------------------- 3. Rural savings: Commercial MFIs need to provide safe and liquid savings
instruments to their clients apart from fulfilling their credit needs. Savings
---------------------- facility provided by banks offers the client a source of liquidity and
expenditure management and helps them to build their debt capacity for
----------------------
future borrowings. From the MFI point of view, the savings mobilisation
---------------------- provides a source of funds for lending, as all clients, who have savings
account with the bank do not borrow at the same time. In India, the postal
---------------------- infrastructure is used very effectively to mobilise savings of the rural
population. According to a survey, the savings mobilised through postal
----------------------
infrastructure accounts for 85% of the country’s total savings in financial
---------------------- institutions.
4. Cost saving innovations and best practices: Due to the peculiarities of
----------------------
the rural sector, the operating cost of loans is very high. The commercial
---------------------- MFIs have been using a number of innovative methods and techniques to
reduce cost in various areas of rural credit and savings mobilisation. Some
---------------------- of these innovations are as under:
---------------------- • Smaller and less expensive MFI branches for areas where density of
population is low.
----------------------
• Establishment of branches and offices in densely populated locations to
---------------------- support maximum clients with minimum cost.
• Introduction of mobile banking, where agents go on motorcycles and issue
---------------------- loans and collect deposits from individuals as well as groups.
---------------------- • Critical evaluation of all possible cash flows of all family members before
sanctioning loan helps in reducing risk to some extent.
----------------------
• Linking repayment schedule with seasonality of produce and reducing
---------------------- dependency of repayment on crop. The lenders ensure that even if crop fails
or livestock dies the borrower can repay the loan from non-farm sources.
----------------------
• Many commercial MFIs use a system of stepped lending, i.e., the loan size
---------------------- is gradually increased upon successful repayment of previous debt.
• Careful selection of loan officers from rural areas, who have sufficient
---------------------- knowledge of local farming practices and non-farm economic activities.
---------------------- • Decentralisation of credit decision in the field by the credit officer, resulting
in quick sanctioning of loans.
----------------------
• Availability of portable computers, smart cards and personal digital assistants
---------------------- to credit officers during field visit for quick decisions.
58 Micro Financing
Notes
Activity 2
----------------------
Based on your knowledge of banking and microfinance, suggest some ----------------------
alternatives for commercial to enter into the rural market MFIs.
----------------------
4.5 ROLE OF GOVERNMENT IN PROMOTING ----------------------
COMMERCIAL MICROFINANCE
----------------------
Income expansion and poverty reduction are the primary goals of the
----------------------
government and it is believed that the commercial microfinance approach can
reach large number of clients on a sustainable basis. The government can play a ----------------------
major role in the promotion of commercial microfinance by promoting favourable
policy environment with least interventions. The factors that can contribute to ----------------------
promote rural financing are:
----------------------
• Favourable policy environment.
----------------------
• Reduction in bias towards rural financing.
• Strengthening legal and regulatory framework. ----------------------
• Building the capacity of commercial MFIs to deliver demand-driven credit, ----------------------

savings and insurance services in a self-sustaining manner.
----------------------
Based on these factors, we can identify three focus areas for the government:
----------------------
1. Providing an enabling environment: The government needs to create a
----------------------
policy environment, which supports rural microfinance. The key enablers
in this direction can be summarised as under: ----------------------
• Low and stable inflation.
----------------------
• Maintenance of stable currency.
----------------------
• Liberalisation of the financial sector.
• Elimination of interest rate controls. ----------------------
• Privatisation of development banks. ----------------------

• Promotion of rural activities through competitive strategies and export ----------------------
promotion.
----------------------
• Improvement in information flow.
• Reduction in legal requirements. ----------------------
----------------------
2. Improving institutional capacity: The following factors can contribute
towards an improved institutional capacity: ----------------------
• Advanced technical assistance and training.
----------------------
• Strengthening of existing formal and semi-formal financial institutions.
----------------------
Notes • Linking formal and informal financial institutions.
• Development of sound and transparent risk management, internal control
---------------------- and management information systems for financial institutions.
---------------------- • Capacity building of commercial MFIs to respond to demand from rural
households through donor intervention.
----------------------
• Cost-effective training and technical assistance to commercial MFIs to
---------------------- assist them to deliver efficient services and maintain high portfolio quality.
• Performance-based grant to commercial MFIs to help improve management
----------------------
information system and reach new clients in rural areas.
---------------------- • Savings mobilisation to reduce dependency on donor funds.
---------------------- 3. Supporting innovation and linkages: The following efforts can help in
institution building to help in reaching different segments of diverse rural
---------------------- markets:
---------------------- • Encourage introduction of other financial services like insurance, deposits,
commodity financing, micro leasing, hedging, etc. besides credit. These
---------------------- products help in reducing transaction cost and better management of risk
and liquidity.
----------------------
• Linkages to commercial sources of funds in order to expand the fund base
---------------------- for MFIs.
----------------------
Activity 3
----------------------
---------------------- Visit the website of SBI and find out how it is contributing towards improving
institutional capacity of MFIs.
----------------------
----------------------
4.6 FINANCIAL INCLUSION BY EXTENSION OF
---------------------- BANKING SERVICES
---------------------- The Reserve Bank of India has been working continuously on promoting
commercial microfinance in the country. We have seen in the previous Unit how
----------------------
the SHG–Bank Linkage Programme has helped in the promotion of rural finance
---------------------- in India. Another initiative in this direction is the Business Correspondent Model.
---------------------- A Working Group was constituted by the Reserve Bank of India to examine
the effectiveness of the Business Correspondent (BC) Model and suggest
---------------------- measures to enlarge the category of persons that can act as BCs, keeping in view
the regulatory and supervisory framework and consumer protection issues. Banks
----------------------
were advised to take necessary action for implementing the recommendations
---------------------- of the Working Group as indicated below.
---------------------- Authorised Business Correspondents
---------------------- Banks can appoint the following entities as BCs:
60 Micro Financing
i. Individual kirana/medical/fair price shop owners. Notes
ii. Individual Public Call Office (PCO) operators. ----------------------
iii. Agents of small savings schemes of Government of India or insurance ----------------------
companies.
----------------------
iv. Individuals who own petrol pumps.
----------------------
v. Retired teachers.
----------------------
vi. Authorised functionaries of well-run Self-Help Groups (SHGs) linked to ----------------------
banks.
----------------------
With a view to ensuring the viability of the BC model, banks (and not BCs)
are permitted to collect reasonable service charges from the customer. Considering ----------------------
the profile of the clientele to whom banking services are being provided through
----------------------
the BC model, banks should ensure that the service charges/fees collected from
the customer for providing banking services through the BC model are fair and ----------------------
reasonable. Banks should in particular ensure that there are no complaints from
the customer about the charges being non-transparent or not reasonable. Any ----------------------
unfair practices adopted by banks in this regard will be viewed seriously by the
----------------------
Reserve Bank of India.
The inclusion of the above entities will substantially expand the list of the ----------------------
already existing BCs. Keeping in view the operational and other implied risks, ----------------------
banks are advised to ensure that they carry out suitable due diligence in respect
of the entities proposed to be appointed as BCs. Banks should also institute ----------------------
additional safeguards as may be considered appropriate to minimise the agency
risks. Information and Communication Technology (ICT) solutions that ensure ----------------------
proper authentication and other security measures may be adopted to minimise the ----------------------
risk while upscaling the model. Further, banks may ensure that while appointing
the above entities as BCs, the fundamental principle that the individuals are ----------------------
residents of the area in which they propose to operate as BCs, stands fulfilled.
----------------------
A summary of the recommendations of the Working Group and the actions
to be taken by banks are as under: ----------------------
Realising the full potential of the BC model ----------------------
Given the right impetus, the BC model has the potential to speed up the ----------------------
process of financial inclusion in the country and bring the vast majority of
----------------------
population within the banking fold. The Group recognises the fact that the
process of financial inclusion involves the three critical aspects of (a) access to ----------------------
banking markets, (b) access to credit markets, and (c) financial education. The
full scope of the model can be realised not just by opening no-frills accounts, ----------------------
but by synthesising the above three aspects as integral components of the model.
----------------------
Towards this end, there should be proper understanding and appreciation of the
BC model by all stakeholders, in particular, by banks. Banks need to appreciate ----------------------
Notes the benefits arising out of adopting the branchless BC model and implement the
same with missionary zeal to achieve the ultimate goal of financial inclusion.
---------------------- Cash handling
---------------------- Banks could think in terms of streamlining cash management by adopting
cash routes (linking various BCs which are in close proximity to each other to a
---------------------- base branch) wherever warranted with suitable cash transit insurance to be borne
---------------------- by the banks.
Financial education and consumer protection
----------------------
i. Banks need to scale up their efforts substantially towards educating the
---------------------- clientele in their respective vernacular languages regarding the benefits of
banking habit. For this purpose, extending necessary financial support from
---------------------- the Financial Inclusion Fund administered by NABARD may be considered.
---------------------- ii. Information regarding BCs engaged by banks may be put on the banks’
websites. The annual reports of banks should also include the progress
---------------------- in respect of extending banking services through the BC model and the
---------------------- initiatives taken by banks in this regard. Banks may also use print and
electronic media (including the vernacular language) to give wide publicity
---------------------- about implementation of the BC model by them.
---------------------- iii. The banks may educate their customers through various means – print,
electronic, etc. – the role of the BC and their obligation towards the
---------------------- customers, in the vernacular language.
iv. The banks need to ensure the preservation and protection of the security and
----------------------
confidentiality of customer information in the custody or possession of the
---------------------- BCs.
v. Banks may put in an appropriate grievance redressal mechanism, which
----------------------
should be widely publicised and also placed in public domain. The details
---------------------- of the grievance redressal officer should be displayed at the premises of the
BC and also at the base branch and made available by the bank/BC at the
---------------------- request of the customer.
---------------------- Ensuring viability of the BC model
i. The BC model can succeed only if the banks own up the BCs as their agents.
----------------------
Banks may need to have a relook at the compensation structure for BCs.
---------------------- ii. The range of services to be delivered through the BC should be revamped
to include suitable small savings, micro credit, micro insurance, small value
----------------------
remittances, etc.
---------------------- iii. Banks may be permitted to collect reasonable service charges from the
customer, in a transparent manner, for delivering services through the BC
----------------------
model. Suitable guidelines may be issued by RBI in this regard, especially
---------------------- keeping in view the profile of customers using these services.
iv. Banks may bear the initial set up cost of the BCs and extend a handholding
----------------------
support to the BCs, at least during the initial stages. Banks may also need
---------------------- to bear the costs relating to transit insurance of the cash handled by BCs.
62 Micro Financing
v. In order to improve the viability of the BC model, banks may consider Notes
providing reasonable temporary overdrafts to the BCs free of interest
charges. ----------------------
Risk mitigation measures ----------------------
To address the various risks involved in rendering banking services ----------------------

through the BC model, banks need to put in place suitable and adequate risk
----------------------
mitigation measures. Further, banks may be guided by the instructions contained
in the guidelines on “Outsourcing of Financial Services” issued by RBI while ----------------------
implementing the BC model.
----------------------
Adoption of appropriate technology
----------------------
Banks may adhere to the RBI guidelines on adoption of appropriate
technology while implementing the BC model. ----------------------
Training for the BCs ----------------------
Banks may also develop suitable training modules in the local language/s in ----------------------
order to provide proper attitudinal orientation and skills to the BCs. The Indian
Institute of Banking & Finance (IIBF) has already developed training modules ----------------------
for BCs. These modules may be translated in vernacular languages and leveraged
----------------------
----------------------
----------------------
1. SHG–Bank Linkage Programme has not helped in the promotion of
rural finance in India. ----------------------
2. Banks can appoint retired teachers as BCs. ----------------------
3. BCs are permitted to collect reasonable service charges from the
----------------------
customer.
----------------------
Activity 4 ----------------------
----------------------
Meet a banking correspondent and enquire about the difficulties faced by
them in delivering banking services to consumers. ----------------------
----------------------
4.7 LESSONS FROM THE COMMERCIAL
----------------------
MICROFINANCE MODEL IN INDIA
----------------------
The dominant model in Indian microfinance is the commercial model where
an MFI is registered as a Non-Banking Financial Company (NBFC) with RBI and ----------------------
taps commercial funding (debt and equity) through different means. It generally
carries a standard loan product that is offered to joint liability groups in rural ----------------------
Notes areas of India. The core elements of commercialisation like standardised processes,
large outreach, efficiency of operations and profitability are the main emphasis of
---------------------- an NBFC. On one hand, the motive of NBFCs is to reach out and provide loans
to a large number of unreached and excluded people, on the other hand, they look
---------------------- for opportunities to tap commercial funding from investors and lenders. In order
---------------------- to do this successfully the commercial microfinance model also emphasises that
the commercial investors should get good returns on their investment.
----------------------
The following reasons were identified for such rapid growth of MFIs during
---------------------- this period:
---------------------- • Excessive multiple lending for consumption purposes.
---------------------- • Granting of loan without assessing the absorption capacity of the client.
• Pushing of loans indiscriminately to low-income clients for consumption
---------------------- purposes without any sensitivity to their debt-servicing ability in order
---------------------- to grow (very fast), showing unnatural profits to attract capital at high
valuations.
----------------------
The cycle of multiple lending can be well understood from the following
---------------------- diagram:
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
Fig. 4.2 Mutually reinforcing Cycle of Growth followed by Some MFIs
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
64 Micro Financing
This growth was achieved with the help of following factors: Notes
• Use of unauthorised agents by MFIs to source and target new clients resulting ----------------------
in minimum personal contact between the MFI and clients.
• Non-adherence to Know your Customer (KYC) norms resulting in lack of ----------------------
documentary proof about the income, expenses and indebtedness of clients. ----------------------
• Low-quality services to clients.
----------------------
The major after-effects of high growth were:
• Increased cash embezzlement and frauds by unauthorised agents and ----------------------
employees.
----------------------
• Loans given to non-existent clients based on false documents given by
agents. ----------------------
• Increased rate of defaults by end customers.
----------------------
• Loans taken by clients to repay another loan, thereby falling into a debt trap.
----------------------
The MFIs, in the race to grow at a superfast speed, did not have the internal
controls to manage this growth. This resulted in increased frauds by the employees ----------------------
and the MFIs were forced to write off huge amounts from their books in the
subsequent year. ----------------------
The key learning from this crisis is the need for internal controls and proper ----------------------
supervision by RBI in order to avoid future crisis situations. The supervisory
mechanism of RBI needs to be strengthened in order to identify gaps in the ----------------------
functioning of NBFC-MFIs and take immediate actions. The misuse of the ----------------------
commercial microfinance model needs to be controlled so that the low-income
clients can be protected. There is a need for developing an enabling microfinance ----------------------
regulatory and supervisory mechanism that can really work on the ground for
the benefit of large number of low-income people, who continue to lack access ----------------------
to quality and affordable financial services at the grassroots. ----------------------
----------------------
Activity 5
----------------------
Keeping in mind the recent crisis in the microfinance sector, what
----------------------
precautionary measures would you suggest the MFIs to attain sustained
growth. ----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
Notes Summary
---------------------- • Commercial microfinance broadly refers to microfinance services provided
by commercial organisations that are part of the formal financial system like
----------------------
banks and non-bank financial institutions.
---------------------- • Professional approach, diversified development, use of commercial sources
---------------------- of funds and operating-for-profit are amongst the key features of commercial
microfinance.
----------------------
• The main obstacles to commercial microfinance are lack of management
---------------------- support, peculiarities of the microfinance market, lack of trained staff and
banking regulations.
----------------------
• The constraints to expansion of commercial microfinance can be divided
---------------------- into two categories. The first set contains constraints, which are peculiar to
the rural sector and challenges present in rural financial intermediation. The
---------------------- second set contains the general constraints present in the financial markets
---------------------- that have an impact on microfinancing as well.
• The extent of penetration of commercial microfinance in rural areas
----------------------
depends upon the extent of availability of economic opportunities for micro
---------------------- entrepreneurs in rural areas and the ability of commercial MFIs to develop
demand-driven products and services and to implement cost-effective
---------------------- mechanism for managing risk.
---------------------- • The commercial MFIs have been adopting successful approaches in
commercial group lending, individual lending and commercial savings in
---------------------- order to reach out to the large number of rural households.
---------------------- • Some cost saving innovations and best practices followed by them include
---------------------- centralisation of branches, mobile banking, power and technological support
to credit officers to take instant decisions, stepped lending, decentralisation
---------------------- of credit decision, etc.
---------------------- • The three focus areas for government in promoting microfinance are
providing an enabling environment, improving institutional capacity and
---------------------- supporting innovation and linkage development.
---------------------- • The Business Correspondent Model of RBI has been a recent initiative
in the financial inclusion by authorising a larger group of people to act as
----------------------
business correspondents.
----------------------
• RBI has provided various guidelines for BCs in order to ensure that they
---------------------- provide best services to clients and there is no misuse of power.
----------------------
----------------------
----------------------
66 Micro Financing
Keywords Notes
----------------------
• Active clients: The number of clients with loans outstanding on any given
date. ----------------------
• Commercialisation: In a microfinance context, commercialisation refers to ----------------------
the move by MFIs to provide services on a financially self-sufficient basis
and under prevailing commercial principle and regulations. ----------------------
• Financial self-sufficiency: In a microfinance context, an institution ----------------------
is financially self-sufficient when it has enough revenue to pay for all
administrative costs, loan losses, potential losses and funds. ----------------------
• Stepped lending: The process in which borrowers, who repay loans on time ----------------------
are eligible for increasingly larger loans.
----------------------
• Sustainability: An organisation’s ability to cover costs.
----------------------
• Transparency: The degree of a financial institution/MFI’s openness as
determined by a sequence of financial information-gathering and testing. ----------------------
----------------------
1. What do you mean by the term commercial microfinance? What are the key ----------------------
characteristics of commercial microfinance?
----------------------
2. What obstacles do banks face in commercialisation of microfinance? Can
----------------------
you suggest ways to overcome those obstacles?
----------------------
3. What are the two categories of constraints to expanding commercial
microfinance? Elaborate each category. ----------------------
4. Elaborate the steps of commercialisation of microfinance and how an MFI ----------------------

moves towards self-sufficiency and profitability with commercialisation.
----------------------
5. What are the three areas of focus for government in supporting promotion
----------------------
of commercial microfinance?
----------------------
6. List the entities, which can be appointed as banking correspondents.
----------------------
7. What are the steps taken by RBI for promoting commercial microfinance?
Elaborate the recommendations of the Working Group for improving the ----------------------
Banking Correspondent Model.
----------------------
8. What are the factors that led to the fast growth of MFIs between 2008 and
----------------------
2010? What was the outcome of this growth?
----------------------
9. What measures should be taken by RBI to keep a control on the activities
of NBFC-MFIs? ----------------------
Notes Answers to Check your Progress
---------------------- State True or False.
---------------------- 1. False
2. False
----------------------
3. True
----------------------
----------------------
----------------------
1. False
---------------------- 2. True
---------------------- 3. False
----------------------
Suggested Reading
----------------------
1. http://rbidocs.rbi.org.in/rdocs/PublicationReport/Pdfs/BCFRFW1908009.
----------------------
pdf
----------------------
2. http://www.rbi.org.in/Scripts/BS_CircularIndexDisplay.aspx?Id=2718
----------------------
3. http://www.idbi.com/pdf/BCMODELREVISED.pdf
----------------------
4. www.microfinanceindia.org, Microfinance India, State of the Sector Report
---------------------- 2010
---------------------- 5. www.mixmarket.org
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
68 Micro Financing
Cooperative Microfinance
UNIT
5
Structure:
5.1 Introduction
5.2 History of Cooperative Microfinance
5.3 Structure and Significance
5.4 Types of Cooperative Microfinance
5.5 Strategy
5.6 Support Services
5.7 Issues in Cooperative Microfinance
5.8 Reasons for Slow Progress of Cooperatives
5.9 Recommendations
5.10 Future Prospects
Summary
Key Words
Suggested Reading
Cooperative Microfinance 69
Notes
Objectives
----------------------
----------------------
●● Outline the history of cooperative microfinance
---------------------- ●● Explain the different types of cooperative microfinance
---------------------- ●● Recommend strategies for cooperatives
---------------------- ●● Analyse the current problems faced by cooperatives
---------------------- 5.1 INTRODUCTION

---------------------- A cooperative is an autonomous association of persons united voluntarily to
meet their common economic, social and cultural needs and aspirations through a
----------------------
jointly owned and democratically controlled enterprise. Cooperatives as business
---------------------- enterprise own some basic interests, such as ownership and control. Therefore,
they follow certain values other than making profit. Need for profitability is
---------------------- composed by the needs of the members and the wider interest of the community.
The values universally recognised as foundations of cooperative behaviour
----------------------
are self-help, democracy, equality, equity and solidarity. Voluntary and open
---------------------- membership, democratic control, economic participation, autonomy, training,
information and concern for community are the predominant features by which
---------------------- the cooperatives put their values into practice.
----------------------
5.2 HISTORY OF COOPERATIVE MICROFINANCE
----------------------
The history of cooperatives in India is more than a 100 years old.
---------------------- Cooperatives in India were introduced by the British primarily to aid small-scale
farmers and to improve access to rural credit. The first Cooperative Societies
----------------------
Act was passed in 1904, which then, only included credit cooperatives. The
---------------------- Act was soon amended to grant the registration at the state level of non-credit
cooperatives, including housing and its administration, allowing them to adapt
---------------------- the legislation to prioritise local needs.
---------------------- The Indian cooperative sector was born during the end of the colonial era.
The primary focus was to address the issues of farmers’ indebtedness and poverty.
---------------------- This initiative was formalised in 1904 by the passage of the Cooperative Credit
Societies Act, 1904. During a century of its existence, this sector has managed
----------------------
to cover more than 5.45 lakh individual cooperative organisations and over 236
---------------------- million members. From its inception, it has several achievements in almost all
sectors of the economy. Subsequent events during both pre and post-Independence
---------------------- period have led to a vast growth of cooperatives covering various sectors of the
Indian economy. How¬ever, the problems and challenges resulting from years
----------------------
of control by Government, growing out of initial support and partnership by the
---------------------- state as well as arising out of the economic realities thrown up by the opening
up of the economy and significant impacts of globalisation in the economy, have
---------------------- been many.
70 Micro Financing
5.3 STRUCTURE AND SIGNIFICANCE Notes
The cooperative structure in India comprises different constituents. At the ----------------------
bottom of this structure are the primary societies, which render various types of
services. Around 80% is concerned with agriculture and out of that, about 60% ----------------------
deal with credit only. Thus, a large majority of primary societies are related to ----------------------
agriculture and credit. They provide various services, such as credit, irrigation,
marketing, transports, etc. These societies are divided into two groups: (i) credit ----------------------
societies and (ii) non-credit societies, and each of these two groups is further split
up into sub-groups: (a) agricultural societies and (b) non-agricultural societies. ----------------------
For supervision and financial assistance to cooperative credit societies, there ----------------------
are central banks and state cooperative banks. The central banks supervise the
functioning of the primary societies of a district or part of a district and offer ----------------------
financial assistance to them. Their capital is drawn from public deposits, share
capitals and loans from other sources. They act as a link between cooperative ----------------------
societies and the money market because of variety of sources from which these ----------------------
banks can draw money, They function as balancing centres by diverting funds
of surplus societies to the needy societies; they also perform ordinary banking ----------------------
functions. At the top of the cooperative credit societies, at the state level, is the
state cooperative bank, also known as the apex bank. It controls the working of ----------------------
the central banks and provides finance to them. It also acts as the link between ----------------------
the Reserve Bank of India from which it borrows and the central banks and
primary societies. It directs the cooperative movement in the state. Its capital ----------------------
comes from share capital, public deposits and loans and advances from the state
and Reserve Bank of India. The National Cooperative Union of India is the apex ----------------------
organisation promoting the cooperative movement in the country. All the above ----------------------
three types of institutions (primary societies, central banks and state cooperative
banks) are concerned with short and medium-term credit to people. Long-term ----------------------
loans are given by land development banks, which have a unitary structure having
branches at different places. These banks obtain their funds from share capital, ----------------------
reserves, deposits, issue of bonds and debentures. However, the major part of ----------------------
their resources is drawn from the floating of ordinary debentures in the market.
----------------------
Some of the major significance of the cooperative microfinance are as
follows: ----------------------
• It is an organisation for the poor, illiterate and unskilled people. ----------------------
• It is an institution of mutual help and sharing. ----------------------
• It overcomes the constraints of agricultural development. ----------------------
• It softens class conflicts and reduces social cleavages. ----------------------
• It reduces bureaucratic evils and follies of political factions. ----------------------
• It creates conducive environment for small and cottage industries. ----------------------
----------------------
Notes
----------------------
---------------------- Multiple Choice Single Response.

1. The objective of establishing cooperative society is to:
----------------------
i. Earn profit
---------------------- ii. Extend services to local community
iii. Voluntarily meet common economic, social and cultural needs of
----------------------
members
---------------------- 2. The basic objective of passing the Cooperative Credit Societies Act,
1904 was:
----------------------
i. To help economic development of India
---------------------- ii. To address the issues of farmers’ indebtedness and poverty
---------------------- iii. To help social development of India
----------------------
Activity 1
----------------------
---------------------- Visit a nearby cooperative society and learn about their schemes, which
address the issues of farmers’ indebtedness and poverty.
----------------------
---------------------- 5.4 TYPES OF COOPERATIVE MICROFINANCE

----------------------
Many types of cooperative microfinance are present in India and majorly it
---------------------- is classified as follows:
---------------------- 1. Primary Agricultural Credit Societies: The major objectives of the primary
agricultural credit societies are to supply agricultural credit for meeting the
---------------------- requirements of funds for agricultural production, distribution of essential
consumer commodities, provision of storage and marketing facilities for
---------------------- light agricultural implements and machinery. At the state level, the credit
---------------------- structure is based on a three-tier system, i.e., the Apex Cooperative Bank
at the state level, the Central Cooperative Bank at the district level and the
---------------------- Primary Agricultural Credit Societies at the village level.
---------------------- 2. Agricultural Non-Credit Societies: While low credit remains the chief
concern of the cooperative movement, since 1912, when the non-credit
----------------------
societies were brought officially under the aegis of the movement, the
---------------------- position became comfortable. The number of societies also rose. Another
interesting development in cooperative during the World Wars was the
---------------------- extension of the movement to non-credit activities, viz. consumer’s
cooperative marketing societies, consolidation societies, etc. The number
----------------------
of agricultural non-credit societies in the districts was 38 in 1978−79.
----------------------
72 Micro Financing
3. Agricultural Cooperative Marketing Societies: Marketing has occupied a Notes
far smaller place in the cooperative picture in India than in many countries,
notably Denmark and the USA. The development of cooperative marketing in ----------------------
India is closely bound with the problem of credit claims of the moneylenders
commonly inhibiting the cultivator’s freedom of action in disposing off his ----------------------
crop. The full utilisation of loans advanced depends upon the arrangements ----------------------
for the marketing of surplus produce.
----------------------
4. Cooperative Farming Societies: The Royal Commission on Agriculture
in 1928 observed that if cooperation failed, there would be no hope for ----------------------
the Indian agriculturists. Cooperative farming is a compromise between
----------------------
collective farming and the peasant proprietorship and gives all merits
of large-scale farming without abolishing private property. It implies an ----------------------
organisation of the farmers based on the common efforts for common
interests. Under this system, all landowners in a village form a cooperative ----------------------
society for tilling the land. The land is pooled, but each farmer retains the
----------------------
right of property. They are allowed to withdraw from the cooperative farm
whenever they desire. In India, the exceedingly small size of holdings is ----------------------
perhaps the reason for the development of cooperative farming societies.
----------------------
5.5 STRATEGY ----------------------
Cooperatives should evolve a time-bound strategy to increase microfinance ----------------------
services to the poor. Credit products and infrastructure of cooperatives should be
suitably readapted to effectively meet the financial needs of the poor. ----------------------
The existing base-level primary savings and credit institutions should be ----------------------
motivated to form self-help groups (SHGs) with homogeneous membership
ranging from 10 to 20 and linking them with the bank for financial services. ----------------------
Base-level cooperatives should also aggressively take up savings activity (deposit ----------------------
mobilisation) to augment resources for on-lending to the self-help groups, which,
in turn, will provide the need-based credit to the members on flexible terms ----------------------
without collaterals, both for consumption and productive purposes. Cooperatives,
under the proposed arrangement of financing the SHGs will have the advantage ----------------------
of reducing their transaction cost, as also the normal risks of lending to the poor ----------------------
through the informal SHGs.
Capacity building of the cooperatives in terms of infrastructure, human ----------------------
resource, knowledge and skill upgradation, procedure and practices, wherever ----------------------
possible by adoption of appropriate technologies in the areas of information and
communication, should receive priorities to provide the services in an efficient ----------------------
and effective manner.
----------------------
Equally important is capacity building measures of SHGs and their members
through appropriate training and educational modules, particularly in regard ----------------------
to decision-making, standard accounting practices, documentation, financial
----------------------
management, including internal control systems.
Cooperatives, wherever necessary, may outsource the services of NGOs, ----------------------
Notes mutual fund institutions and other intermediaries to form the SHGs and to
provide the services for capacity building of SHGs and their members. These
---------------------- intermediaries can also be the appropriate channel to route the credit to the SHGs
for on-lending to their members.
----------------------
Experiences of successful microfinance models show that even the poor
---------------------- have the capacity to save and do save for future exigencies. This culture of thrift
needs to be appropriately focused through education, motivation and other means.
----------------------
Such savings on regular basis by the members would create wealth and augment
---------------------- the resources of cooperatives by the linkage practice for lending to the poor.
---------------------- Cooperative banks may develop appropriate financial and service packages
with a view to meet the needs of the poor in the SHGs adequately on the strength
---------------------- of their own saving, supplemented by borrowings from external sources.
----------------------
5.6 SUPPORT SERVICES
----------------------
Cooperatives do need support services and appropriate mechanism to
---------------------- access them keeping in view the needs of members of SHGs and to protect their
economic interests. The most important support measure would be to cover risk
----------------------
arising from death, accidents, natural calamities, old age, illness, etc. Hybrid
---------------------- insurance products will have to be evolved and provided to the members of
the SHGs at affordable cost to cover various risks and uncertainties. Such risk
---------------------- coverage and social security as an integral part of microfinance may be provided
either through cooperative insurance institutions or through tie-ups with other
----------------------
insurance companies.
----------------------
Cooperative banks may also need, at least at the initial stages, funding support
---------------------- either by way of loan or by re-finance from development finance institutions like
NABARD in India to augment the resources for microfinance activities.
----------------------
For capacity building, particularly for HRD business planning and
---------------------- development, environment protection, technology adoption, etc., the existing
training institutions, including those established by cooperatives, NGOs,
---------------------- microfinance institutions, government agencies, etc. could be the major source
---------------------- for training in various disciplines. Wherever possible, government agencies
responsible for implementing the poverty alleviation programmes could also
---------------------- be involved for providing needed services to the cooperatives, SHGs and its
members.
----------------------
Entrepreneurship development and skill upgradation need special focus
---------------------- for establishing micro enterprises by the members of SHGs and this has to be
---------------------- organised and provided for by the co-operatives, either directly or through other
intermediaries.
----------------------
----------------------
----------------------
74 Micro Financing
5.7 ISSUES IN COOPERATIVE MICROFINANCE Notes
These are the following issues that cooperative microfinance is facing: ----------------------
• Inability to ensure active membership, speedy exit of non-user members, ----------------------
lack of member communication and awareness building measures.
----------------------
• Serious inadequacies in governance including that related to boards’ roles
and re-sponsibilities. ----------------------
• A general lack of recognition of cooperatives as economic institutions ----------------------

amongst both the the policymakers and public at large. ----------------------
• Inability to attract and retain competent professionals. ----------------------
• Lack of efforts for capital formation particularly concerning the enhancement ----------------------
of member equity and thus, member stake.
----------------------
• Lack of cost competitiveness arising out of issues, such as overstaffing, a
general top-down approach in forming cooperatives including the tiered ----------------------
structures.
----------------------
• Politicisation and excessive role of the government chiefly arising out of
the loopholes and restrictive provisions in the Cooperative Acts. ----------------------
----------------------
5.8 REASONS FOR SLOW PROGRESS OF
----------------------
COOPERATIVES
----------------------
Despite rapid growth, the overall progress of cooperative movement during 100
years of its existence is not very impressive. It is, therefore, necessary to know ----------------------
the causes of poor performance of the movement and on that basis take such
steps as would promote faster growth of cooperative movement in India. ----------------------
1. Government intervention: Government intervention was an essential ----------------------

element in the working of these institutions, which eventually led to the slow
----------------------
growth of the movement. The movement’s independence and self-reliance
existed only on paper and files. After the attainment of Independence, in ----------------------
particular after the beginning of the five-year plans, some healthy changes in
the attitude of the government did take place. However, cooperatives were ----------------------
not given proper importance that they deserved in any plan. The cooperative
----------------------
movement grew very slowly and haphazardly and failed to become a full-
fledged people’s movement. It was a state-driven institution. ----------------------
2. Mismanagement and manipulation: The essence of the cooperative ----------------------
movement is that it gives the farmers the status of shareholders and assures
them agricultural, educational and medical facilities. Under the Maharashtra ----------------------
State Cooperatives Act, a minimum of 11 farmers is required to form a ----------------------
cooperative. Today the shareholder membership averages between 15,000
and 25,000 farmers. The strength of the movement was the involvement of ----------------------
Notes the farmers who were shareholders in the sugar mill regardless of the size
of their holdings.Over the years, this truly democratic idea got corrupted
---------------------- and farmers with larger holdings grew more powerful.
---------------------- 3. Lack of awareness: Objectives of the movement, the contributions it can
make in rebuilding the society and the rules and regulations of cooperative
----------------------
institutions were not clear to the people. Unfortunately, no special efforts
---------------------- have been made to spread awareness. Lack of education, village politics,
caste-ridden elections to the offices of cooperative societies, bureaucratic
---------------------- attitudes of the government officers at the lower rank are some of the hurdles
in spreading the correct information about the cooperative movement and
----------------------
in educating the people about its true character and vital role in the society.
----------------------
4. Flaws in functioning: From inception, the cooperative movement has
---------------------- suffered from lack of skilled personnel. This was due to two major factors.
Firstly, there has been a lack of institutions for the purpose of training
---------------------- personnel. Secondly, because of the unsatisfactory working of cooperative
---------------------- institutions, efficient personnel did not feel attracted or motivated towards
them. Due to such weakness, the movement failed to grow at a rapid pace.
----------------------
---------------------- 5.9 RECOMMENDATIONS

---------------------- In order to address the issue of lack of cooperative credit to large sections of the
farming community, the following recommendations were made:
----------------------
• Providing incentives to become members of cooperatives to those who are
---------------------- outside the credit system in the form of soft loans/grants for the purpose of
share capital contribution to cooperatives.
----------------------
• Conducting a detailed and focused study on the reasons for large sections of
---------------------- rural and agricultural population not being covered by formal credit system
---------------------- with emphasis on the need to make modifications to enable larger coverage
of these populations.
----------------------
• Considering a separate line of credit for meeting the credit needs of the
---------------------- creditworthy farmer members of weak Primary Agricultural Credit Societies
(PACS).
----------------------
• Encouraging the formation of SHGs comprising non-defaulting members
---------------------- of such PACS as have become ineligible for NABARD funding.
---------------------- • Providing an additional avenue of refinance to cooperatives by drawing
up a suitable scheme to fund it from the Rural Infrastructure Development
---------------------- Fund (RIDF).
---------------------- • As the risks for the Indian farmers are of high degree because of the
dependence of agriculture on weather, the whole issue of finance and
----------------------
insurance needs a fresh look and a permanent solution. An expert committee
---------------------- can study the issue and take it forward based on the available information
and recommendations made by various studies.
76 Micro Financing
5.10 FUTURE PROSPECTS Notes
Reforms are necessary in order to overcome weaknesses of the cooperatives ----------------------
societies. The first and foremost improvement concerns the reorganisation of
primary societies so that they can function properly. For this reorganisation, three ----------------------
steps are called for. First, the weak and inefficient societies should be merged
----------------------
with efficient societies; otherwise, the weak societies would weaken people’s
confidence in the movement. Second, small societies should be merged to build ----------------------
larger societies. With large amount of resources at its disposal, big societies can
avail certain facilities, which small societies cannot secure. Third, instead of ----------------------
single-purpose societies, multi-purpose societies need to be organised though
----------------------
single purpose societies appear to be more useful because each one would
concentrate on a specified function. ----------------------
It is very much necessary to spread the cooperative movement as people’s ----------------------
movement. People should not think it as a part of the government or a department
of the government. People should own it and manage it. People should be ----------------------
educated about the advantages of this movement. Educational institutions at
----------------------
various levels, radio, TV, newspapers, poster and other mass media can be used
for this purpose. However, Government’s participation and support is necessary, ----------------------
though it should not be patronage, interference or domination. It should facilitate
its growth in a healthy way. The cooperative movement should be conceived ----------------------
and developed as a part of the national economy. Along with private and public
----------------------
sector, it should be treated as a separate sector in its own right. In fact, of the
three sectors, the cooperative sector alone can claim to be the people’s sector ----------------------
with a human face. Therefore, for its growth, more resources should b eallocated
under the five-year plans of the government. Also, there is a need for extending ----------------------
the cooperative activities in all the regions of the country. The northeastern states
----------------------
are lagging behind. There is also an urgent need for helping the weaker sections
and vulnerable groups like SCs and STs to form cooperatives in order to be free ----------------------
from the exploitation of the middlemen. Therefore, appropriate concession and
facilities should be extended to such societies. Finally, there should be research ----------------------
and continuous monitoring and inspection about the problems and constraints
----------------------
of different cooperative societies. It will help to overcome the difficulties and
proceed further. The cooperative movement will be an important impetus for ----------------------
rapid rural development of the country.
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
Notes
----------------------
---------------------- 1. Cooperative farming is a compromise between ____________ and

_______________.
----------------------
2. SHGs have the advantage of reducing beneficiary’s ___________ and
---------------------- __________ of lending to the poor.
----------------------
---------------------- Activity 2
----------------------
Visit an SHG and write down any three problems faced by the SHG in
---------------------- identifying the beneficiaries.
----------------------
Summary
----------------------
• The first Cooperative Societies Act was adopted in1904; the Act was soon
----------------------
amended to grant the registration at the state level of non-credit cooperatives,
---------------------- including housing and its administration, allowing them to adapt the
legislation to prioritise local needs.
----------------------
• About 80% of cooperative microfinance is concerned with agriculture. Most
---------------------- of these societies, about 60% deal with credit only and a large majority of
---------------------- primary societies are related to agriculture and credit. They provide various
services, such as credit, irrigation, marketing, transports, etc.
----------------------
• Capacity building of the cooperatives in terms of infrastructure, human
---------------------- resource, knowledge and skill upgradation, procedure and practices,
wherever possible by adoption of appropriate technologies in the areas of
---------------------- information and communication, should receive priorities to provide the
---------------------- services in an efficient and effective manner.
---------------------- • Some of the major issues in cooperative microfinance are inability to ensure
active membership, attract and retain competent professionals, lack of efforts
---------------------- for capital formation, lack of cost competitiveness, etc.
---------------------- • For the growth of cooperative microfinance, more resources should be
---------------------- allocated under the five-year plans of the government. Also, there is need
for extending the cooperative activities in all the regions of the country. And
---------------------- finally, there should be research and continuous monitoring and inspection
about the problems and constraints of different cooperative societies.
----------------------
----------------------
78 Micro Financing
Keywords Notes
----------------------
• Cooperative: A jointly owned commercial enterprise (usually organised
by farmers or consumers) that produces and distributes goods and services ----------------------
and is run for the benefit of its owners.
----------------------
• Globalisation: A processes of international integration arising from
increasing human activity and interchange of worldviews, products, ideas, ----------------------
and other aspects of culture.
----------------------
----------------------
----------------------
1. What do you understand by cooperative microfinance?
----------------------
2. Describe the structure and significance of cooperative microfinance.
----------------------
3. Explain different types of cooperative microfinance.
----------------------
4. Discuss the major issues and problems related to cooperative microfinance.
----------------------
5. Explain why there is a slow progress of cooperatives in India. ----------------------
----------------------
----------------------
----------------------
Multiple Choice Single Response.
----------------------
1. The objective of establishing cooperative society is to:
----------------------
iii. Voluntarily meet common economic, social and cultural needs of
members ----------------------
2. The basic objective of passing the Cooperative Credit Societies Act, 1904 ----------------------
was:
----------------------
ii. To address the issues of farmers’ indebtedness and poverty
----------------------
1. Cooperative farming is a compromise between collective farming and ----------------------
peasant proprietorship.
----------------------
2. SHGs have the advantage of reducing beneficiary’s transaction cost and
normal risks of lending to the poor. ----------------------
----------------------
Notes
Suggested Reading
----------------------
1. Helms, Brigit. 2006. Access for All: Building Inclusive Financial Systems.
---------------------- Washington, D.C.: World Bank.
---------------------- 2. http://www.nabard.org/databank/IARD%20Web/csidfiles/Microfinance%20
through%20women%20co-op%20banks.pdf
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
80 Micro Financing
Client Impact Studies
UNIT
6
Structure:
6.1 Introduction
6.2 Microfinance Business Models
6.3 Client Impact Studiey Assumption I
6.4 Client Impact Studiey Assumption II
6.5 Client Impact Studiey Assumption III
6.6 Client Impact Studiey Assumption IV
6.7 Client Impact Studiey Assumption V
6.8 Client Impact Studiey Assumption VI
6.9 Client Impact Studiey Assumption VII
6.10 Client Impact Studiey Assumption VIII
6.11 Assessment of Client Impact Studies
6.12 Effectiveness of SHG. Bank Linkage in targeting the Poor
Summary
Key Words
Suggested Reading
Client Impact Studies 81

Notes
Objectives
----------------------
----------------------
●● Appraise client impact studies undertaken by various agencies/
---------------------- organisations
---------------------- ●● Critique the various assumptions under which the impact studies are
explored
---------------------- ●● Evaluate the effectiveness of SHG - Bank Linkage in targeting the
---------------------- poor
---------------------- 6.1 INTRODUCTION

---------------------- In recent years, microfinance has gained growing recognition as an effective
---------------------- tool in improving the quality of life and living standards of very poor people.
This recognition has given rise to a movement that now has a global outreach
---------------------- and has penetrated the remote rural areas, besides slums and towns.
---------------------- Microfinance programmes extend small loans to poor people for their varied
needs such as consumption, shelter, income generation and self-employment etc.
----------------------
In some cases, microfinance programmes offer a combination of several services
---------------------- to their clients, in addition to credit. These include linkages with savings and
insurance avenues, skill development training and marketing network. Micro
---------------------- credit programmes, thus, assume significance since they facilitate poverty
---------------------- reduction through promotion of sustainable livelihoods and bring about women
empowerment through social and collective action at the grassroots. In addition,
---------------------- microfinance interventions lead to increased social interaction for poor women
within their households and in the community, besides greater mobility that
---------------------- increases their self-worth and self-assertion in the social circle.
---------------------- In India, the microfinance movement has almost assumed the shape of
an industry, embracing thousands of NGOs/MFIs, community-based self-help
----------------------
groups and their federations, cooperatives in their varied forms, credit unions
---------------------- and public and private banks. During the last decade, the sector has witnessed
a sharp growth with the emergence of a number of Microfinance Institutions
---------------------- (MFIs) that are providing financial and non-financial support to the poor in an
effort to lift them out of poverty.
----------------------
The MFI channel of credit delivery, coupled with the national level
---------------------- programme of SHG-Bank Linkage today reaches out to millions of poor across
---------------------- the country.
In view of their large-scale intervention in the microfinance sector, several
---------------------- organisations such as SIDBI (Small Industries Development Board of India), DFID
---------------------- (Department for International Development, U.K), IFAD (International Fund for
Agricultural Development, Rome), AFC (Agricultural Finance Corporation of
---------------------- India Ltd.), NABARD (National Bank for Agriculture and Rural Development),
82 Micro Financing
RFAS (Rural Finance Access Survey), World Bank and many others had from Notes
time to time undertaken Impact Assessment Studies of microfinance programme
vis-à-vis objectively verifiable socio-economic indicators. The objectives of ----------------------
these studies were varied with a view to assessing the impact of its micro credit
programme on the ultimate beneficiaries/clients and improving the practices by ----------------------
understanding the process of MFI intervention. ----------------------
The studies highlight the benefits received by the client households from
----------------------
their association with microfinance, in terms of expansion and diversification
of livelihood activities, growth in employment opportunities, income growth, ----------------------
asset acquisition, savings, access to loans from various sources, reduction in
vulnerability and women empowerment. A clients’ retrospective stories, based ----------------------
on in depth interviews, give a holistic picture of the changes brought about in
----------------------
their lives as a result of the assistance.
----------------------
Such studies have been bringing out that there is vast unfulfilled demand
for microfinance in India, and the MFI sector has immense potential and scope ----------------------
to grow, supplement and complement the SHG-Bank Linkage Programme.
----------------------
6.2 MICROFINANCE BUSINESS MODELS ----------------------
MFIs follow different business models. Some are based on SHG (Self Help ----------------------
Group) model, a few have Grameen (Bangladesh Grameen Bank Model pioneered
by Dr. Mohammed Yunus, Nobel Laureate) model, some have Individual Banking ----------------------
Model and few have Sector specific (e.g. fishery) Cooperative Model. ----------------------
The MFIs, however, do not strictly follow all the specific details of their
----------------------
respective model. Most of the models are hybrids or adapted to suit the local
socio-economic requirements. For example, although the groups formed by ----------------------
Grameen MFIs were not SHGs, some of them followed certain features of SHGs
like collection of savings and inter-loaning among the group members. ----------------------
Table 6.1 Operational Features of Microfinance Models in India ----------------------

Operational SHG Grameen Individual ----------------------
Features Banking &
Sector Specific ----------------------
Area of operation Mainly rural Rural & urban Rural & urban ----------------------
Main clients Poor, borderline Poor & poorest, General, non-
poor, Women women poor men & ----------------------
women
----------------------
Service focus Savings & credit Cyclical credit Need based
credit (higher ----------------------
amounts)
Transactions Monthly/Weekly Weekly meetings Individual ----------------------
meetings ----------------------
----------------------

Notes Savings Rs 20 – Rs 200 Rs 5 – Rs 30 Flexible,
minimum 10-15
---------------------- % of loan
---------------------- Interest on savings 3% - 4%, Bank Nil 4% 4.5% – 9.5%
rate
---------------------- Loan size Rs 2500 – Rs Rs 1000 – Rs Rs 5000 – Rs
50000 30000 200000
----------------------
Effective interest 12% – 24% 21% - 26% 12% – 24%
---------------------- rate
No. of loan 12 – 24 months 12 – 18 months 12 – 36 months
---------------------- installments
---------------------- (monthly)
Insurance Mostly voluntary Compulsory & Compulsory
---------------------- voluntary
Developmental Training & linkage Group training None,
----------------------
services with enterprise & occasional occasional
---------------------- development market support enterprise
programmes support
----------------------
[Source: “Assessing Development Impact of Microfinance Programmes”, SIDBI Report]
----------------------
Many of the MFIs started as development support institution, with the
---------------------- vision of improving the quality of life of the poor and underprivileged, through
interventions in various social activities. They adopted microfinance activities
---------------------- subsequently. Their experience in working with the poor helped them in offering
---------------------- microfinance services to their clients. All of them were accepting savings from
their clients earlier, but of late, many of them have stopped the practice, as they
---------------------- had no legal status to accept deposits. Apart from providing credit, some of them
offered other services such as training facilities and marketing arrangements to
---------------------- their clients.
----------------------
----------------------

---------------------- 1. MFIs follow different business models, which are ________
----------------------
---------------------- 1. Many of the MFIs started as purely profit-oriented institution accepting

small savings from their clients.
---------------------- 2. Microfinance programmes extend large loans to poor people for their
---------------------- varied needs such as consumption, shelter, income generation and self-
employment etc.
----------------------
----------------------
84 Micro Financing
6.3 CLIENT IMPACT STUDY ASSUMPTION I Notes
Client Impact Study Assumption I states:“Microfinance is an effective ----------------------
strategy for extending financial services to the poor and other disadvantaged
groups not reached by formal sector finance”, which has been found to be ----------------------
‘partially supported’ from the findings of various studies.
----------------------
• MFI movement is predominantly taking place in better developed Southern
----------------------
States and in rural areas.
----------------------
• MFIs generally serve poor clientele, but ‘very poor’ clients are still
unreached. ----------------------
• Majority of clientele is from socially disadvantaged Scheduled Castes and ----------------------

Tribes, and Backward Classes.
----------------------
• Coverage of women clients is predominant.
----------------------
MFIs, on an average, mostly serve rural clients, the proportion ranging from ----------------------
65% to 100%. Out of the total rural clients:
----------------------
• Female clients, on an average, constituted 80 per cent of the total clientele.
Here to it ranges from 20% to 95% depending on the type and location of ----------------------
the MFIs.
----------------------
• Among various social groups, clients belonging to Backward Classes
have the highest share (e.g. 50 percent) in the studies, followed by clients ----------------------
belonging to Scheduled Castes (25 percent). However, Scheduled Tribe ----------------------
clients had the least representation. Classification by wealth rank revealed
that, majority of the clients belonged to ‘borderline’ category (40 per cent) ----------------------
followed by ‘poor’ category (30 per cent). However, ‘very poor’ clients
have least representation (10 per cent). ----------------------
----------------------
• Majority of the women clients were illiterate (55 per cent) followed by
those who had completed primary level education (40 per cent). In the case ----------------------
of male clients, the scenario was better and the corresponding percentages
were 25 and 35. Percentage of clientele with access to formal financial ----------------------
institutions like banks and post offices increased slightly in case of formal
----------------------
credit (7 per cent to 8 per cent) but decreased in case of formal savings (16
per cent to 15 per cent). ----------------------
The percentage of households reporting their main source of income as ----------------------
agriculture, animal husbandry and non-farm activities have increased, whereas,
those reporting casual labour and others have marginally decreased over the ----------------------
period. The allied agricultural activities like fishing and salaried income did not ----------------------
register any significant change.
----------------------
----------------------

Notes 6.4 CLIENT IMPACT STUDY ASSUMPTION II
---------------------- Client Impact Study Assumption II states: “There is an overall improvement
in access and use of MFI loans but not of other services”. This is supported by
---------------------- the data collected in client impact studies.
---------------------- • Access to micro credit has improved for clients.
---------------------- • Savings, under MFI programme, has experienced a setback (as many MFIs
---------------------- were not eligible for collecting deposits from its clients).
---------------------- • Micro Credit has been utilised for investment in productive activities besides
other household requirements.
----------------------
Access to Savings
----------------------
Though savings was the most popular microfinance service among the
---------------------- clients, the discontinuation of savings schemes by some MFIs resulted in fall in
number of clients with savings with MFIs across all wealth ranks. Provision of
----------------------
opening micro savings account in the group under the programme had proved to
---------------------- be a boon for the clients, especially for the vulnerable ones. However, with the
passing of “Microfinance Institutions (Development and Regulations) Bill 2011,
---------------------- things will now improve on the savings front for MFIs. However, for commercial
banks engaged in SHGs-Bank Linkage Program, the savings story is heartening,
----------------------
with significant increase in savings by SHG members (Source: NABARD Status
---------------------- Report on Microfinance 2010-11).
---------------------- The reasons for preference of the savings scheme, especially by women,
were their ability to:
----------------------
• Maintain savings account at their doorstep.
----------------------
• Save small amounts on regular basis, which was not possible in any formal
---------------------- financial institution.
---------------------- • Create emergency fund to give them a kind of security against the odds.
---------------------- • Contribute to their family or near and dear ones during distress.
----------------------
• Pay monthly installments in case of paucity of funds.
----------------------
• Exercise control over the expenditure decision.
----------------------
• Create fellow feelings/bondage among the members of the group
----------------------
Members felt that savings in SHG was a panacea, as it helped in emergency
---------------------- situations, including releasing of mortgaged land or house, medical purposes,
children’s education and social and religious functions.
----------------------
----------------------
86 Micro Financing
Access to Micro Credit Notes
Micro credit has made a perceptible impact on the lives of many client ----------------------
households through provision of small loans with easy repayment terms, which,
in turn, has helped them in starting new enterprises or expanding their existing ----------------------
ones. Availing of loan from MFIs has increased across all wealth rank categories
but the increase was more visible for the ‘very poor’ category and all of them ----------------------
opted for it at the expense of group loan. ----------------------
Average size of MFI loan and Group loan has also increased for all individual
----------------------
wealth ranks over time. The rise was more significant for ‘very poor’ category.
----------------------
Use of Micro Credit
Micro credit has been utilised for various purposes by the client households. ----------------------
Direct investment occupied the major share (65 per cent) in MFI loan-use pattern ----------------------
for all wealth ranks, over the decade.
----------------------
Micro credit used for risk needs was highest for ‘very poor’ category initially,
but substantially came down during the decade. This showed that with the support ----------------------
of micro credit, the clients belonging to the vulnerable groups were gradually
gaining strength, over time, for coping with their vulnerability and were utilising ----------------------
the fund for productive investment. ----------------------
Access to Insurance
----------------------
The number of MFIs offering life insurance went up marginally for all
----------------------
models over the decade.
----------------------
• Among the insurance product, Life Insurance remains the most popular
product. However, experience in selling this product has been different in ----------------------
different MFIs. Some have sold well, whereas others have not gained much
success. ----------------------
• The coverage under Asset Insurance remained at a nascent stage across all ----------------------
models and is yet to make any perceptible impact among the clients.
----------------------
• Many MFIs initially started their own in-house insurance schemes, with
the following features: ----------------------
• Advantages of micro credit ----------------------
• Available at the doorstep. ----------------------
• Involved less paper work. ----------------------

• Accessible to the poor. ----------------------
• No corruption involved. ----------------------
• No involvement of middlemen. ----------------------
----------------------

Notes Use of Non-financial Services
---------------------- While some MFIs were providing non-financial services such as specialised
training pertaining to the client’s occupation and/or enterprise development
---------------------- programme, a majority of them had not taken adequate initiative in skill
development of their clients in spite of the demand for such services.
----------------------
The coverage of clients under various training programmes has increased
---------------------- over time. Similarly, coverage under Enterprise Development Programme (EDP)
improved from 14 per cent to 20 per cent during the decade. The coverage under
----------------------
health related services went up from 5.0 per cent to 25 per cent over time.
----------------------
Access to Micro Credit by Group Leaders
---------------------- The various client impact studies have attempted to assess whether the group
---------------------- leaders utilise their position for their own benefit by availing larger chunks of
micro credit.
----------------------
• The findings on profile of group leaders showed that the 70 per cent of them
---------------------- came from ‘borderline’, and 30 per cent from the ‘non-poor’ categories.
This percentage has remained almost the same during the decade with a
---------------------- marginal change.
----------------------
• The findings showed that the group leaders occupied a better position in
---------------------- comparison to their fellow members regarding amount of micro credit
availed.
----------------------
---------------------- Activity 1
----------------------
‘Direct investment occupied the major share (65 per cent) in MFI loan-use
---------------------- pattern for all wealth ranks, over the decade’. Substantiate this statement by
observing how micro credit has been utilised for various purposes by the
---------------------- client households.
----------------------
---------------------- 6.5 CLIENT IMPACT STUDY ASSUMPTION III

---------------------- Client Impact Study Assumption III states: “Microfinance increases
enterprise activities” was “supported” by the impact studies.
----------------------
With micro credit support, clients have started new or expanded existing
----------------------
enterprises, which not only provided better employment opportunities but also
---------------------- increased enterprise income. Let us read about these activities.
---------------------- 1. Micro credit for enterprises: Many clients have used micro credit
for developing their existing activities or diversifying into new activities with a
---------------------- view to increasing their sources of income.
---------------------- During the decade of studies, the number of enterprises of the client
88 Micro Financing
households increased by 2 per cent while those supported by micro credit Notes
increased by 6 per cent. The overall proportion of micro credit supported
enterprises to total enterprises increased slightly from 43 per cent to 45 per cent. ----------------------
The MFI credit had smoothened the income cycle of the family by way ----------------------
of ensuring regular income and helped the financially backward in developing
their own enterprise and standing on their own feet, thus greatly improving their ----------------------
standard of living. ----------------------
2. New enterprises supported by micro credit: The proportion of new
----------------------
enterprises started by client households with micro credit support declined from
27 per cent to 14 per cent. It can be surmised that, in general, the clients were ----------------------
not very eager to take up new enterprises with micro credit due to lack of skills
and marketing problem. Instead, they used the available credit for stabilising ----------------------
and developing existing enterprises.
----------------------
3. Sectoral profile of micro credit financed enterprises: Over the period,
the proportions of the enterprises supported by micro credit in various sectors ----------------------
to the total enterprises increased marginally from 15 per cent to 16 per cent for ----------------------
agriculture and from 20 per cent to 21 per cent for animal husbandry but declined
for fisheries and non-farm activities. ----------------------
4. Activities pursued by the clients: The main enterprises pursued by the ----------------------
clients did not differ much during the last decade. But there were many instances
of both expansion and diversification of enterprises with micro credit support. ----------------------
5. Change in income from activities: Clients reported increase in income ----------------------

from majority of activities. The activities that accounted for higher income gain
relate to self-employment – manufacturing (75 per cent of units reported increase ----------------------
in income), trading (70 per cent) and service (65 per cent), indicating their higher ----------------------
potential for income generation.
----------------------
6. Non-agricultural enterprises as income sources: Client households
reporting non-agricultural activities as the main source of income increased for all ----------------------
categories of clients. Thus, microfinance showed a positive impact by increasing
non-agricultural enterprise activity in the client households. ----------------------
7. Employment pattern: Labour requirement per household, which was ----------------------

initially 1.4 persons improved to 1.8 by the end of the decade. Microfinance has
not only provided increased employment opportunities to under-employed family ----------------------
members, but it also has a spillover effect of creating demand for hired labour ----------------------
(which increased from 30 per cent to 35 during the period.)
----------------------
8. Risk and closure of activities: Many microfinance clients were affected
by several risk factors such as cash crunch (30 per cent), marketing problems (15 ----------------------
per cent), and illness (15 per cent). Since they worked at a very small scale and
had little financial backing, these factors often forced them to close their activities. ----------------------
Inability of some MFIs to supply timely and adequate credit and rigidity of some
----------------------
in sticking to their loan amounts specified for various rounds were responsible
for the cash crunch faced by many clients thus. ----------------------

Notes 9. Clients’ perception on differences made by micro credit: Majority of
the clients (55 per cent) reported that the increase in the size of activity was the
---------------------- main difference that micro credit had made. Also, qualitative improvement (40
per cent) and market support (10 per cent) were the other differences mentioned
---------------------- by the clients. Among different wealth ranks, larger percentages of non-poor (65
---------------------- per cent) reported that micro credit had made more difference in their activities.
---------------------- 10. Human capital: Micro credit helped the clients in realising the need
for providing education to their children. At the beginning of the studies, all
---------------------- children (below 14 years) of 55 per cent of households were availing of school
education. More remarkable was the fact that 65 per cent of female children were
---------------------- going to school (the percentage was 70 per cent for ‘very poor’ clients).
----------------------
6.6 CLIENT IMPACT STUDY ASSUMPTION IV
----------------------
Client Impact Study Assumption IV states: “Microfinance contributes to
----------------------
improvement in income related aspects” was supported by the data in the studies.
---------------------- • Micro credit contributed to improvement in asset acquisition.
---------------------- • Partially helped clients to take advantage of educational opportunities for
---------------------- their children.
• Produced positive impact on diversification of livelihood for the poor.
----------------------
• Contributed to reduction in casual labour.
----------------------
• Contributed to improved level of income.
----------------------
• Reduced dependence on costly informal sources.
----------------------
• Brought about reduction in the incidence of poverty among clients.
----------------------
These are some of important considerations related to Client Impact Studies
---------------------- Assumption IV.
---------------------- Acquisition of assets
---------------------- Acquisition of assets is an indication of capital formation and also
improvement in the living standards of clients.
----------------------
In the case of “very poor” category, the percentage of households reporting
----------------------
acquisition of assets increased from 32 per cent to 40 per cent during the decade.
---------------------- However, during the decade of study period, the percentage of households
---------------------- acquiring assets remained almost the same, indicating that the loan amounts were
used more for working capital than acquisition of productive assets.
----------------------
The average value of assets increased from Rs. 23,000 to Rs. 25,000 over
---------------------- the period. The share of productive assets in the total assets increased from 35
per cent to 48 per cent over time.
----------------------
90 Micro Financing
Availability of credit played an important role in the acquisition of assets. Notes
The proportion of sample client households acquiring assets with micro credit
support increased from 70 per cent to 78 per cent. ----------------------
Multiple sources of income ----------------------
Majority of the client households (over 70 per cent) had multiple sources ----------------------
of income.
----------------------
During the decade of study, the proportion of households with multiple
sources of income declined slightly, mainly for the ‘non-poor’ category. ----------------------
However, for ‘very poor’ and ‘poor’ clients, there was an improvement, ----------------------
indicating that micro credit had helped the poorer clients to seek more sources
of income. ----------------------
Wealth rank wise, the dependency ratio (i.e. total number of members per ----------------------
earner in the household) of client households had fallen drastically for the poorer ----------------------
and borderline clients but risen for the non-poor, indicating that the number of
earners per household is on the increase. For non-client households, the ratio ----------------------
had risen for all wealth ranks except those in ‘self-sufficient category’.
----------------------
Dependence on casual labour
----------------------
There was a decline in the casual labour employment among client
households (from 40 per cent to 35 per cent). ----------------------
Cost of borrowing ----------------------
Microfinance offered relatively cheap credit in a simplified manner to the ----------------------
clients who, otherwise, would not have been eligible to get any credit from
institutional sources. However, this amount being small, the clients continued ----------------------
to borrow from non-MFI sources. But their proportion declined during the
decade across all wealth ranks. The percentage of households borrowing from ----------------------
moneylenders came down from 8 per cent to 5 per cent while those borrowing ----------------------
from friends came down from 5 per cent to 2.5 per cent.
----------------------
Interest rate of different sources
Interest rates on MFI loans, as reported by the clients, were less than the ----------------------
interest rates charged by moneylenders. However, compared to the interest rates ----------------------
charged by sources other than moneylenders, MFI loans were not cheap.
----------------------
Reduction in poverty
A wealth ranking exercise was done to assess whether microfinance has ----------------------
improved the position of the clients with respect to poverty. An Index Based ----------------------
Ranking was also designed for the purpose. Using these ranking exercises, the
clients were ranked in five categories at the end of the period of studies. ----------------------
The results showed that half of the clients in the ‘very poor’ category had ----------------------
moved up to ‘poor’ category. Only about 15 per cent remained in the same
category. The remaining clients had moved to still higher category. For the poor ----------------------

Notes category, about 40 per cent remained in the same category and a number of them
moved to higher categories. About 10 per cent of them moved down to ‘very
---------------------- poor’ category.
---------------------- Since micro financing provided mainly one input (credit) for economic
upliftment, it may not be right to expect that all clients would come above the
---------------------- poverty level because of participating in the programme.
---------------------- One of the major problems confronting the poor households is the lack of
adequate income and assets to deal with several risk situations such as major
---------------------- illness, accidents, irregular employment, death of the main earner and so on.
Devising suitable products and services to help these vulnerable sections is a
----------------------
major challenge before the MFIs and it is interesting to explore the data collected
---------------------- in these studies to understand how the MFIs have grappled with this problem.
----------------------
Activity 2
----------------------
“Microfinance contributes to women empowerment”. Substantiate this
----------------------
statement with research.
----------------------
----------------------
6. 7 CLIENT IMPACT STUDY ASSUMPTION V
----------------------
Client Impact Study Assumption V states: “Microfinance builds capacity of
---------------------- vulnerable households to manage risks” is supported by the data culled during
the various studies.
----------------------
• Microfinance has helped in building resilience of vulnerable households
---------------------- through income enhancement.
---------------------- • Decreased risk borrowings by clients.
• Improved their capacity for coping with risk situation.
----------------------
• Reduced dependence on costly informal sources for risk loans.
----------------------
Social groups are subject to different degrees of vulnerability on account
---------------------- of differences in their socio-economic conditions. Among the poor households,
certain types such as ‘women-headed households’ and ‘SC/ST households’ are
---------------------- more prone to vulnerability. Compare to ‘male headed households’, ‘women
---------------------- as sole earners’ households had a much higher proportion (60 per cent) in the
‘very poor’ and ‘poor’ categories as against 35 per cent among ‘male headed
---------------------- households’.
---------------------- Relief in distress
---------------------- The study revealed that on account of prolonged terminal illness and death
of the main earner, desertions were encountered by some clients. The MFIs had
---------------------- tried to assist them to the extent possible. However, a major problem with many
MFIs was their shortage of resources to adequately meet the loan requirements
---------------------- of the members.
92 Micro Financing
Consequently, the capability of many MFIs to increase the income of the clients Notes
was restricted; so was their ability to help them in distress. Even so, the MFIs
have been endeavouring to help their clients in risk situations, as a result of which ----------------------
there is increased resilience in the vulnerable categories of clients such as ‘poor’,
‘SC/STs’, ‘women as sole earners’ and ‘women headed households’, enabling ----------------------
them to take proactive action and to cope with risk situations of various types. In ----------------------
contrast, the non-clients in similar situations had not received similar assistance.
----------------------
Building resilience with insurance
----------------------
There was an increase in the proportion of households with life insurance,
during the study period (45 per cent to 50 per cent). Grameen and individual ----------------------
banking model MFIs were able to expand coverage of life insurance among their
clients. SHG - MFIs, however, lagged behind. There is a much greater scope for ----------------------
popularising insurance as an anti-vulnerability measure.
----------------------
MFI borrowings in risk situation
----------------------
Risk borrowings comprise borrowings for the following purposes:
----------------------
i. Lifecycle events (mainly marriage).
----------------------
ii. Debt redemption.
iii. Emergency house repair. ----------------------
iv. Medical costs. ----------------------
v. Emergency food needs. ----------------------
The proportion of households borrowing for risk went down across all ----------------------
wealth ranks (48 per cent in baseline to 30 per cent). Availability of loans from
MFIs could partly explain the higher proportion of client households borrowing ----------------------
for risk purposes.
----------------------
Purpose-wise risk borrowings
----------------------
The proportion of households borrowing for meeting marriage expenses
went up slightly across most wealth ranks, particularly among the poor. The ----------------------
proportion of client households borrowing for meeting medical expenses also
----------------------
increased slightly (from 25 per cent to 26 per cent) among client households.
Contribution of costly informal sources (CIS) to risk loans ----------------------
The dependence of the households for risk borrowing from costly informal ----------------------
sources (CIS), mainly moneylenders, reduced after receiving increased credit ----------------------
support from MFIs. The proportion of client households borrowing from costly
informal sources for risk purposes declined sharply from 36 per cent to 23 per ----------------------
cent.
----------------------
Risk borrowing by women-headed households
----------------------
Microfinance emerged as a valuable source of risk borrowing for two of the
most vulnerable sections of the poor households, i.e. ‘women sole earner’ and ----------------------

Notes ‘women earning along with men’. However, covariate risks were often beyond
the powers of the MFIs to overcome and needed intervention of Governments
---------------------- at various levels.
----------------------
6.8 CLIENT IMPACT STUDY ASSUMPTION VI
----------------------
Client Impact Study Assumption VI states: “Microfinance contributes to
---------------------- women empowerment” is “partially supported” by the studies.
---------------------- • Microfinance contributed towards increase in savings by women in their
own name.
----------------------
• Microfinance created new economic avenues for women.
---------------------- • Ownership of assets jointly with male members has improved.
---------------------- • Microfinance enabled increased control of women over running family
enterprises.
----------------------
Women constituted over 80 per cent of the sample sizes. The studies,
----------------------
therefore, attempted to throw light on how far the microfinance programmes have
---------------------- contributed to their empowerment. Empowerment was broadly measured in terms
of women’s access to saving and credit, their ownership of assets, employment
---------------------- benefit and enterprise management.
---------------------- Women’s access to financial services
---------------------- The proportion of client households saving with MFIs declined significantly
from 78 per cent to 52 per cent. The reasons for this have been discussed earlier.
----------------------
The proportion of women households saving with other formal sector
---------------------- institutions such as banks, post office, LIC and PF also increased (from 14 per
cent to 16 per cent) but that with the informal sector declined (from 11 per cent
---------------------- to 6 per cent). The poorer women clients benefitted significantly in comparison
---------------------- with other wealth rank categories as also compared to non-clients.
---------------------- Share of women in total household savings

Women clients had higher share (31 per cent) in the total savings of
----------------------
households than the non-clients (28 per cent). The share of women savings in
---------------------- total household savings increased significantly for the ‘very poor’ category from
72 per cent to 80 per cent.
----------------------
Economic activities pursued by women
----------------------
Microfinance helped women in contributing to their household incomes by
---------------------- pursuing activities like tailoring, dairy, agriculture, floriculture, running tea shops
and small grocery shops either on their own or with the help of their spouses.
----------------------
Women’s share in family employment in MFI supported activities
----------------------
Women’s share in family employment generated by MFI supported activities,
---------------------- showed overall improvement going up from 40 per cent to 45 per cent.
94 Micro Financing
Opportunities for individual growth Notes
Greater opportunities for increased responsibility, awareness and skills were ----------------------
available mainly to women in leadership positions, especially Group Presidents
and Secretaries in SHG Model MFIs and Centre Leaders in Grameen MFIs. ----------------------
Empowerment at the household level ----------------------
Empowerment at the household level covered women’s ownership of assets ----------------------
within the household, their involvement in enterprise management, contribution
to income and involvement in decision-making. ----------------------
Assets ownership ----------------------

The study showed that ownership of assets exclusively by men declined from ----------------------
45 per cent to 35 per cent, while joint ownership (both men and women) improved
significantly from 28.0 per cent to 37.0 per cent and ownership exclusively by ----------------------
women improved slightly from 26.0 per cent to 27.0 per cent. ----------------------
Women’s involvement in enterprise management
----------------------
The management of micro credit supported enterprises by women improved
----------------------
marginally. This trend towards greater share in management by women
households was more pronounced in the South/West regions (from 40 per cent ----------------------
to 47 per cent) as compared to the North/East regions.
----------------------
Contribution to household income and involvement in decision-making
----------------------
With the support of microfinance, women were contributing to the income
of the family. Women have started making decisions on children’s education, ----------------------
improving the condition of housing and purchasing household assets.
----------------------
Microfinance and women empowerment in community
----------------------
Many MFI client women were emboldened by their participation in group
meetings or federation meetings and could afterwards participate in the Gram ----------------------
Panchayat meetings and in ‘morchas’ (public demonstrations) for social causes.
----------------------
Some had successfully contested in the local Panchayat elections.
----------------------
The backing of the MFI and the Group gave women courage and self-
confidence to fight for success in their activities and for economic betterment. ----------------------
In difficult ─ sometimes hostile ─ social milieu, they tactfully maneuvred their
way and attained success. ----------------------
----------------------
6.9 CLIENT IMPACT STUDY ASSUMPTION VII
----------------------
Client Impact Study Assumption VII: “Microfinance brings about overall
improvement in the socioeconomic status of clients” is “partially supported” by ----------------------
the studies. ----------------------
• Microfinance contributed to improvement in household income.
----------------------

Notes • Microfinance contributed partially to improvement in pattern of food
consumption.
---------------------- • Microfinance did not influence migration.
----------------------
Average household income
---------------------- The client households recorded an increase of 69 per cent in average
---------------------- household income as compared to non-clients (30 per cent) across all wealth
ranks. Among this, poorer households showed significant income increase. The
---------------------- increased income is generated from the activities pursued by the clients with
micro credit support.
----------------------
Frequency distribution showed that all households had not benefitted equally
---------------------- with increase in household income. On the whole, 79 per cent households showed
increase in income; 30 per cent of client households recorded increase of over
----------------------
200 per cent and another 49 per cent recorded increase of 100 per cent to 200
---------------------- per cent.
---------------------- Average income level of clients of all MFIs worked out to be Rs. 45,000.
A number of factors were responsible for income variation, e.g. poverty level
---------------------- of clients, regional disparity in general development of the area, client coverage
with different rural/urban developmental settings, longer association of clients,
---------------------- variations in provision of successive loans and enterprise support by MFI.
---------------------- A comparison of the income of the sub sample clients covered by different
---------------------- MFIs with the coverage of poor by these MFIs (according to the total sample)
showed that the clients of MFIs having lower coverage of poor had higher level
---------------------- of average income.
---------------------- Number of meals per day
---------------------- There was a decline in the proportion of client households having one or two
meals per day and a substantial increase in the proportion of client households
---------------------- having three meals a day (from 65 per cent to 80 per cent). The pattern was
observed across all wealth ranks including the ‘very poor’ and ‘poor’.
----------------------
A similar change was also observed in the proportion of non-client
---------------------- households, though at the end of the decade, proportion of households having
three meals per day was lower than that of client households having three meals
----------------------
per day. Thus, microfinance contributed to an improvement in the pattern of food
---------------------- consumption of the client households.
---------------------- Health care
---------------------- Overall, the proportion of client households availing of treatment at private

hospitals increased sharply at the expense of other modes of treatment. This was
---------------------- true in the case of ‘very poor’ and ‘poor’ households also.
---------------------- There was no clear evidence that on account of better affordability of medical
treatment, there was a fall in the proportion of client households losing working
---------------------- days due to illness.
96 Micro Financing
Larger number of clients showed preference for childbirth at Government Notes
hospital rather than at home or at the Public Health Centre. The clients with
longer association with MFI had more preference for private hospitals. They ----------------------
were ready to spend more in the case of child delivery.
----------------------
Purchase of clothing
----------------------
Clients showed preference for purchasing clothes ‘at any time’ rather than
at festivals, across all the wealth ranks at the end of the decade. The proportion ----------------------
of households shifting in favour of ‘any time purchases’ were higher among
----------------------
clients than among non-clients.
----------------------
Education
The proportion of households having children in primary schools showed a ----------------------
decline and those going to secondary schools and colleges increased (30 per cent ----------------------
to 34 per cent), both among clients and non-clients, with marginal variations in
proportions. ----------------------
At end of the period of study, large proportion of client households moved ----------------------
from low-cost education to high cost education, partly because of the graduation
of children from primary to secondary and to college education and also partly ----------------------
because of the keenness of the clients to send their children to better schools. ----------------------
Impact on employment ----------------------
As revealed in the Focus Group Discussions (FGD), microfinance has
----------------------
contributed in generation of employment opportunities. The impact on reducing
unemployment was positive but not so large as to provide employment to ----------------------
everyone in the family.
----------------------
Seasonal migration
----------------------
Data showed that there was hardly any impact of MFI loaning in the
proportion of client families migrating during the end of survey period, though ----------------------
the average number of days did show some decline from 23 to 14. The volume
of MFI loaning was not so large as to create large employment opportunities to ----------------------
decrease client household migration. Besides, the local markets were not large ----------------------
enough to provide sufficient opportunities to the clients.
----------------------
Awareness of clients of different types of models
----------------------
The clients’ awareness regarding microfinance and banking was quite good,
particularly in regard to their own savings and micro credit. This awareness was ----------------------
better among higher wealth ranks. Knowledge about interest offered on savings
or withdrawability of savings was, however, lower. As regards micro credit, ----------------------
clients were aware of the interest rates but not so much about the calculation of
----------------------
loan installment.
----------------------
• Nearly 60 per cent of the clients had visited a bank and MFI branch
accompanied by others, though fewer had visited on their own. ----------------------

Notes • Similarly, about 40 per cent of the poor clients were familiar with the process
of withdrawal of cash from bank account and other aspects of bank accounts.
----------------------
Clients of SHGs were generally better informed of microfinance and banking
---------------------- related matters than clients of Individual Banking and Grameen models.
----------------------
6.10 CLIENT IMPACT STUDY ASSUMPTION VIII
----------------------
Client Impact Study Assumption VIII: “Microfinance improves the terms,
---------------------- conditions and accessibility of other financial services” is “partially supported”
---------------------- by the studies.
• Access to formal banking services improved through SHG-Bank linkage
----------------------
programme.
----------------------
• Increased reliance on microfinance and formal sector has reduced dependence
---------------------- on informal sector.
---------------------- • Fall in proportion of clients borrowing at high interest rates.
---------------------- • Clients continue to avail costly informal services from moneylenders during
---------------------- emergencies or fill the gap for enterprise financing.
---------------------- Access to savings options
---------------------- Access to savings was an important feature of the microfinance movement.

Savings constituted the basis of their credit worthiness with the MFI. Access to
---------------------- MFI membership raised the status of clients with banks, which started offering
them savings account facilities. The proportion of client households holding
---------------------- formal savings accounts went up from 30 per cent to 33 per cent. For non-clients,
---------------------- it decreased from 33 per cent to 27 per cent.
When some of the MFIs decided to discontinue savings facilities - both
----------------------
compulsory as well as voluntary – the members were extremely disturbed.
---------------------- Members clamoured their restoration in all group meetings. When this was not
done, some of them were not keen for availing credit and withdrew from the
---------------------- membership.
---------------------- Access to credit options
---------------------- The client households, across all wealth ranks and models, showed their
increased reliance on microfinance as also on formal sector and reduced
---------------------- dependence on informal sector, both costly sources of finance, and on other
---------------------- private informal sources as well. There was a fall in the proportion of clients
borrowing at very high rates of interest and with outstanding debts.
----------------------
MFI activities and formal financial sector
----------------------
The overall relationship between the MFIs and the banks was becoming
---------------------- closer in matters of mutual benefits. Many public and private sector banks have
98 Micro Financing
started giving long-term loans to MFIs for on lending through SHGs or directly. Notes
The volume of funds available from the commercial banks through this medium
for the target group is increasing. ----------------------
Informal financial services ----------------------
Moneylenders continued to function throughout the country. In areas where ----------------------
the microfinance movement has gained momentum, the demand for loans from
them has come down and the rates of interest in the informal market have declined. ----------------------
Wherever the MFIs were weak and the volume of their loaning has been small,
----------------------
the operations of moneylenders have remained unaffected. In Southern India,
interest rates in informal market came down more than in the North and East ----------------------
due to increased microfinance activities.
----------------------
In the studies, clients with a fairly long association with the MFIs were further
interviewed for obtaining the clients’ own review of their life since they joined ----------------------
the microfinance movement and of the process of change they had experienced.
----------------------
The interview covered details of all loans received by the clients till the end of the
period of survey to ascertain how they had utilised them and how they visualised ----------------------
overall benefits received from participation in the microfinance operations. Their
----------------------
experience during the association offered insights for impact assessment of the
assistance. ----------------------
They responded enthusiastically and provided insight into how the support ----------------------
from MFIs and Groups had helped them in income stability and developing a
new sense of confidence. Not all are success stories; in a few cases, calamities ----------------------
like drought and prolonged illness had destabilised their lives. It is credible
for the MFIs that clients expressed their gratitude for providing a number of ----------------------
benefits such as assistance for developing existing activities, diversifying into ----------------------
new activities and repayment of their costly past debts. The studies have revealed
that MFIs had extended support to clients’ efforts in innovation, diversification ----------------------
and restarting even after failure, without which, perhaps the clients would not
have been successful. ----------------------
The clients, in general, expressed their satisfaction with microfinance ----------------------

programme of the MFIs. Ability to come out of the clutches of moneylenders
----------------------
with microfinance support was considered a highly significant achievement of
MFI movement. As members of well-knit groups, a close bond of friendship ----------------------
developed among women members, which gave them strength and confidence.
Broadly, the clients gave feedback on savings, loans from the MFI, insurance, ----------------------
other development support services and group dynamics.
----------------------
Savings related: About 20 per cent of all sample clients considered inculcating
‘ability to save’ among the poor as a positive aspect of the programme. Response ----------------------
for the clients of MFIs with SHG model was high at 30 per cent. Other important ----------------------
aspects of the programme, which were appreciated, include facility of collection
of deposits at the doorstep, compulsory savings opportunity and flexibility in ----------------------
savings.
----------------------

Notes Loan related: Nearly one fourth of all sample clients considered ‘easy access
to loan’ a positive aspect of the MFI lending. Next in importance were ‘low
---------------------- interest rates’ and ‘timely availability of loan’.
---------------------- Suggestions of Clients for Improvement
---------------------- Savings related: Major suggestions include continuance/restarting collection

of deposits, increasing interest paid on deposits and to keep the deposits in banks.
----------------------
Loan related: A large number of clients (35 per cent) considered interest
---------------------- charged on loan too high and wanted it to be reduced. Other suggestions were
increasing the amount of loan, making repayment on monthly basis, providing
----------------------
loans for purposes such as education, housing, consumption, land purchase and
---------------------- marriage, making loan repayment flexible, providing loans to all members on
a regular basis, reducing service charges and providing additional loans when
---------------------- required.
---------------------- Other Services: Regarding other services, providing training on skill
development was considered important by about 15 per cent of clients.
---------------------- Providing insurance facilities (covering life and/or assets), conducting awareness
---------------------- programmes for new groups and improving behaviour of the MFI staff collecting
loan repayment installments were also suggested by the clients.
----------------------
Feedback from Dropouts
----------------------
Responses from a sample number of dropouts, who were clients of MFIs
---------------------- in the baseline, were gathered to know the reasons for their action. Wealth rank-
wise, 36 per cent of ‘borderline’ clients, 31 per cent of ‘poor’ clients, 15 per cent
---------------------- of ‘self-sufficient’ clients and less than 10 per cent of ‘surplus’ and ‘very poor’
---------------------- clients dropped out.
The positive feature of the programme is that 11 per cent of the dropouts
----------------------
had graduated to formal banking with the benefit of microfinance. Other broad
---------------------- reasons given by dropouts were:
---------------------- (a) Withdrawal of savings facility.
---------------------- (b) Inability to follow all rules and conditions of microfinance programmes.
---------------------- (c) Not satisfied with the programme.

(d) Group’s functioning not favourable.
----------------------
(e) Other personal problems.
----------------------
---------------------- Feedback from Non-clients

The non-clients in the sample clusters expressed their views on whether they
----------------------
were willing to join in the MFI programme and why they had not joined yet. After
---------------------- significant expansion of the microfinance programme in the surrounding areas,
awareness regarding the operational details of the MFI programme in their area
---------------------- has increased among half of the surveyed non-clients and 45 per cent of them
100 Micro Financing

showed willingness to join the programme. This indicated a scope for increasing Notes
the outreach of the microfinance programme in the existing coverage.
----------------------
6.11 ASSESSMENT OF CLIENT IMPACT STUDIES ----------------------
While there had not been too many large-scale studies in the sector during ----------------------
the period under review, there have been a couple of study reports that appeared
causing concern. ----------------------
One report suggests that the impact of microfinance on the poor has not been ----------------------
as positive as the sector would believe. Another report goes to suggest that as
----------------------
an instrument of poverty alleviation, microfinance does not come out as a clear
choice. ----------------------
Centre for Microfinance’s (CMF’s) study of Spandana customers in ----------------------
Hyderabad slums was unable to find unequivocal evidence that microfinance
lifts people out of poverty. The findings indicate that microfinance is a great tool ----------------------
for smoothening consumption and relieving seasonal liquidity crises that visit
poor families and that it obviates the need to resort to high-cost borrowing from ----------------------
informal sources. ----------------------
The longitudinal impact study commissioned by SIDBI shows that some ----------------------
of the intuitive hypotheses on impact of microfinance are supported. What is
counter-intuitive is that the hypothesis ‘Microfinance is an effective strategy ----------------------
for extending financial services to the poor…’ is only partially supported. The
hypothesis that microfinance contributes to women’s empowerment is also found ----------------------
to be only partially supported by the study. ----------------------
Skoch Foundation carried out a study that found that only a little over
----------------------
10 per cent of newly opened no frills accounts were actually used. GTZ had
commissioned an inventorisation of MFIs and microfinance organisations ----------------------
(MFOs) in the country. More than 750 MFIs have been identified and brought
into a database for the first time. This is more than three times the number of ----------------------
MFIs that report to Sa-Dhan’s quick report.
----------------------
Further work on improving the data quality is ongoing. This inventory holds
----------------------
promise of bringing more information on the numerous smaller operations in
microfinance to the table. ----------------------
Microfinance Penetration ----------------------
In this study, the provisional data sets relating to SHG linkage and MFI ----------------------
client outreach data relating to March 2009 has been incorporated.
----------------------
There is a significant change in the microfinance penetration index (MPI)
and microfinance poverty penetration index (MPPI) in several states. The MPI ----------------------
and the MPPI reveal that the southern region is leading in penetration, perhaps
beyond the point of saturation in some states. Eastern region is placed next best ----------------------
on MPI and northeastern region is placed second best on MPPI. Northern region
----------------------

Notes is the worst placed on MPI while central region is worst placed in MPPI. Jammu
and Kashmir, Punjab and Haryana have to make progress in penetration in
---------------------- general terms. Bihar and UP have considerable work to do in poverty penetration
through microfinance as they are hardly reaching 17 per cent of average national
---------------------- penetration.
---------------------- The low microfinance penetration levels are not concerns merely at the
---------------------- bank/MFI levels. Unsatisfactory performance in specific states should be a major
issue before the state authorities. If an effective instrument of doorstep financial
---------------------- access for the poor, performing well in other states, is not able to make a dent
in any specific state, then the authorities should study the reasons and propose
---------------------- solutions.
---------------------- It is easier to blame the banks and MFIs for non-performance, but the reason
for their local non-performance in a state or a district is difficult to explain.
---------------------- Existence of favourable conditions for microfinance to take root and thrive should
---------------------- be examined and the needful should be done by the state authorities. An annual
study of the microfinance climate could be carried out by institutions such as
---------------------- NABARD, SIDBI or Sa-Dhan and the comparative analysis sent across all the
states so as to create a competitive environment and stimulate states towards
---------------------- action.
---------------------- High levels of penetration are also a cause for concern as they indicate that
the debt levels could exceed the repayment capacity of the poor households. Some
----------------------
locations that had repayment problems have been found to have unsustainable
---------------------- levels of lending at the household level. There is a need to closely study the
ground situation in such states that have a high penetration ratio.
----------------------

----------------------
1. Microfinance emerged as a valuable source of risk borrowing for two of
---------------------- the most vulnerable sections of the poor households, i.e. _____________
and __________________.
----------------------
2. Microfinance helped ____________ in contributing to their household
---------------------- incomes by pursuing activities like tailoring, dairy, agriculture,
---------------------- floriculture, running teashops and small grocery shops either on their
own or with the help of their ___________.
----------------------
3. Greater opportunities for increased responsibility, awareness and skills
---------------------- were available mainly to ___________ in leadership positions.
----------------------
---------------------- 6.12 EFFECTIVENESS OF SHG-BANK LINKAGE IN

TARGETING THE POOR
----------------------
Although data available to us cannot measure this component directly, we
---------------------- can look at some indirect indicators on the relationship between SHGs and the
102 Micro Financing

poor using results of the Rural Finance Access Survey 2003 (RFAS-2003) for Notes
the states of AP and UP. First, the majority of the beneficiaries of SHG Bank
Linkage are from among the poorer groups. ----------------------
RFAS-2003 indicates that nearly 54% of SHG members are from the poorest ----------------------
groups—the landless and marginal farmers. However, significant differences
exist across states. While 73% of SHG members in UP are from the poorest ----------------------
households – the landless and marginal farmers, the corresponding proportion ----------------------
in AP is lower (43%). In AP though, almost a quarter of the poorest households
belong to SHGs, but the proportion of households from richer categories that ----------------------
belong to SHGs is much higher.
----------------------
Table 6.2 SHG Membership by Type of Households
----------------------
Marginal Small Medium Large Others Total
Andhra Pradesh ----------------------
SHG member (% 25.3 34.3 31.1 29 29.6 28.2 ----------------------
households)
% of SHG 43.3 14 11.4 11.4 19.9 100 ----------------------
members
----------------------
Uttar Pradesh
SHG member (% 10.3 5.4 5.3 4.1 6.7 8.2 ----------------------
households)
% of SHG 72.8 8.8 7.4 4.4 6.7 100 ----------------------
members
----------------------
Marginal = landholding less than 1 acre, Small = 1-2 acres, Medium = 2-4
----------------------
acres, Large = more than 4 acres. Others includes households with or without
land but involved in commercial activities. ----------------------
[Source: RFAS-2003, Rural Finance Access Survey, World Bank]
----------------------
The study suggests absence of a strong relationship between village-
----------------------
level indicators of poverty and the number of SHGs. The size of the village is
significant, indicating that the larger the village, greater the number of SHGs ----------------------
found. Higher rates of illiteracy presumed to be correlated to poorer villages
are associated with fewer SHGs in the village. Similarly, the negative sign for ----------------------
(distance to) main road implies villages in the interior, away from good roads
----------------------
and having fewer SHGs. Also, neither village per capita income nor inequality
within the village is significant, again underlining the weak link between poverty ----------------------
and presence of SHGs. There is also no significant relationship between presence
of NGOs and number of SHGs in the village. ----------------------
To summarise, therefore, the RFAS-2003 data allow for the first time a ----------------------
statistical analysis of certain aspects of SHGs in India, which we have used to
----------------------
look at the reach of the SHG-bank linkage model into the poorest households,
who are predominantly amongst those excluded from formal finance. Our results ----------------------
show a positive relationship between poorer households (income quintiles
from 20-40 and 40-60) and SHG membership. The relationship between the ----------------------

Notes poorest households and SHG membership is positive too, though not significant
statistically. On the other hand, despite the proliferation of SHGs across the
---------------------- state in AP, the data suggests that the poorer and more difficult to reach villages
are likely to have relatively fewer SHGs. This further underlines the challenges
---------------------- ahead in scaling-up microfinance for a vast and varied country like India.
---------------------- Recent analyses indicate that access to loans under SHG Bank Linkage has
---------------------- contributed to the reduction in vulnerability of poor households. This reduction
in vulnerability takes varied forms.
----------------------
1. Improvement in asset position: The programme significantly improved
---------------------- the asset position (comprising livestock and consumer durables) of sample
households. The average increase in assets was about 72%. About 59% of
---------------------- households saw assets increase after groups were formed. Before the groups
were formed, one in three households had no assets; after the groups were
----------------------
formed, that changed to one in six;
---------------------- 2. Increase in savings: The average saving per member more than tripled.
---------------------- 3. Changes in borrowing patterns and financed activities: Average
borrowing per household increased by 96%. A shift in the activities of the
---------------------- self-help groups was observed. This shift shows lower share of consumption
---------------------- and cultivation loans after the groups formed and a larger share of allied
agricultural activities and small businesses.
---------------------- 4. Increase in employment: Employment per household went from an average
---------------------- of 318 days a year to 375 days. The proportion of employment generated
through nonfarm and off-farm activities increased.
----------------------
5. Increase in consumption expenditure: Consumption expenditure per
---------------------- household per month increased by 20%. Per capita consumption increased
by 22% per month.
----------------------
6. Impact on income: The average net income per household increased by
---------------------- 33%. About 43% of the incremental income generated was from nonfarm
activities.
----------------------
7. Impact on poverty: Reduction of households below the poverty line was
---------------------- 54%.
---------------------- 8. Social impact: 89% of members reported that as a result of the group’s
activities, they could meet officials from the government or from banks,
---------------------- while about 77% had never had that opportunity before. Changes were also
reported regarding attitudes toward women.
----------------------
Some Lessons from SHG-Bank Linkage
----------------------
In large part, the success of SHG Bank Linkage may be attributed to the fact
---------------------- that it is well aligned with Indian history and circumstances and capitalizes on
---------------------- the country’s vast network of rural bank branches. The idea of local savings-and-
loan clubs enjoying access to formal financial services by becoming corporate
---------------------- customers of banks is good and is practiced in a small way in many countries.
104 Micro Financing

A well-run club can keep its reserves at the bank and take bulk loans,which it Notes
can on-lend to its members at a premium, covering its costs and rewarding its
savers in the process. In India, this practice seems particularly appropriate on two ----------------------
counts. First, the country has active NGOs that have been zealous in their efforts
towards group formation; NGOs view SHGs as having many benefits (such as ----------------------
women’s empowerment) beyond microfinance. Second, and perhaps even more ----------------------
important, SHG Bank Linkage seems particularly suited to India because the
model capitalises on the country’s vast (and unique) network of rural banks that ----------------------
are otherwise unable to reach out to the poor.
----------------------
Equally important, the success of SHG Bank Linkage underscores just
how important a role skillful leadership, good policy, and conducive legal and ----------------------
regulatory framework can play. Indeed, the role of government in establishing ----------------------
the necessary policy and legal framework and the leadership role assumed by
NABARD in championing the movement cannot be underestimated. ----------------------
Government recognised the potential of SHG banking very early on in the ----------------------
movement’s history; NABARD was given the task of leading this effort and it
took to the task with exemplary diligence. It involved NGOs, commercial banks, ----------------------
RRBs and even cooperative banks in forming SHGs and then linking those up
----------------------
with nearby bank branches. Legal obstacles were removed and the RBI issued
Guidelines in 1992 to experiment with a pilot of 500 SHGs to link with banks. ----------------------
This pilot program as well as the work of a number of NGOs was reviewed by a
Working Group on Bank Lending to the Poor through NGOs and SHGs (1995) ----------------------
and detailed guidelines were drawn to encourage banks to use this method.
----------------------
To encourage banks to lend to SHGs, NABARD made available subsidised
----------------------
refinancing to banks for their lending to SHGs, so that the groups could take bulk
loans from banks that could be on-lent to group members who could use them to ----------------------
take up or expand micro-businesses. (More recently, such subsidised refinancing
to banks has been phased out, as banks have begun to see SHG lending as a ----------------------
profitable and commercially viable business). Further inducements for banks
----------------------
came in the form of allowing banks to count SHG lending towards their legal
obligation to direct a fraction of their loans to the poor (‘priority sector lending’ ----------------------
obligations). It seemed an ideal way to realize an old Indian dream – to make
the vast network of rural banks key suppliers of loans to the poor. ----------------------
----------------------
Activity 3
----------------------
“Microfinance brings about overall improvement in the socioeconomic status ----------------------
of clients”. Substantiate this statement with data obtained from your research.
----------------------
----------------------
Summary
----------------------
• In view of large-scale intervention in the microfinance sector, several
organisations such as SIDBI (Small Industries Development Board of India), ----------------------

Notes DFID (Department for International Development, U.K), IFAD (International
Fund for Agricultural Development, Rome), AFC (Agricultural Finance
---------------------- Corporation of India Ltd.), NABARD (National Bank for Agriculture and
Rural Development), RFAS (Rural Finance Access Survey) and many others
---------------------- had from time to time undertaken Impact Assessment Studies of microfinance
---------------------- programme vis-à-vis objectively verifiable socio-economic indicators.
---------------------- • The objectives of these studies were varied with a view to assessing the
impact of micro credit programme on the ultimate beneficiaries/clients and
---------------------- improving the practices by understanding the process of MFI intervention.
---------------------- • MFIs follow different business models. Some are based on SHG (Self Help
---------------------- Group) Model, a few have Grameen model (Bangladesh Grameen Bank
Model, pioneered by Dr. Mohammed Yunus, Nobel Laurete), some have
---------------------- Individual Banking Model and few have Sector specific (e.g. fishery) Co-
operative Model. The MFIs, however, do not strictly follow all the specific
---------------------- details of their respective model. Most of the models are hybrids or adapted
---------------------- to suit the local socio-economic requirements.
---------------------- • Client Impact Study Assumption I states:“Microfinance is an effective

strategy for extending financial services to the poor and other disadvantaged
---------------------- groups not reached by formal sector finance”, which has been found to be
‘partially supported’ from the findings of various studies.
----------------------
• Client Impact Study Assumption II states: “There is an overall improvement
----------------------
in access and use of MFI loans but not of other services”. This is ‘supported’
---------------------- by the data collected in client impact studies.
---------------------- • Client Impact Study Assumption III states: “Microfinance increases

enterprise activities” and is “supported” by the impact studies. With micro
---------------------- credit support, clients have started new or expanded existing enterprises,
---------------------- which not only provided better employment opportunities but also increased
enterprise income.
----------------------
• Client Impact Study Assumption IV states: “Microfinance contributes to
---------------------- improvement in income-related aspects” and is “supported” by the data in
the studies.
----------------------
• Client Impact Study Assumption V states: “Microfinance builds capacity
----------------------
of vulnerable households to manage risks” and is “supported” by the data
---------------------- culled during the various studies.
---------------------- • Client Impact Study Assumption VI states: “Microfinance contributes to

women empowerment” and is “partially supported” by the studies.
----------------------
• Client Impact Study Assumption VII: “Microfinance brings about overall
----------------------
improvement in the socioeconomic status of clients” and is “partially
---------------------- supported” by the studies.
106 Micro Financing

• Client Impact Study Assumption VIII: “Microfinance improves the terms, Notes
conditions and accessibility of other financial services” and is “partially
supported” by the studies. ----------------------
----------------------
Keywords
----------------------
• Income quintiles: Quintiles are a means by which the population is ----------------------
segmented into five class brackets based on a person’s education, income
and occupation. ----------------------
• SFMC: SIDBI Foundation for Micro-Credit. ----------------------
• SGSY: Swarnajayanti Gram Swarozgar Yojana. ----------------------
• SHPI: Self-Help Promoting Institution. ----------------------
• SIDBI: Small Industries Development Bank of India. ----------------------

----------------------
• SKS: Swayam Krishi Sangam.
----------------------
• SLR: Statutory Liquidity Ratio.
----------------------
• StCB: State-level cooperative bank.
----------------------
1. What is Client Impact Study? What are its objectives? ----------------------
2. How many Microfinance Business Models have been discussed in this unit? ----------------------
Compare their characteristics. ----------------------
3. “Microfinance is an effective strategy for extending financial services to the
----------------------
poor and other disadvantaged groups not reached by formal sector finance.”
Comment. ----------------------
4. “There is an overall improvement in access and use of MFI loans but not ----------------------
of other services.” Give your views.
----------------------
5. “Microfinance increases enterprise activities.” Explain.
----------------------
6. “Microfinance contributes to improvement in income related aspects”.
Elucidate. ----------------------
7. “Microfinance builds capacity of vulnerable households to manage risks.” ----------------------
Discuss.
----------------------
8. What lessons have been drawn from the SHG-Bank Linkage Programme?
----------------------
9. “Microfinance improves the terms, conditions and accessibility of other
financial services.” Explain. ----------------------

Notes 10. How effective has SHG-Bank Linkage Programme been in reaching the
poor?
----------------------
---------------------- Answers to Check your Progress

---------------------- 1. MFIs follow different business models, which are SHG (Self Help Group)
model, Grameen (Bangladesh Grameen Bank Model, Individual Banking
---------------------- Model and Sector specific (e.g. fishery) Co-operative Model.
---------------------- 1. False
---------------------- 2. False
----------------------
Fill in the blanks.
----------------------
1. Microfinance emerged as a valuable source of risk borrowing for two of the
---------------------- most vulnerable sections of the poor households, i.e. ‘women sole earner’
and ‘women earning along with men’
----------------------
2. Microfinance helped women in contributing to their household incomes by
---------------------- pursuing activities like tailoring, dairy, agriculture, floriculture, running tea
---------------------- shops and small grocery shops either on their own or with the help of their
spouses.
----------------------
3. Greater opportunities for increased responsibility, awareness and skills were
---------------------- available mainly to women in leadership positions.
----------------------
Suggested Reading
----------------------
1. “Assessing Development Impact of Microfinance Programmes”, SIDBI
---------------------- Report.
---------------------- 2. “Status Report on Microfinance 2010-11”, NABARD 2010-11RFAS-
---------------------- 2003(Rural Finance Access Survey, World Bank) Report.
----------------------
----------------------
----------------------
----------------------
----------------------
108 Micro Financing

Housing Microfinance
UNIT
7
Structure:
7.1 Introduction
7.2 Housing Microfinance: Meaning
7.3 Housing Microfinance vis-à-vis Micro-Enterprise Loans
7.4 Housing Microfinance vis-à-vis Formal Mortgage Loans
7.5 Advent of Housing Microfinance
7.6 Importance of Housing Microfinance
7.7 Sources of Housing Microfinance
7.8 Underwriting and Funding of Housing Microfinance
7.9 Housing Microfinance Products
7.10 Development of Housing Microfinance Products
7.11 Challenges before Housing Microfinance Institutions
7.12 Constraints faced by Housing Microfinance Institutions
7.13 Commercial Banks and Housing Microfinance Activities
Summary
Key Words
Suggested Reading
Housing Microfinance 109

Notes
Objectives
----------------------
----------------------
●● Explain the concept of Housing Microfinance (HMF)
---------------------- ●● Differentiate between HMF and micro enterprise/mortgage loans
---------------------- ●● Describe the advent of housing microfinance
---------------------- ●● Outline the steps involved in the development of microfinance products
●● Analyse the challenges and constraints of housing microfinance
----------------------
---------------------- 7.1 INTRODUCTION
---------------------- Housing is one of the fundamental needs of humans. In spite of the

significant growth in the availability of institutional finance for housing, the
---------------------- problem of housing in India continues to be very acute, particularly among the
underprivileged and marginalised categories. One of the major reasons for this
----------------------
is that a majority of the population is beyond the reach of the formal institutional
---------------------- system of housing finance. In spite of the fact that the demand for housing
continues to be high, the financing options available for low-income households,
---------------------- especially for those employed in the informal sector, are not only limited but also
not tenable in the long run. In this context, the Microfinance Institutions (MFIs)
----------------------
provide a novel channel to finance housing for the poor.
---------------------- Microfinance is the extension of very small loans to impoverished borrowers
---------------------- to encourage private enterprise. It facilitates the provision of a wide range of
financial services to the very poor. The poor lack collateral, steady employment
---------------------- and have a non-verifiable credit history as such they cannot meet the minimal
qualifications to gain access to traditional credit.
----------------------
Microfinance has enabled extremely poor people to engage in self-
---------------------- employment projects. It is expected to be more than a financial service used in
the fight against poverty, empowerment and the creation of a social environment
----------------------
that is essential to people’s well-being. Microfinance institutions provide loans
---------------------- for income-earning activities, as also for consumption and emergencies.
A relatively new loan portfolio for microfinance encompasses “housing
----------------------
microfinance” wherein apart from providing loans for income-generating
---------------------- activities and emergencies, microfinance institutions provide finance for housing.
Housing Microfinance (HMF) programmes have attained a prominent position
---------------------- in many countries. In India, housing microfinance is still in the evolving stage
and the total quantum of housing microfinance forms a small portion of the
----------------------
total microfinance lending. In addition to the above, the ability for microfinance
---------------------- institutions to provide housing continues to be difficult, caught up in concerns
over scarce funding, legal risks arising from informal land title, lack of collateral
---------------------- and insufficient knowledge about construction
----------------------
110 Micro Financing

7.2 HOUSING MICROFINANCE: MEANING Notes
Housing Microfinance (HMF) initiatives seek to make housing finance ----------------------
accessible and affordable to the poor households who are often outside the
reach of formal institutional intermediaries in housing finance. In simple words, ----------------------
housing microfinance is the application of the principles of microfinance to the ----------------------
delivery of housing finance. It may be defined as the provision of small loans to
low-income households for a wide range of housing activities, including but not ----------------------
limited to repair, renovation, improvements to existing structures, purchase of
land, new construction and even improvement in infrastructure facilities, such ----------------------
as sewage. ----------------------
Housing microfinance is generally described as a division of microfinance,
which encompasses initiatives that (a) target the habitation needs of the poor or ----------------------
the very poor, (b) extend relatively small loan amounts based on the anticipated ----------------------
repayment capacity, (c) carry a short repayment period, (d) are usually not
collateralised, (e) are priced to ensure long-term financial viability of the provider, ----------------------
and (f) incorporate systemic due diligence and follow-up procedures.
----------------------
As stated above, housing microfinance consists mainly of loans to low-
income people for renovation or expansion of an existing home, construction of ----------------------
a new home, land acquisition and basic infrastructure (e.g., hooking up to city
----------------------
sewage lines). So far, most of the successes in the field of housing microfinance
have been with home improvement loans. Land acquisition and new housing ----------------------
construction are still subjugated by subsidies, rather than financial services.
----------------------
Low-income households tend to build gradually and incrementally, often
building only one room at a time. This process of “progressive housing” or ----------------------
“progressive build”, as it is generally referred to, is thought to be compatible
with microfinance, which comprises small loans of a short tenure. ----------------------
Housing microfinance is basically designed for low-income households that ----------------------

do not have access to traditional housing finance, but who wish to expand or
----------------------
improve their dwellings or build a home in incremental steps relying on sequential
small loans. ----------------------
The beneficiaries of housing microfinance, therefore, are the economically ----------------------
active poor working in the “informal” economy. They generally are the financing
institutions’ existing microfinance clients. ----------------------
----------------------
7.3 HOUSING MICROFINANCE VIS-À-VIS
MICRO-ENTERPRISE LOANS ----------------------
In many ways, housing microfinance is similar to micro-enterprise loans. In ----------------------

both the cases, underwriting is generally based on assessment of the applicant’s
----------------------
cash flow (ability to pay) and character assessment (assumed willingness to pay).
However, housing microfinance loans are generally larger and of longer duration. ----------------------
In some cases, housing and micro enterprise loans may be indistinguishable. Many
micro businesses are conducted in whole or in part from the home, and many ----------------------

Notes micro lenders allow some portion of the loans to be used for house improvement.
However, Frank Daphnis, the co-author of the book Housing Microfinance: A
---------------------- Guide to Practice, has pointed out some important differences between housing
microfinance and typical micro-enterprise finance. The important differences are
---------------------- as under:
---------------------- Table 7.1 Differences between Housing Microfinance and
Micro-Enterprise Finance
----------------------
Sr.No. Typical Micro-Enterprise Loan Housing Microfinance
---------------------- 1. Impacts borrower’s income. Impacts borrower’s asset base
---------------------- and may impact income.
2. May offer very small loan Relatively larger incremental
---------------------- amounts. loan amounts.
3. Can be individual or group loans. Usually individual loans.
---------------------- 4. Repayment capacity is based on Repayment capacity is based on
generation of future income. borrower’s current income.
----------------------
5. May or may not be “fungible”, “Fungibility” is relatively harder
---------------------- e.g., a loan granted for business as home loans are disbursed in a
could be utilised for home staggered manner and are easily
---------------------- improvement. verifiable.
6. Loans are generally unsecured. Loans are generally secured
----------------------
against legal title of the land or
---------------------- any other paralegal document.
---------------------- 7.4 HOUSING MICROFINANCE VIS-À-VIS FORMAL

---------------------- MORTGAGE LOANS
---------------------- Housing microfinance differs from formal mortgage lending on a few key
parameters. They are as follows:
----------------------
1. The loans are smaller and of a shorter term than conventional mortgage
---------------------- loans.
---------------------- 2. As the loans are smaller in size, housing microfinance loans are generally
not used for purchase of a new home but rather for home improvements,
---------------------- incremental building or development of a starter dwelling in sites and
---------------------- services initiatives.
3. Housing microfinance is usually not collateralised by the property, which
----------------------
is, of course, a defining characteristic of formal mortgage loans.
----------------------
4. Housing microfinance is largely offered by MFIs, NGOs, cooperatives and
---------------------- NBFIs, the primary source of mortgage lending are the banking institutions.
Housing microfinance clients generally cannot qualify for formal mortgage
---------------------- loans for a variety of reasons including low income, informal sources of
---------------------- income, lack of land title and inability to meet formal building standards
(standards which are often far too rigid to accommodate affordable housing).
----------------------
112 Micro Financing

Notes
Activity 1 ----------------------
----------------------
Make a comparative analysis and list out at least four salient differences
between housing microfinance products and conventional mortgage-backed ----------------------
housing loan products.
----------------------
7.5 ADVENT OF HOUSING MICROFINANCE ----------------------
Until a few years ago, access to housing-related finance was extremely ----------------------
restricted. Its focus has been almost exclusively on home acquisition and
mortgage-backed lending. Mortgage lending and a supporting secondary ----------------------
mortgage market have rarely materialised as financially viable options in ----------------------
addressing the housing needs of the poor. This is due to the following three key
impediments: ----------------------
1. Sources of funds that can match repayment periods spanning 10 to 30 years ----------------------
are few, thereby creating a severe asset-liability mismatch for commercial
institutions interested in housing finance. ----------------------
2. In cases where these sources do exist, poor borrowers do not sustain ----------------------
repayments over long period of time.
----------------------
3. The majority of the poor do not have clear title to the land they occupy for
a variety of reasons, thereby prohibiting their access to mortgages. ----------------------
In brief, as the underprivileged cannot offer mortgages, largely they have ----------------------
been kept out of all formal housing finance. ----------------------
Internationally, housing finance for the poor is often categorised as Shelter
Advocacy to Housing Finance (SAHF), and Micro Credit to Housing Finance ----------------------
(MCHF). While both approaches offer housing loan products with an emphasis ----------------------
on reaching the financially excluded, the respective origin of the two has set
distinctive characteristics in the way they deliver housing services to the poor. The ----------------------
Shelter Advocacy to Housing Finance (SAHF) grew out of the efforts to upgrade
the slums. The primary focus of SAHF is on land rights and shelter advocacy, ----------------------
and credit plays a secondary role. As a result, while assessing the impact of a ----------------------
SAHF programme, more emphasis is placed on human development indicators
than on financial performance. Moreover, due to its focus on land acquisition ----------------------
and infrastructural services, SAHF tends to have relatively bigger loan amount
and longer repayment period, if there is a loan element in the programme. On ----------------------
the other hand, Micro Credit to Housing Finance (MCHF) evolved naturally out ----------------------
of conventional micro credit programmes.
Microfinance institutions have long observed that clients use micro enterprise ----------------------
loan proceeds to improve their living conditions. Due to the non-availability and ----------------------
lack of access to housing and consumer finance, the microfinance clients often
make use of the business loans for housing needs. In general, a micro enterprise ----------------------

Notes loan offers much better and flexible repayment terms than informal sources
of money lending, and such a microfinance loan can provide a supplement
---------------------- or alternative to saving towards housing improvements. This suggests that
microfinance has potential beyond income-generating uses and can also be used
---------------------- for personal asset building activities such as investments in housing. This leads
---------------------- one to believe that economically active poor people can finance their habitation
needs in a manner that is incremental and affordable, and under conditions that
---------------------- allow the finance provider to cover all associated costs. This gave an opportunity
to the microfinance institutions to introduce an additional product to their
---------------------- conventional product line. In this way by offering an additional product to their
---------------------- existing customers, the MFIs are in a position to maintain the transaction costs
low.
---------------------- In general, microfinance institutions offer housing microfinance to their
---------------------- clients as short-term cash-flow-based credit for renovation and incremental
construction purposes. Loan amounts are modest and so are the credit terms.
---------------------- It is observed that such loans are usually priced marginally lower than micro-
enterprise lending, conceivably reflecting the perceived reduction of risk.
----------------------
Housing microfinance has established itself to be a viable and growing
---------------------- product line for all kinds of microfinance institutions. Historically, the traditional
microfinance institutions have led to housing microfinance (occasionally
---------------------- becoming housing microfinance-specialised institutions). Housing microfinance
---------------------- pilots of the last few years by commercial banks have led to further product
diversification in this field.
----------------------
---------------------- 7.6 IMPORTANCE OF HOUSING MICROFINANCE
---------------------- Housing microfinance is important on two critical counts:

1. It can help meet the effective demand for habitation and settlement finance
----------------------
of low- income households in the developing countries.
---------------------- 2. It can contribute to the business development strategy of financial institutions
---------------------- that have low or moderate-income households as their target clientele,
particularly MFIs.
----------------------
The demand for housing microfinance is high. Indeed, microfinance
---------------------- institutions have found that microfinance clients already channel a good portion
of micro-enterprise loans to home improvement.
----------------------
Some of the other factors due to which housing microfinance has assumed
---------------------- a lot of importance are as under:
---------------------- (a) Shelter is a basic human need that helps ensure personal safety and health.
Housing microfinance offers small, incremental loans as such they are
---------------------- suitable for the way in which poor people build their homes − progressively
---------------------- and over time.
(b) The home is a personal asset that usually appreciates over time. Thus, home
----------------------
improvement not only enhances living conditions, it is an investment.
114 Micro Financing

(c) Micro entrepreneurs often use their homes as productive assets in generating Notes
income. A home can be a place to manufacture goods, stock up inventory
and conduct business. ----------------------
With the advent of the microfinance revolution in India, housing microfinance ----------------------
has assumed a lot of importance and has potential of having significant impact on
the stakeholders engaged in the task of providing affordable housing. Microfinance ----------------------
has the potential to enable small borrowers to begin planning for a house and
----------------------
arranging necessary resource for it. At the same time, these institutions can have
an impact on the domestic decision-making, portfolio diversification of lenders, ----------------------
expansion of the housing sector and growth of the local economy as a whole.
----------------------
Microfinance for housing is considered suitable for gradual upgradation of the
dwelling units of the poor families. Such upgradation may include improvement ----------------------
of existing rooms, addition of a room, or installation of water or electricity supply.
Based on their credit history, microfinance for housing should be designed for the ----------------------
low-income households who wish to enlarge or improve their dwellings or build
----------------------
a home in incremental steps, relying on small loans raised over a period of time.
It has to be a sustainable approach suited to the needs of the low-income market. ----------------------
----------------------
----------------------
----------------------
1. The process of extension of very small loans to those in poverty to
stimulate entrepreneurship is known as: ----------------------
i. Microfinance ----------------------
ii. Project finance
iii. Venture Capital ----------------------
iv. Seed Capital ----------------------
v. Housing Finance
----------------------
2. Microfinance Institutions (MFIs) provide loans for:
i. Housing ----------------------
ii. Income earning activities ----------------------
iii. Consumption
----------------------
iv. Emergency situations
v. All of the above ----------------------
3. Because of their smaller size, housing microfinance loans are not used
----------------------
to purchase a home but rather for:
i. Home improvements ----------------------
ii. Incremental building,
----------------------
iii. House Repairs
iv. Site Preparation ----------------------
v. All of the above ----------------------

Notes 7.7 SOURCES OF HOUSING MICROFINANCE
---------------------- Housing microfinance can be made available in several forms and it brings
together a wide variety of institutions, including (a) microfinance institutions
---------------------- (MFIs), (b) housing companies, (c) non-governmental organisations and (d)
regulated financial institutions, such as banks, Non-Bank Financial Institutions
----------------------
(NBFIs), cooperatives, etc. A major distinction can be made between financial
---------------------- institutions (MFIs, banks and NBFIs) that offer housing microfinance as part
of their primary mission to provide financial services and institutions that offer
---------------------- housing microfinance as part of their primary mission to improve the shelter
situation of the poor.
----------------------
Microfinance Institutions
----------------------
Microfinance institutions enter the housing lending market for a variety of
---------------------- reasons, such as to meet client demand, to diversify their product line, or to benefit
from government or donor incentives for upgrading slums or shelter provision
----------------------
programmes. MFIs that have already developed a strong capital base and have a
---------------------- history with individual lending products are well placed to succeed in this market.
---------------------- Micro Housing Lenders

The second group of institutions, whose primary focus is improving shelter,
----------------------
comprises NGOs or NBFIs that have been developed to conduct the savings and
---------------------- lending operations for housing NGOs. These groups offer affordable pricing
while collaborating with experienced micro lenders and commercial banks. By
---------------------- capitalising on their experience with microfinance and housing, the banks are
able to expand into new markets with a new operating model without risking
----------------------
their existing line of business.
----------------------
Activity 2
----------------------
---------------------- Identify at least three microfinance institutions operating in India and list
out their various housing microfinance products.
----------------------
----------------------
7.8 UNDERWRITING AND FUNDING OF HOUSING
---------------------- MICROFINANCE
---------------------- Underwriting for housing microfinance products currently uses traditional
---------------------- microfinance models to evaluate ability to repay (cash flow and character
assessment). Microfinance institutions also use a range of approaches to
---------------------- reduce credit risk on their housing microfinance portfolio. Lenders may rely
on mandatory savings over a specified period, membership in savings groups,
---------------------- co-signers or previous success with micro-enterprise loans as increasing the
---------------------- likelihood of repayment.
As far as funding is concerned, many microfinance institutions that provide
----------------------
housing products have access to commercial financing or deposits. These
116 Micro Financing

institutions demonstrate strong middle management and solid internal controls, Notes
and can compensate for the costs of introducing a new product. However, not
all institutions introducing housing finance are fully sustainable. Many shelter- ----------------------
focused institutions receive donor aid in order to provide more affordable products
to a target population. ----------------------
----------------------
7.9 HOUSING MICROFINANCE PRODUCTS
----------------------
Housing microfinance can be used for home improvement, incremental
building, new construction, at-home production and storage or house purchase. ----------------------
There is great variability in loan amount, terms and conditions. Home ----------------------
improvement loans are typically short-to mid-term loans ranging from three to
36 months, with some institutions offering up to 60 months. ----------------------
Housing microfinance products broadly fall into two categories: “linked” ----------------------
and “stand-alone”. Housing finance on a linked basis is provided only to clients
who have prior history with the provider (only to current MFI clients), while ----------------------
housing finance on a stand-alone basis is available to all eligible clients, including
----------------------
first-time clients.
Many microfinance institutions either limit access of housing microfinance ----------------------
to their existing micro-enterprise customers or require that the households should ----------------------
save for a period of time in order to qualify for a housing microfinance loan.
This in effect, serves to strengthen the relationship between the customer and ----------------------
the financial institution.
----------------------
The first type of link housing loans uses housing microfinance as a reward
for faithful repayment on a series of micro-enterprise loans. Some microfinance ----------------------
institutions also use a prior micro-credit requirement for housing microfinance as
----------------------
a business strategy to gradually add a housing product by leveraging its known
customer base. Once these MFIs gain experience with housing microfinance, ----------------------
some drop this prerequisite for eligibility for the housing microfinance and lend
to the public at large. ----------------------
The second type of widely used link involves prior savings. The microfinance ----------------------
industry puts great emphasis on savings mobilisation and products as the key
to credit of all types, not just for housing but also for other financial services. ----------------------
Many MFIs require deposits of amounts approximating the future debt service ----------------------
into an account for six to 18 months.
----------------------
MFIs, banks and NGOs deliver stand-alone housing microfinance services
when they offer housing microfinance credits to the public at large independent ----------------------
of other financial products. In this case, the institution lends without a prior
history of credit or of savings with the provider. Stand-alone products facilitate ----------------------
loan originations and ramping up volume. However, they also require methods
----------------------
to replace the “linked” strategies that effectively reduce credit risk.
----------------------
----------------------

Notes
----------------------

1. Housing microfinance is offered by a wide variety of institutions
---------------------- including:
---------------------- i. Microfinance institutions (MFIs),
---------------------- ii. Housing companies
iii. Nongovernmental organisations
----------------------
iv. Banks, Non-Bank Financial Institutions (NBFIs)
---------------------- v. All of the above
---------------------- 2. Housing finance on a linked basis is provided only to:
---------------------- i. New clients

ii. Defaulter borrowers
----------------------
iii. Existing clients
---------------------- iv. None of these
---------------------- v. All of the above
----------------------
---------------------- 7.10 DEVELOPMENT OF HOUSING MICROFINANCE

PRODUCTS
----------------------
Housing microfinance follows the basic principles of microfinance, such
---------------------- as small loan amounts, short loan terms and alternative forms of collateral and
---------------------- is used by the customer solely in a housing project, usually home improvement
or progressive building.
---------------------- In order to develop a housing microfinance programme, it is advantageous
---------------------- to follow a chain of steps involving:
i. Assessing the demand with a view to understand the market potential and
----------------------
clients’ profile.
---------------------- ii. Incorporating findings from the demand assessment into product design and
pricing.
----------------------
iii. Implementing the product with technical advising services once the
---------------------- operational procedures are streamlined. The product should be offered as a
pilot in a small set of locations.
----------------------
iv. Evaluating the impact of the product on the clients’ economic and social
---------------------- outcomes to analyse cost-effectiveness of the programme.
---------------------- v. Identifying what aspects are successful and which product features need
to be adjusted. The programme can then be replicated and scaled across
---------------------- geographic locations.
118 Micro Financing

Each of these stages involves several steps. A demand assessment study is Notes
generally conducted through household interviews and focus groups. Such studies
enable microfinance institutions to understand preferences of potential borrowers ----------------------
for different characteristics of a housing loan, such as tenure, repayment period,
technical assistance and potential for a linked product. ----------------------
The demand assessment should also contain a profile of the customer base, ----------------------
including socio-economic and demographic characteristics, customers’ sources of
----------------------
income and expenses and an estimate of informal and formal financial contracts,
which exist in the region. In addition to demand assessment, it is equally important ----------------------
to assess the loan absorption capacity of clients. This requires analysis of income
flows of potential customers across different seasons and the extent of borrowing ----------------------
for non-housing products or from local moneylenders.
----------------------
Product design must incorporate results from the demand and capacity
assessment so that the product design not only takes care of the customers’ needs ----------------------
but also takes into account the customers’ willingness and capacity to pay. Product ----------------------
design also involves setting the price for the product. Interest rates are determined
by three components: (a) the cost at which the microfinance institution can secure ----------------------
funds, (b) the operational costs involved in running the programme, and (c) the
provisions for losses. While the microfinance institution does not have much ----------------------
leeway to control these components of interest rates at least in the short run, the ----------------------
microfinance institution may be able to make an internal arrangement to lower
the rate through cross-subsidy if the mission of the institution justifies it. ----------------------
The microfinance institutions may also consider whether construction and ----------------------
awareness assistance should also be made a part of the product. Construction
assistance can become a factor to differentiate the product from other products ----------------------
of other competing microfinance institutions. In the face of high interest rates,
----------------------
construction assistance can also reduce the cost of building a home, and thus
lower the borrower’s liability. In case the microfinance institution decides to ----------------------
offer technical assistance, it is advisable for the institution to collaborate with
another agency having expertise in providing such assistance instead of offering ----------------------
the service itself.
----------------------
Once the demand assessment and the initial product design stage have
taken place, the concerned microfinance institution must do a pilot test of the ----------------------
product in order to determine the feasibility and sustainability of the product ----------------------
amongst the clients. The microfinance institution must also put in place systems
for implementing the programme. As discussed under points (a) to (e) above, ----------------------
although the institution can utilise the existing systems to provide housing finance,
such as group structure for disbursement, monthly meeting for repayment, etc., ----------------------
it may be required to make some changes in operation. ----------------------
Verification of required documents, client eligibility and loan usage, and
collection of provision of additional services, such as technical assistance, bulk ----------------------
purchase of raw materials are some of the examples that are required as part of ----------------------
the process and that many microfinance institutions are not habitually familiar
with. Particularly because of the high costs associated with large loan sizes and ----------------------

Notes longer tenure, it is crucial that the operational procedures are streamlined before
rolling out the product. The pilot phase of the product is an opportunity for an
---------------------- MFI to test the take-up rate of the product and the appropriateness for the targeted
market and to fine-tune the product in such a way that the impact of the product
---------------------- is maximised. Upon successful results from the pilot phase, the product should
---------------------- be expanded to larger areas.
Finally, careful evaluation of the impact of the housing product is a significant
----------------------
part of the process, which requires sufficient attention. Introducing a housing
---------------------- microfinance product involves substantial resources and operational costs for the
microfinance institution. It requires large sums of capital investments or loans
---------------------- provided by donors or other financial institutions. In order to justify and promote
such investments, the impact of the product on clients’ economic conditions and
----------------------
vulnerabilities, incomes and consumption, risk behaviour, among other factors,
---------------------- must be measured. The results from the impact evaluation could have significant
implications for future housing policies and the availability of funding sources
---------------------- for the sector.
----------------------
Activity 3
----------------------
---------------------- Using the Internet as your resource, study the housing microfinance products
of some of the commercial banks in India.
----------------------
---------------------- 7.11 CHALLENGES BEFORE HOUSING

---------------------- MICROFINANCE INSTITUTIONS
---------------------- Housing microfinance is gaining popularity as a recognised product of
microfinance institutions. However, its potential clashes with the original
---------------------- mandate of microfinance institutions, many of which were designed to support
---------------------- the development of micro and small enterprises through the provision of working
capital and fixed assets loans.
---------------------- The potential of housing microfinance depends on the institution’s ability
---------------------- to move beyond the limits of its original product characteristics and more
deeply understand and respond to the needs of its clients. This reorientation
---------------------- will determine whether housing microfinance becomes a major contributor to
improved shelter for millions of people around the world. In this regard, some
---------------------- of the constraints/challenges are as under:
---------------------- 1. Limited access to medium and long-term capital: It is well known
that medium and long-term housing loans should be funded with capital
----------------------
that matches their long-term structure. Yet much of the funding of the
---------------------- microfinance institutions tends to be short-term − a year or less. While
some housing microfinance providers capture savings, they rarely collect
---------------------- enough to cover the demand for housing loans. In this regard, adequate
funding instruments would enable the financing institutions to develop their
----------------------
portfolios and avoid a mismatch between the source and use of funds.
120 Micro Financing

2. Insufficient understanding of the appropriate relationship between Notes
subsidies and financial services: There are sufficient reasons for
governments to subsidise low-income housing. Housing microfinance can ----------------------
complement subsidies, but financial services should be kept distinct from the
subsidy element. In a slum improvement programme, for example, loans to ----------------------
individual slum-dwellers should be managed separately from state subsidies ----------------------
for infrastructure and sanitation. Most microfinance institutions’ comparative
advantage lies in providing financial services, not administering subsidies. ----------------------
MFIs usually weaken themselves when they try to do both.
----------------------
3. Insecure land tenure: In most developing countries, poor families do not
----------------------
possess formal proof of land ownership. While formal land titles are not
necessary in housing microfinance, land security is essential. Households are ----------------------
more likely to invest in their homes when they know they will not be evicted.
This security is also important for financial institutions’ risk management. ----------------------
----------------------
7.12 CONSTRAINTS FACED BY HOUSING
----------------------
MICROFINANCE INSTITUTIONS
----------------------
Microfinance housing products enable the microfinance institutions to
diversify their portfolios, cross-subsidise their products and develop business ----------------------
relationships with their clients. In spite of these potential rewards, as stated above,
microfinance institutions face significant obstacles when they attempt to provide ----------------------
home loan products. Firstly, MFIs are usually unable to access adequate funding ----------------------
for housing finance. Secondly, lack of clear land titles amongst low-income
households often makes it difficult for MFIs to lend to them. Thirdly, there is ----------------------
also a lack of understanding about the level of non-financial assistance that low-
income households may need for housing. Finally, housing microfinance loans ----------------------
are distinct enough from standard micro-credit loans that they represent a major ----------------------
shift away from typical microfinance mechanisms. HMF loans typically involve
larger sums of money and longer terms. Joint liability lending, the cornerstone ----------------------
of microfinance, tends to be less effective as loan amounts grow larger.
----------------------
Some of the constraints faced by the microfinance institutions are as under:
----------------------
1. Lack of awareness: There is a lack of awareness among MFIs on how to
develop demand-driven housing microfinance loan products and services ----------------------
and to implement them.
----------------------
2. Lack of access to affordable and long-term capital/commercial funds:
Funding possibly poses the largest constraint for MFIs in delivering HMF. ----------------------
It is only the last decade or so that MFIs have started offering housing
----------------------
microfinance loans to their graduated clients, that is, clients with a successful
repayment record. In the absence of a large number of successful stand-alone ----------------------
housing microfinance examples, loans for housing often tend to be perceived
by financial institutions as consumption loans. Financial institutions are ----------------------
unwilling to lend for consumption loans and thus some MFIs find it difficult
----------------------

Notes to meet the housing finance demand with limited resources. That target
population of HMF often lacks a legal title, as will be discussed later, makes
---------------------- things even more difficult.
---------------------- 3. Land and ownership issues: Most of the poor, especially urban poor do
not have legal land ownership rights or title deeds/documents. In general,
---------------------- there are four ways to demonstrate land rights in India. The first three ways
can be used to access bank finance. First, one can gain land rights through
----------------------
a title deed, which has the highest legal sanction. Second, one can attain
---------------------- leasehold, which gives the holder rights to use property for a certain number
of years. Third, one can receive a license to cooperative societies, upon which
---------------------- members register with the cooperative to demonstrate right to the property.
The fourth is through stamp paper signifying sale of a property and has no
----------------------
legal validity.
---------------------- As noted earlier, access to formal sources of housing finance is limited by
---------------------- one’s ability to show evidence of legal title and formal employment. Low-
income households who inhabit informal settlements seldom have formal
---------------------- legal titles. Their rights to land exist through other forms of land security.
---------------------- In rural areas, para-legal rights are typically embodied by pattas, which
are land rights to either ancestral or government-granted land. While
---------------------- ancestral pattas are accepted by banks and other financial institutions, pattas
to government-granted land are not always acceptable. This is because,
----------------------
the latter specifies that the property may not be sold or transferred for a
---------------------- certain period of time. Clearly then, this form of land security would not be
acceptable to a bank as collateral. Recognising these rights would incentivise
---------------------- rural households to invest in their dwelling because these rights provide
them with land security.
----------------------
---------------------- At the same time, as far as housing microfinance is concerned, in spite of

these obstacles posed by the lack of title, the existence of a full title has
---------------------- not always been necessary for housing microfinance, as some MFIs have
already proven. Most MFIs in India retain legal title from their clients only
---------------------- as a psychological deterrent, without any intention of repossessing the house
---------------------- in the event of default. There are two reasons for this. Firstly, the process
of foreclosure is often time-consuming and burdensome for microfinance
---------------------- institutions and secondly, MFIs may find it morally problematic to possess
a poor person’s home or land.
----------------------
4. Lack of construction/building expertise to provide technical or
----------------------
construction assistance to the client borrowers: At first glimpse,
---------------------- providing technical assistance and supervision of the construction process
has many setbacks. It implies increased administrative costs and often, the
---------------------- MFI may not have the expertise to provide technical assistance regarding
construction. As a result, these services would have to be outsourced, the
----------------------
cost of which ultimately get passed on to the consumer, making it more
---------------------- expensive for clients to borrow. However, such assistance has the potential
122 Micro Financing

to yield a broad array of benefits including the increased likelihood of Notes
completing construction through enhanced efficiency, lowered overall cost
of construction through cheaper materials, and more robust construction with ----------------------
good quality materials. These benefits translate into increased likelihood
of repayment. For those microfinance institutions that do not possess ----------------------
technical expertise, partnerships with NGOs or private institutions, such as ----------------------
construction companies or material suppliers, provide a viable option. There
has been evidence that these partnerships generate some positive outcome. ----------------------
In addition, it may help the MFI to directly estimate finance requirements
of their clients. ----------------------
----------------------
5. Awareness building: Offering HMF would also necessitate some level of
awareness building amongst potential borrowers. The reasons for this are ----------------------
twofold. Firstly, microfinance clients are used to repaying loans on a short-
term basis for durations up to a year. HMF entails loans that are at least ----------------------
three years long. Thus, MFIs must spend time training their borrowers to
----------------------
develop a long-term view of their finances. Secondly, while “progressive
build”, that is, incremental building characterises low-income housing ----------------------
construction when access to finance is limited, MFIs observe that once
barriers for access to housing finance are removed (for example via HMF), ----------------------
clients are keen to build once and for all, rather than over time. This may
----------------------
not be financially possible for them or for the MFI. This reinforces the
importance of cost-effective construction assistance, but also underscores ----------------------
the need for awareness building on “progressive build”.
----------------------
6. Subsidies: The general perception is that government subsidy programmes
and institutional grants for housing tend to cloud prospects for microfinance. ----------------------
They create a culture of expectation amongst the beneficiaries and ----------------------
furthermore perpetuate a culture of non-repayment. While there is no doubt
about the negative consequences that are entailed in government direct ----------------------
subsidy programmes, there are various other ways to make better use of
subsidies. ----------------------
7. Interest rates: If a housing loan is secured by the beneficiary’s home, ----------------------

housing loans should be cheaper than micro-enterprise loans. However, ----------------------
as we saw earlier, foreclosure is not realistic for most MFIs. Furthermore,
most banks are not comfortable lending to MFIs for housing purposes since ----------------------
banks are unable to assess credit risk of low-income groups. The result, as
we saw earlier, is that medium to long-term funding for HMF is not readily ----------------------
available. The funding, which is available is priced at prohibitively high ----------------------
interest rates due to these reasons in the absence of subsidies for HMF.
----------------------
8. Delivery mechanisms: For micro-credit loans, MFIs predominantly used
joint liability methodology although some large MFIs in the country have ----------------------
started experimenting individual lending. In the context of providing housing
----------------------
microfinance, both the methods, i.e., lending to individuals and group lending
through their SHGs are currently in use. However, it is important to note ----------------------

Notes that some of the MFIs use individual lending method to utilise existing
group structure to select borrowers, disburse loans and collect repayments.
---------------------- In such a case, each individual is liable to only his/her own loan but group
lending helps to reduce administrative costs.
----------------------
Although the benefits of joint liability in the context of micro-enterprise loans
----------------------
are widely known, evidence suggests that people become increasingly less
---------------------- willing to be liable for other members’ loans as the loan amount becomes
larger. Further, in urban areas where the potential of HMF is perceived to
---------------------- be high, joint liability becomes even more questionable as social networks
are more fluid, migration is frequent and incomes are more stable than in
----------------------
rural regions.
----------------------
9. Reaching the poorest: The issues in lending to the poorest mainly revolve
---------------------- around the volatile income of low-income groups and the vulnerability
of these groups to small economic shocks, which could adversely affect
---------------------- repayment. Further, those employed in the informal sector have greater
---------------------- problems accessing credit. Complicated land title and collateral issues
make the business all the more difficult. In an attempt to reach the poorest
---------------------- in this difficult environment, MFIs that have existing HMF products often
require either savings deposits or successful repayment of previous loans.
---------------------- These practically act as substitutes for physical collateral and reduce risk for
---------------------- the MFI. By offering HMF to clients with successful previous repayment
records, MFIs are able to retain good clients who have credit disciplines.
---------------------- Despite these options, however, MFIs’ options are strictly limited. First,
many MFIs are not able to offer savings products. Second, even with past
---------------------- good borrowers as potential clients, the loan amount and the tenure required
---------------------- for new construction of a house are much larger than other existing loan
products and pose an immense risk to MFIs. Accordingly, a rational option
---------------------- left with MFIs, as far as reaching the poorest is concerned, is perhaps to
focus on house repair and upgradation loans, which are typically as big as
---------------------- or slightly larger than micro-enterprise loans.
---------------------- 10. Loan quantum: It is observed that very few microfinance institutions offer
---------------------- loans that are able to cover the complete cost of a new housing unit. This
is mainly due to funding issues and fear of non-repayment. Since the loan
---------------------- amounts from an MFI are not enough to cover the construction of a house,
the beneficiaries then resort to a number of informal sources of credit.
---------------------- Moneylenders tend to charge extremely high rates of interest. As the poor
---------------------- tend to pay off their biggest liability first, the moneylender’s loan receives
higher priority, which leads to defaults on the MFI loan at the time of
---------------------- repayment. In other words, the lack of funds leads to a vicious cycle, which
limits the ability of the MFI to lend.
----------------------
This calls for highlighting the importance of “progressive build” to the
----------------------
clients. Progressive building allows MFIs to reduce the risk of default
---------------------- while borrowers can obtain future inflow of credit until they complete the
124 Micro Financing

construction, upon successful repayment in each phase, without relying on Notes
moneylenders. In addition, technical assistance in the form of providing
information regarding low-cost building materials and partnership with ----------------------
material suppliers is an area that is potentially extremely effective in solving
this problem. ----------------------
----------------------
7.13 COMMERCIAL BANKS AND HOUSING ----------------------
MICROFINANCE ACTIVITIES
----------------------
All over the world commercial banks are yet to demonstrate a comprehensive
interest in developing the capacity to deliver housing microfinance loans. While ----------------------
results from the new housing microfinance products offered by commercial banks
----------------------
show potential, they are yet to be adopted widely and globally, to be viewed as
a key area of growth on par with other traditional banking products for any but ----------------------
a handful of banks and meet any nation’s underserved housing demands.
----------------------
In order to enable the financial institutions to reach economies of scale in
housing microfinance, they must first have access to sophisticated physical, ----------------------
financial and human resources – resources, which microfinance institutions
typically do not have. Not only do banks have high levels of skilled human ----------------------
capital and sophisticated back-office operations, they also have access to capital ----------------------
markets and the capacity to provide a broad menu of financial services, including
housing finance. ----------------------
It is important to note, however, that the primary use of HMF provided by ----------------------
MFIs has been for progressive housing improvements, rather than for purchase
or construction of house. Commercial banks have the potential to harness their ----------------------
comparative advantages to serve a broader range of housing needs for the poor.
----------------------
Bank’s tremendous financial, operational and human resources enable them to
take on new products with higher perceived risk. The few interested commercial ----------------------
banks have seen that housing microfinance constitutes a lucrative line of business.
In this context, commercial banks have proven that they can not only compete ----------------------
but also reach economies of scale with their HMF offerings.
----------------------
Commercial banks are cautious as far as housing microfinance is concerned
because of the overall complexity of housing issues in developing countries and ----------------------
the subsequent perception of risk. As such, even if they do enter the microfinance ----------------------
sector, they tend to stick with the “traditional”, well-tested micro-enterprise
products before developing housing microfinance products. ----------------------
Banks standardise products in order to scale them, so they prefer that HMF ----------------------
products adhere to traditional micro-enterprise product methodologies. They
tend to avoid the provision of construction assistance, specialised loan officers ----------------------
and other services that raise the costs and complexities of the business.
----------------------
A strong commitment on the part of the top management of the individual
banks is critical to break traditional conceptions and the risk perception of both ----------------------
housing finance and microfinance.
----------------------

Notes
----------------------

1. HMF loans typically involve ___________ sums of money and
---------------------- ___________ terms.
---------------------- 2. Much of the funding of the microfinance institutions tends to be
__________.
----------------------
3. In most _____________ countries, poor families do not possess formal
---------------------- proof of land ownership
---------------------- 4. Primary use of HMF provided by MFIs has been for progressive housing
_________, rather than for _________ or ___________ of house.
----------------------
----------------------
Summary
----------------------
• Microfinance is the extension of very small loans to impoverished borrowers
---------------------- to stimulate entrepreneurship. It facilitates the provision of a wide range of
financial services to the very poor.
----------------------
• Microfinance Institutions (MFIs) provide loans for income-earning activities,
---------------------- as also for consumption and emergency situations.
---------------------- • A relatively new loan portfolio for microfinance encompasses “housing
microfinance” wherein apart from providing loans for income-generating
----------------------
activities and emergency situations, microfinance institutions provide finance
---------------------- for housing.
---------------------- • Housing microfinance is generally described as a division of microfinance,

which encompasses initiatives that (a) target the habitation needs of the
---------------------- poor or the very poor, (b) extend relatively small loan amounts based on
the anticipated repayment capacity, (c) carry a short repayment period, (d)
---------------------- are usually not collateralised, (e) are priced to ensure long-term financial
---------------------- viability of the provider, and (f) incorporate systemic due-diligence and
follow-up procedures.
----------------------
• Housing microfinance consists of small loans to low and lower middle-
---------------------- income households typically but not necessarily without collateral,
specifically intended for housing-related endeavours, including new
---------------------- constructions, repairs, improvements or upgradation of existing structures,
---------------------- purchase of land and investment in infrastructure.
---------------------- • In many ways, housing microfinance is similar to micro-enterprise loans.

In both the cases, underwriting is generally based on assessment of the
---------------------- applicant’s cash flow (ability to pay) and character assessment (assumed
willingness to pay). However, housing microfinance loans are generally
---------------------- larger and of longer duration.
126 Micro Financing

• Housing microfinance is offered by a wide variety of institutions including Notes
microfinance institutions, housing companies, NGOs, regulated financial
institutions, such as banks, NBFIs, cooperatives, etc. ----------------------
• Housing microfinance products broadly fall into two categories: “linked” ----------------------
and “stand-alone”. Housing finance on a linked basis is provided only to
clients who have prior history with the provider (only to current MFI clients), ----------------------
while housing microfinance on a stand-alone basis is available to all eligible ----------------------
clients, including first-time clients.
----------------------
• In order to develop a housing microfinance programme, it is advantageous
to follow a chain of steps involving (a) demand assessment with a view ----------------------
to understand the market potential and clients profile; (b) incorporating
findings from the demand assessment into product design and pricing; ----------------------
(c) implementing the product with technical advising services once the
----------------------
operational procedures are streamlined; (d) evaluating the impact of the
product on the clients’ economic and social outcomes to analyse cost- ----------------------
effectiveness of the programme, and (e) identifying what aspects are
successful and which product features need to be adjusted. The programme ----------------------
can then be replicated and scaled across geographic locations.
----------------------
• All over the world commercial banks are yet to demonstrate a comprehensive
----------------------
interest in developing the capacity to deliver housing microfinance
loans. Commercial banks have the potential to harness their comparative ----------------------
advantages to serve a broader range of housing needs for the poor. Bank’s
tremendous financial, operational and human resources enable them to take ----------------------
on new products with higher perceived risk.
----------------------
• Commercial banks are cautious as far as housing microfinance is concerned
because of the overall complexity of housing issues in developing countries ----------------------
and the subsequent perception of risk. ----------------------
----------------------
Keywords
----------------------
• Housing microfinance: Small loans to low and lower middle-income
households, with or without collateral, specifically for housing-related ----------------------
endeavours, including new constructions, repairs, improvements or ----------------------
upgradation of existing structures, purchase of land and investment in
infrastructure. ----------------------
• Stand-alone HMF: Housing microfinance credits to the public at large ----------------------
independent of other financial products.
----------------------
----------------------
1. Define and explain the concept of “Housing Microfinance”.
2. Discuss the relevance of housing microfinance in the Indian context. ----------------------

Notes 3. Compare and explain the differences between the following:
---------------------- i. Housing microfinance and micro-enterprise loans

ii. Housing microfinance and housing mortgage finance
----------------------
iii. Linked and stand-alone HMF products
----------------------
4. Explain the process of development and designing of housing microfinance
---------------------- products.
---------------------- 5. Analyse the constraints and challenges faced by the housing microfinance
---------------------- institutions.
---------------------- 6. Write short notes on:

i. Progressive build
----------------------
ii. Advent of housing microfinance
----------------------
iii. Benefits of housing microfinance
----------------------
iv. Housing microfinance and commercial banks
----------------------
v. Underwriting and funding of housing microfinance loans
----------------------

---------------------- 1. The process of extension of very small loans to those in poverty to stimulate
---------------------- entrepreneurship is known as:
i. Microfinance
----------------------
2. Microfinance Institutions (MFIs) provide loans for:
----------------------
v. All of the above
----------------------
3. Because of their smaller size, housing microfinance loans are not used to
---------------------- purchase a home but rather for:
---------------------- v. All of the above

----------------------
----------------------
1. Housing microfinance is offered by a wide variety of institutions including:
----------------------
v. All of the above
----------------------
2. Housing finance on a linked basis is provided only to:
---------------------- iii. Existing clients
128 Micro Financing

Check your Progress 3 Notes
Fill in the blanks.
----------------------
1. HMF loans typically involve larger sums of money and longer terms.
----------------------
2. Much of the funding of the microfinance institutions tends to be short term.
----------------------
3. In most developing countries, poor families do not possess formal proof of
land ownership. ----------------------
4. Primary use of HMF provided by MFIs has been for progressive housing ----------------------
improvements, rather than for purchase or construction of house.
----------------------
----------------------
Suggested Reading
----------------------
1. Daphnis, Frank. 2004. Housing Microfinance: A guide to Practice. CHF
International. ----------------------
2. Ferguson, Bruce. 2004. “Scaling up housing microfinance: A guide to ----------------------

practice.” Paper presented at a workshop at the World Bank.
----------------------
3. Khan, Harun R. 2012. “Enabling Affordable Housing for All – Issues ----------------------
& Challenges .” Inaugural address delivered by Harun R Khan, Deputy
Governor, Reserve Bank of India at International Conference on Growth ----------------------
with Stability in Affordable Housing Markets organised by the National
Housing Bank and the Asia Pacific Union for Housing Finance, New Delhi, ----------------------
January 30. ----------------------
4. Manoj, P.K. 2010. “Prospects and Problems of Housing Microfinance ----------------------
in India.” European Journal of Economics, Finance and Administrative
Sciences. ----------------------
5. Merrill, Sally R. 2009. Microfinance for Housing: Assisting the “Bottom ----------------------
Billion” and the “Missing Middle”. IDG Working Paper No. 2009-05.
----------------------
6. Ramji, Minakshi and Stuti Tripathi. 2010. “Micro-housing Loans for Micro- ----------------------
entrepreneurs: A Needs Assessment.” Microfinance Review.
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------

Notes
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
130 Micro Financing

Development of Microfinance Products
UNIT
8
Structure:
8.1 Introduction
8.2 Product: Meaning
8.3 When should an MFI explore New Product Development
8.4 Process of New Product Development
8.4.2 Phase II: Design and Development
8.4.3 Phase III: The Pilot Test
8.5 Top 10 Lessons for Successful Product Development
Summary
Key Words
Suggested Reading
Development of Microfinance Products 131

Notes
Objectives
----------------------
----------------------
●● Discuss about microfinance products
---------------------- ●● Describe how to develop various MF products
---------------------- ●● Analyse the different phases of microfinance product development
---------------------- 8.1 INTRODUCTION
----------------------
Traditionally, most microfinance institutions (MFIs) have offered a uniform
---------------------- credit product for all their customers (a “mono-product”). This traditional product
usually relies on a stepped lending methodology where loan terms and conditions
---------------------- are set to minimise the risk and costs of the provider institution. However, the
requirements of the beneficiary, his needs and preferences are not given much
----------------------
consideration.
---------------------- This supply-driven, one-size-fits-all approach is now being replaced by a
---------------------- more market and client-driven approach because of several factors:
• Added competition resulting from the entrance of formalised commercial
----------------------
banks into the microenterprise market.
----------------------
• Increasing client dropout rates resulting from inflexibility or inappropriateness
---------------------- of current product offerings.
---------------------- • A more sophisticated clientele with more discriminating preferences.

---------------------- Since the sustainability of MFIs depends on achieving a significant level of
scale and portfolio growth, there has been greater impetus on the part of MFIs,
----------------------
on the one hand, to refine existing products to retain customers and, on the other,
---------------------- to introduce products and services to attract new clients.
---------------------- Although this shift in approach, from providing “microenterprise credit”

to “a range of financial services to low-income clients,” is a positive sign that
---------------------- the market for financial services to the unbanked population is deepening, over-
eagerness to introduce new products into the market without proper due diligence
---------------------- and internal preparation could lead to deleterious results that threaten the long-
---------------------- term viability of the MFI.
The current rural financial market development approach envisages the
----------------------
provision of “reasonably priced and durable financial intermediation services
---------------------- that are demanded by customers”. The challenge lies in the ability of MFIs to
balance between providing appropriate services and achieving financial viability.
---------------------- This Unit provides a general road map for the new product development process.
---------------------- Information in this Unit is sourced from usaid.gov.
----------------------
132 Micro Financing

8.2 PRODUCT: MEANING Notes
A product, broadly defined, is anything that satisfies a customer’s need. ----------------------
The product can be a way for an institution to position itself strategically within
the market as well as with its clientele. A product can be considered in three ----------------------
component parts: ----------------------
• Core product − the reason why the customer wants to pay to receive the
benefit (e.g., financial security) or to fulfil a certain need (e.g., investment ----------------------
capital). ----------------------
• Actual product − the specific features, such as terms and conditions of the
----------------------
loans, that characterise what the customer is buying.
• Augmented product − how the customer receives the product, e.g., how the ----------------------
loan is delivered and processed.
----------------------
8.3 WHEN SHOULD AN MFI EXPLORE NEW PRODUCT ----------------------

DEVELOPMENT ----------------------
As product development is a process that requires a substantial amount of ----------------------

resources (human and capital) and time commitment, it might not be appropriate
for all MFIs. Whether an MFI should consider new products depends on the ----------------------
institution’s stage of development, the level of competition in the market in which ----------------------
it operates and the needs of its clientele. Often, what is required is not necessarily
the introduction of a completely new product but simply a readjustment or ----------------------
refinement of an existing product.
----------------------
Institutional Readiness
----------------------
Walk before you run. An MFI should have an established credit product
(i.e., its core product) and ensure that all the “fundamentals” are in place before ----------------------
moving on to offer additional products. These fundamentals include:
----------------------
• Governance structure and control: The MFI should have a board of
directors that has a clear strategic vision for the institution, is committed to ----------------------
market-driven strategies and is able to provide the level of oversight needed
----------------------
to hold management accountable for performance.
----------------------
• Systems and operational procedures: The MFI should have in place an
appropriate management information system to handle its information and ----------------------
reporting requirements. The management information system should be able
to record and track client data, portfolio performance and cost structures. ----------------------
Policies and procedures for field and branch staff should be well defined,
----------------------
and appropriate internal controls should be in place to minimise the risk of
fraud, waste and abuse. ----------------------
• Organisational structure: The institution should have an open ----------------------

communications channel to allow ideas to flow vertically between
management and the field, as well as horizontally across departments. ----------------------

Notes The corporate culture should be an environment where innovation and
experimentation are rewarded through properly designed incentives.
----------------------
It is important to remember that product development is a systematic
---------------------- process whose success depends on awareness of market signals and institutional
capacity to:
----------------------
i. Mobilise the appropriate resources during the design and testing phase.
----------------------
ii. Operationalise the product once it has been launched.
----------------------
----------------------

---------------------- 1. Sustainability of MFIs depends on achieving a significant level of
___________ and ____________.
---------------------- 2. In terms of microfinance institutions, customers demand _____________
---------------------- and durable ________________ services.
3. Product development is a process that requires a substantial amount of
---------------------- __________ and ________________.
----------------------
---------------------- Activity 1
----------------------
An MFI is helping a self-help group in developing a product for the house
---------------------- cleaning segment. Find out the opportunities available to it in the given
economic conditions.
----------------------
----------------------
8.4 PROCESS OF NEW PRODUCT DEVELOPMENT
----------------------
New product development is a process that consists of four distinct phases:
---------------------- identification and preparation, design and development, pilot testing and product
launch. Three sources influence each phase of the product development: customer
---------------------- needs, competitors in the market and institutional strengths. For sustainability
---------------------- of the product, these sources should be considered in each phase of the process.
Three sources influence each phase of the product development: customer
---------------------- needs, competitors in the market, and institutional strengths. For sustainability
---------------------- of the product these sources should be considered in each phase of the process.
----------------------
This phase begins when the institution decides to formally investigate the
---------------------- development of a new product. The institution will mobilise staff and other
resources to work on the development effort and create a work plan.
----------------------
The failure rate of new financial products in developed countries can be
---------------------- as high as 75%. Consequently, an MFI should identify opportunities before
134 Micro Financing

embarking on the product development process. These opportunities are Notes
manifested through a set of market signals − customers, competitors and the
environment as well as the bottom line driven motives of the institution. ----------------------
1. The customer is always right: One of the simplest yet most effective ----------------------
methods by which an institution can learn about product needs is by listening
more carefully to its clients. This can be done through direct feedback to loan ----------------------
officers during group meetings, or through special focus group discussions
----------------------
with customers. An MFI also can gain valuable information by tracking
reasons for client desertion or conducting client exit interviews. ----------------------
2. Know your market: Product ideas can be generated simply by watching ----------------------
closely economic, industry and environmental trends. During high inflation,
for example, clients will want to have access to liquid savings products. ----------------------
Another source of ideas is the MFI’s competitors. An MFI should know
----------------------
who its competitors are and what products they are offering. Competitors
can be a resource rather than a threat. An MFI can adapt or improve upon ----------------------
product features offered by its competitors.
----------------------
3. Getting ready—what it takes: Internal preparation activities help ensure
that (a) the product idea fits with the strategic vision and objectives of the ----------------------
MFI, (b) there is institutional buy-in to move forward and actualise the idea
into a product and (c) the appropriate resources (financial and human) are ----------------------
allocated to the process. ----------------------
The MFI should follow the steps of firstly conducting an institutional assesment ----------------------
and secondly assembling a team. The details are:
----------------------
• Institutional assessment: First, an institution should determine whether and
how the new product idea helps promote its mission, its competitive strategy, ----------------------
its financial goals and its social impact. Once the MFI decides that the product
idea would not detract from these goals and objectives, it then must assess ----------------------
its capacity to handle an additional product. Major factors that should be ----------------------
considered in this evaluation include staff skill level, delivery channels,
management information systems and training procedures. In addition, ----------------------
the institution should assess how the introduction of a new product would
affect its overall portfolio risk and liquidity level. Such risk management ----------------------
considerations should be viewed in relation to the added customer benefit ----------------------
and profit gain from portfolio diversification.
----------------------
• Assembling the team: Introducing a new product requires a team effort.
A new product development team has two major resources: (a) a product ----------------------
champion to oversee and guide the entire process and to generate enthusiasm
and build institutional support for the product, and (b) a cross-functional ----------------------
team of three to seven staff members to carry out the day-to-day tasks of ----------------------
product development. Each team member should bring a different type of
expertise and skills to the process. The number of team members and the time ----------------------
devoted by each staff member will depend on the resources of the institution.
----------------------

Notes 8.4.2 Phase II: Design and Development
The first step for the new product development team is to design a
----------------------
prototype. Design and development of a product prototype involve drafting the
---------------------- initial features and characteristics of the new idea. To design a prototype, the
development team must understand client needs and the competitive landscape
---------------------- to determine what clients will buy.
---------------------- 1. Design a prototype: A successful prototype is developed based on market
intelligence that the institution gathers from its clients, its institutional
---------------------- experience and the local environment. Once market research is completed
---------------------- and the terms and conditions of the new product have been structured,
the institution can finalise the prototype by taking into account cost
---------------------- considerations, financial projections and regulatory and legal compliance.
---------------------- 2. Select your target market: To address customer needs, an institution
needs to get close to and understand its clients. Market segmentation is the
---------------------- process by which an institution can gather information about its clients and
---------------------- their needs. A market can be segmented by geography, demography (e.g.,
age, income, gender), business size, financing need (e.g., working capital
---------------------- versus fixed assets) and customer behaviour (e.g., clients who care about
price versus those who care about the quality of the service). Segmenting
---------------------- the market can identify niches where product needs are not being met and
---------------------- where clusters of clients exist that could serve as the target market for the
prototype.
----------------------
3. Mine your institutional knowledge: The MFI itself, especially line staff,
---------------------- such as loan officers and credit managers, represents an invaluable source of
information about client needs. Studying current product offerings also can
---------------------- inform the MFI about customer preferences and behaviour, such as which
clients are price sensitive or which prefer certain loan features. In addition,
----------------------
company documents, such as loan files, especially those who were declined,
---------------------- also can provide insight about potential market opportunities.
---------------------- 4. Know what the competition is doing: The new product development team
should pay close attention to price, packaging and placement of competitive
---------------------- products in designing a prototype. Knowing what the competitor is offering,
how the product is delivered and how it is perceived by customers can help
---------------------- the institution shape its product in a way that differentiates it from the rest
---------------------- of the market.
---------------------- 5. Receiving client input: Soliciting direct client feedback on the prototype
provides a reality check for the institution before it starts the next phase of the
---------------------- new product development process, the pilot test. A variety of methods exists
to obtain input, including one-on-one interviews, focus group discussions,
---------------------- participatory rapid appraisals, sample surveys or questionnaires and action
---------------------- research. Although these methods of primary data gathering provide valuable
feedback, they also are labour and cost-intensive. The MFI, thus, should
---------------------- ensure that adequate resources are allocated to this stage of the process.
136 Micro Financing

6. Measuring costs and break-even sales volume: Once the basic prototype Notes
has been formulated, the product development team must ensure that it
can deliver it to the client cost-effectively. First, the team has to examine ----------------------
internal logistics and required systems to estimate costs and adjust product
features accordingly. The costs should take into account such factors as the ----------------------
hiring and training of staff, management information systems and marketing/ ----------------------
promotion costs. Second, the team has to estimate revenue based on market
share projections and product characteristics. These two sets of data are then ----------------------
used to calculate the break-even sales volume. MFI management should
analyse the break-even sales volume in comparison to the potential market ----------------------
demand to determine the length of time it would take to reach the break- ----------------------
even sales volume and the availability of other revenue sources to cover the
development costs of the product in the meantime. ----------------------
Finalising the prototype design will involve balancing cost and profitability ----------------------
considerations with customer service, competitive strategy and risk. This can
----------------------
help the MFI determine the return goals and the type of information needed from
the pilot test, the next phase of the product development process. ----------------------
8.4.3 Phase III: The Pilot Test ----------------------
A pilot test introduces the product prototype to a limited number of customers
----------------------
so that it can be determined whether the product’s features meet market demands
before the institution offers the product to a larger market. The pilot test helps to ----------------------
ensure a certain level of market acceptance once the product is commercialised.
Thus, the MFI should design the test in a way that will accurately capture ----------------------
customers’ reactions.
----------------------
1. Defining success: To determine whether the pilot test was successful, the
institution has to identify performance indicators and establish targets for ----------------------
these indicators. Common performance indicators include:
----------------------
• Volume − number of clients, level of sales and market share ----------------------
• Profitability − rate of return for product ----------------------
• Productivity − number of clients per loan officer ----------------------
• Resource efficiency − money and/or time invested ----------------------
2. Setting up − where, how many and how long?: Critical elements of the ----------------------
pilot test are test sites, sample size and duration. The number of sites should
----------------------
be manageable and easily accessible by the product development team. The
location or locations for testing should represent a subset of the institution’s ----------------------
target market for the product and must have the internal capacity to sell and
monitor the product being tested. The number of customers involved in ----------------------
the test or the sample size, should be large enough to ensure a reasonable
----------------------
level of confidence that the data reflect the broader target market, yet small
enough so as not to make information gathering expensive or monitoring ----------------------

Notes difficult. The duration of the pilot test will depend on the terms and structures
of the product as well as market conditions. In deciding the time frame,
---------------------- the institution should consider the trade-off between cost and reliability of
test results, the opportunity cost of being late to market versus prematurely
---------------------- entering the market, and the length of time needed for administrative and
---------------------- operational adjustments necessary for product implementation.
---------------------- 3. Preparing the test site: Critical operational functions of the institution must
be prepared and equipped to handle the requirements of the new product or
---------------------- service. Each test site should put in place the appropriate processes, from
the application process to policies and procedures as to how the product
---------------------- is evaluated, approved and managed. The product development team has
---------------------- to ensure that the management information system can track and monitor
client information and produce reports. In addition, sales staff have to be
---------------------- trained to have a thorough understanding of the product and the procedures
and policies for product delivery. A marketing and promotional strategy has
---------------------- to be developed, including promotional materials, such as fact sheets and
---------------------- brochures to generate interest and publicise the new offering.
4. Monitoring and evaluating results: Three major areas that the product
----------------------
development team should focus its monitoring efforts on are the delivery
---------------------- process, loan terms and competitive response. The delivery process is
monitored to assess the efficiency and timeliness of the application, approval
---------------------- and disbursement processes. The reactions of clients to the terms and
conditions of the product also are monitored to inform potential refinements
----------------------
and adjustments. The team should monitor whether the new product has
---------------------- resulted in a price war with the competition or whether it has cannibalised
other products in the institution’s portfolio. Once the information has
---------------------- been gathered, the product development team must evaluate whether
commercialising the new product is worth the investment to the institution.
----------------------
The following evaluation criteria should be considered in arriving at a go/
---------------------- no-go decision:
---------------------- • Financial viability: Administering a diverse product line is a costly,

complicated endeavour. Products or services that do not help cover the
---------------------- costs of running the institution may jeopardise its long-term viability.
Consequently, there must be strong market prospects to ensure that the loss
----------------------
in short-term profits will be more than offset by expected revenues generated
---------------------- from capturing a larger share of the market.
---------------------- • Competitive considerations: Financial projections and the product’s

ultimate commercial success are tied to the product’s competitive position
---------------------- in the marketplace. Three factors determine the product’s competitiveness
− market share, product mix and market position. Market share relates to
---------------------- the retention of customers, the capture of clients from the competition and
---------------------- the luring of new clients who were previously unserved. Product mix looks
at whether the new product complements or dilutes current offerings. An
---------------------- MFI should consider its market position when contemplating a product line
138 Micro Financing

expansion. An MFI that is transforming into a formal financial institution, Notes
for example, may have to incorporate certain core products, such as savings
accounts, so that potential clients can treat it seriously as a bank substitute ----------------------
or an MFI may want to identify itself with a particular market segment,
such as a village bank focusing on poverty alleviation. The important thing ----------------------
to remember is to have a coherent product mix and not try to be all things ----------------------
to all people.
----------------------
• Institutional capacity: Introducing a new product is resource intensive
and a potentially disruptive process for employees who are accustomed to ----------------------
certain operating procedures. A critical consideration in deciding whether
----------------------
to move forward with product development is the potential for internal
collaboration and institutional change. Institutional capacity entails having ----------------------
a number of systems in place: delivery channels (physical infrastructure
and communications channels) to market the product to the target customer ----------------------
group; management information systems to track the disbursement and
----------------------
collections as well as monitor portfolio performance; and human resources,
who understand the terms and characteristics of the new product and who ----------------------
are able to sell and market the product.
----------------------
----------------------
Launching a new product or service requires as much preparation, calculation
and control as the pilot test phase. Launching the product too quickly could ----------------------
result in the institution’s lack of capacity to efficiently deliver the new product,
----------------------
potentially reducing market acceptance of the product and damaging the
institution’s reputation. Launching the product too slowly increases the likelihood ----------------------
that competitors will develop and launch a similar product and capture the MFI’s
potential market. ----------------------
1. Implementation plan: It is important to plan when and how the institution ----------------------
will phase in the new product line at each branch office. The plan should
take into account the institutional capacity needed to carry out the separate ----------------------
functions and tasks of marketing, processing, delivering and managing the
----------------------
new product.
----------------------
2. Human resource development: As an MFI expands its product line, having
an established training programme can help ensure product consistency and ----------------------
quality control. Factors such as staff education level, attitude and current
workload must be analysed to determine what type of training is most ----------------------
appropriate as well as the content of the training. In deciding which staff to ----------------------
train, the institution should analyse the benefits of employing specialised
versus generalist loan officers. Generalist credit officers are able to offer ----------------------
clients a full menu of product options. They also allow the MFI to serve
the needs of the microenterprise as it grows, without having to divide the ----------------------
portfolio among credit officers. Specialising would be appropriate when ----------------------
there is a unique type of underwriting or a specific target market associated
with the product. ----------------------

Notes An MFI can encourage a shift in attitudes through appropriately structured
incentives. Well-designed incentives will institutionalise training and help
---------------------- senior management guide the focus of operations. Effective incentives
are usually performance based and multiple, weighted and time limited,
---------------------- straightforward and reinforcing, balanced between individual and collective
---------------------- goals and aligned with institutional targets.
---------------------- 3. Internal support systems: In addition to human resource development,

the MFI must also develop operational systems to support the new product
---------------------- line. The MFI’s management information system should be able to process
information about the new product. At a minimum, loan officers should track
----------------------
the hours spent working with different products on timesheets since salaries
---------------------- typically represent one of the largest costs. Accountability and quality control
systems must be in place for scaled-up product implementation. Oversight
---------------------- can come in the form of portfolio reviews, performance evaluations
and credit policies and operational manuals. Lastly, adequate lines of
----------------------
communication should be established between headquarters and branches,
---------------------- between management and staff and between customers and the MFI. Many
MFIs use client visits or technical assistance as the main means of dialogue
---------------------- with customers. Familiarity with clients can also be forged through credit
performance and daily portfolio reports.
----------------------
---------------------- 4. The 4 Ps of marketing: An MFI should develop and implement a marketing

strategy so that it can capture and retain a broader market for the new product.
---------------------- This strategy revolves around Product, Price, Promotion and Positioning
(or Placement) − the four Ps of marketing.
----------------------
• Product: The pilot test enables the MFI to gauge market reaction to the
---------------------- prototype product. Based on the results of consumer feedback during the
---------------------- testing phase, the product development team can refine the features of the
product so that it will appeal to the broader target market. The adjustments
---------------------- should take into account the previously mentioned component parts of the
product − core product, actual product and augmented product.
----------------------
• Price: Pricing a product should take into account (a) the cost of delivering
---------------------- the product, (b) the customer’s ability and willingness to pay and (c) the
competitor’s pricing and the institution’s own position in the market. Cost
----------------------
recovery is a key component of pricing, and the institution must take into
---------------------- consideration all related expenses over and above the cost of capital incurred
to deliver a product. Competitive considerations are another key component.
---------------------- High prices are often associated with better quality, superior customer
service, and professionalism, while lower prices can be confused with slower
----------------------
turnaround time, poor customer service and lack of support services. The
---------------------- MFI should thus consider the way its pricing will affect how customers will
perceive the product in relation to other products on the market.
----------------------
• Promotion: Promotions are the primary means of communicating a product’s
---------------------- features to the market and building consumer awareness. Promotional activity
140 Micro Financing

can include advertising, publicity and public relations. The promotional plan Notes
should be tailored to the target market. Print advertising, for example, would
not be appropriate for an audience that is illiterate or speaks a local dialect. ----------------------
• Positioning/placement: Placement involves how the product is delivered ----------------------
to customers. It refers both to the physical location (distribution) of the
product and to its positioning in the market relative to competing products. ----------------------
In the first instance, the institution needs to evaluate whether the product is
----------------------
available in locations where clients have easy access and when clients need
it. Some physical upgrades to the office may also be required; for example, ----------------------
an institution that is introducing savings products should add safety vaults
to its branches to store deposits. In terms of market positioning, the MFI ----------------------
should decide whether it will position itself as a full service intermediary
----------------------
where clients have the convenience of one-stop shopping, or an efficient
provider of a particular line of similar products aimed at a broader market. ----------------------
----------------------
----------------------
Multiple Choice Single Response. ----------------------
1. To determine whether the pilot test was successful, the institution has
to identify two important performance indicators: ----------------------
i. Cost and profit ----------------------

ii. Revenue and sales price ----------------------
iii. Volume and profitability
----------------------
2. What is the key component of pricing?
i. Prices of inputs ----------------------
ii. Sales price ----------------------
iii. Cost recovery
----------------------
----------------------
Activity 2 ----------------------
Observe the costing pattern of an MFI product and write down the important ----------------------
cost components, which need to be recovered.
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------

Notes 8.5 TOP 10 LESSONS FOR SUCCESSFUL PRODUCT
DEVELOPMENT
----------------------
As microfinance institutions become more sophisticated and client-oriented,
---------------------- they start to offer a range of products. For developing the products successfully,
---------------------- the following points need to be considered throughout the product development
process:
----------------------
1. Solicit client feedback throughout the process to continually refine the
---------------------- product.
2. Expect problems to arise along the way.
----------------------
3. Generate institutional buy-in early and continually throughout the product
---------------------- development process.
---------------------- 4. Test the product in actual market settings and expand slowly.
----------------------
5. Make realistic cost revenue projections to prepare for the financial impact
---------------------- of adding another product.
---------------------- 6. Make sure systems have sufficient capacity and flexibility to manage and
track new products.
----------------------
7. Provide appropriate training and incentives to staff to ensure effective
---------------------- implementation.
----------------------
8. Cancel the product if external or internal conditions are not conducive to
---------------------- new products.
---------------------- 9. Identify a product “champion” who will maintain momentum throughout

the development process.
----------------------
10. Create a client-centred institution.
----------------------
---------------------- Summary
----------------------
• Microfinance institutions (MFIs) traditionally offers uniform credit product
---------------------- but sustainability of these institutions are a big problem and for that different
other products need to be developed.
----------------------
• A product, broadly defined, is anything that satisfies a customer’s need. The
---------------------- product can be a way for an institution to position itself strategically within
the market as well as with its clientele.
----------------------
---------------------- • Product development is a process that requires a substantial amount of

resources (human and capital) and time commitment.It might not be
---------------------- appropriate for all MFIs.
----------------------
142 Micro Financing

• New product development is a process that consists of four distinct phases: Notes
i) identification and preparation, ii) design and development, iii) pilot testing
and iv) product launch. ----------------------
• Identification and preparation requires knowledge of customer base, market ----------------------

information, client services, existing players, institutional assessment,
----------------------
assembling the team, etc.
----------------------
• The process of design and development includes selection of target markets,
mining of institutional knowledge, knowing what the competitors are doing, ----------------------
receiving client inputs and measuring cost and break-even sales volume.
----------------------
• The pilot test of a product helps to ensure a certain level of market acceptance
once the product is commercialised. It includes volume, profitability, ----------------------
productivity and resource efficiency. ----------------------
• Product launch and commercialisation is the final and very important phase ----------------------
of product development which includes human resource development,
management information system, accountability and quality control systems, ----------------------
communication and marketing.
----------------------
----------------------
Keywords
----------------------
• Price: The amount paid by a buyer for goods or services.
----------------------
• Packaging: The process of design, evaluation and production of packages.
----------------------
• Branding: Giving a product or service a particular image or brand
identification. ----------------------
----------------------
• Client: Someone who pays for goods or services.
----------------------
• Market share: The percentage of a market (defined in terms of either units
or revenue) accounted for by a specific entity. ----------------------
• Competition: A business relation in which two parties compete to gain ----------------------

customers.
----------------------
----------------------
----------------------
1. What do you understand by product? What are the main components of a
product? ----------------------
2. What is the right time to explore microfinance products? Explain. ----------------------
3. Discuss the different phases of product development. ----------------------
4. Explain the 4 Ps of marketing. ----------------------


1. Sustainability of MFIs depends on achieving a significant level of scale and
----------------------
portfolio growth.
----------------------
2. In terms of microfinance institutions, customers demand reasonably priced
---------------------- and durable financial intermediation services.
---------------------- 3. Product development is a process that requires a substantial amount of

resources and time commitment.
----------------------
----------------------
---------------------- 1. To determine whether the pilot test was successful, the institution has to
identify two important performance indicators:
----------------------
iii. Volume and profitability
----------------------
2. What is the key component of pricing?
----------------------
iii. Cost recovery
----------------------
----------------------
Suggested Reading
----------------------
1. Ledgerwood, Joanna. 1999. Microfinance Handbook: An Institutional and
---------------------- Financial Perspective. World Bank Publications.
---------------------- 2. Microinsurance product development for microfinance providers, Michael
J. McCord, manual developed as part of the IFAD project Facilitating
----------------------
Widespread Access to Microinsurance Services, managed by the
---------------------- Microfinance Centre and implemented by the MicroInsurance Centre, LLC.
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
144 Micro Financing

Promoting Women’s Enterprises
UNIT
9
Structure:
9.1 Introduction
9.2 Growth of Women’s Enterprises in India
9.3 Types of Women Entrepreneurs
9.4 Importance of Women Entrepreneurs
9.5 Role of Women Entrepreneurs
9.6 Problems of Women Entrepreneurs
9.7 Promoting Women’s Enterprises
9.7.1 Schemes for Development and Promotion of Women Entrepreneurs
Summary
Key Words
Suggested Reading
Promoting Women’s Enterprises 145

Notes
Objectives
----------------------
----------------------
●● Describe the current scenario of women’s enterprises
---------------------- ●● State the importance of women’s participation in entrepreneurship
---------------------- ●● Examine the role of women’s enterprises in India
---------------------- ●● Analyse the basic problems with these enterprises
----------------------
9.1 INTRODUCTION
----------------------
Development of women’s enterprises is an essential part of entrepreneurship
---------------------- in India. More than 96% women workers are still self-employed. These self-
employed workers are those who earn a living through their own small business
----------------------
or their own labour.
---------------------- Unlike workers in the organised sector, they do not obtain a regular salary.
---------------------- A small number of self-employed poor women formed their own organisation in
1972 when the Self Employed Women’s Association (SEWA) was registered as
---------------------- a trade union in Gujarat. According to international finance corporation report
of 2012 only about 10% of MSME in India are owned by women. In order to
---------------------- increase the number of women’s enterprises in the MSE sector, many schemes
---------------------- have been devised by the government and some more are in the process of being
finalised, aimed only at the development of women’s enterprises in India.
----------------------
9.2 GROWTH OF WOMEN’S ENTERPRISES IN INDIA
----------------------
---------------------- The last five decades have seen phenomenal changes in the status and
workplace diversity of women in India. In the 1950s, women took small initiative
---------------------- to start small, one-woman enterprises at home and from home for self-occupation
and engagement.
----------------------
Women entrepreneurs during the 1960s fell under two categories. The first
---------------------- category took to creating and managing an entrepreneurial activity and the second
category of women took tremendous courage to break through the social maps
----------------------
and codes to take charges of the business the male member of the family had
---------------------- left after his death or else her family would lose the business. The women in
the 1970s opened up new frontiers and developed not only inspirations but also
---------------------- drives for self-employment and employment generation. These women wanted
home, marriage, children as well as occupation. They accepted the share of the
----------------------
work and responsibilities for success and growth of their enterprise.
---------------------- They desired their voices to be heard as leaders to employees and as
managers of the enterprises to all business environments. In the 1980s, the number
----------------------
of women pursuing highly sophisticated technological and professional education
---------------------- increased. They entered into family business as equal contributing partners. They
146 Micro Financing

made their personal choices and stood up for their convictions. The women of Notes
the 1990s were qualified, confident, clear about their goals, processes and the
dynamics of goal accomplishment. In many cases, they outperformed their male ----------------------
counterparts. The 21st century is seeing advancement especially in the field
of telecom, information technology and finance. Many of these industries are ----------------------
directed and headed by women these days. Women in this century have ventured ----------------------
to build enterprises, to discover the relevance and meaning of life by themselves.
----------------------
In the 1991 census, only 1,85,900 women calculating for only 4.5% of the
total self-employed women in the country were entered. Basically, they were ----------------------
engaged in those sectors, which were not organised like agribusiness, agro
industries, handlooms, handicraft and cottage industries. The census report ----------------------
showed more than 2,95,680 women entrepreneurs involving 11.2% of the total
----------------------
2.64 million entrepreneurs in India during 1995−1996. This is almost double the
percentage of women (5.2%) amid the total population of self-employed during ----------------------
1981. The women were to be given training in self-employment/entrepreneurship
of shorter duration as well as some training in trade and skill areas. In order ----------------------
to mobilise women’s entrepreneurs, a number of activities such as conducting
----------------------
training, establishing women’s industrial estates/areas/sheds, creating common
marketing exposition centres, training the trainers/promoters, using mass media, ----------------------
etc. are required. A combination of all these activities is required to stimulate the
development of women’s entrepreneurship. ----------------------
----------------------
----------------------
State True or False. ----------------------
1. The women of the 1990s were not qualified and confident, not clear
----------------------
about their goals and processes.
2. The number of women pursuing highly sophisticated technological ----------------------
and professional education has decreased now.
----------------------
3. The last five decades have seen a decrease in the status and workplace
diversity of women in India. ----------------------
----------------------
9.3 TYPES OF WOMEN ENTREPRENEURS ----------------------
Women entrepreneurs in India are broadly divided into the following ----------------------
categories:
----------------------
1. Affluent entrepreneurs: Affluent women entrepreneurs are those
women entrepreneurs who hail from rich business families. They are the ----------------------
daughters, daughter-in-laws, sisters, sister-in-laws and wives of affluent
people in the society. Many of them are engaged in beauty parlour, interior ----------------------
decoration, book publishing, film distribution and the like. The family ----------------------
supports this type of entrepreneurs in carrying out their responsibilities.
----------------------

Notes 2. Small and medium entrepreneurs: Women in towns and cities take
up entrepreneurship as a challenge to do something new and to be
---------------------- economically independent. They are educated women who generally
start small and medium enterprises where risk is low. Under this category,
---------------------- women usually start service centres, schools, food catering centres,
---------------------- restaurants, grocery shops, etc.
3. Self-employed entrepreneurs: Poor and very poor women in villages
----------------------
and town rely heavily on their own efforts for sustenance. They start tiny
---------------------- and small enterprises like making brooms, wax candles, providing tea and
coffee to offices, ironing clothes, knitting work, tailoring firm, etc. Such
---------------------- women are called self-employed entrepreneurs.
---------------------- 4. Rural entrepreneurs: Women in rural areas/villages start enterprises,
which need least organising skill and have less risk. Rural entrepreneurs
---------------------- engage in producing dairy products, pickles, fruit juices, pappads and
jaggery.
----------------------
---------------------- 9.4 IMPORTANCE OF WOMEN ENTREPRENEURS
---------------------- It is important to note the women engaged in economic activities as self-
employed individuals. Numerous traditional occupations and activity open to
----------------------
women were mainly based on caste, creed and the nature of self-employment was
---------------------- based on the standard of living. Presently, women are generating employment for
themselves in the unorganised sector and another category of women provides
---------------------- employment for others. The country needs to mobilise and utilise fully all its
resources including human resources. The participation of women in economic
----------------------
activities is necessary not only from a human resource point of view but also
---------------------- it is essential from the objective of raising the status of women in the society.
The economic status of women is now accepted as an indicator of a society’s
---------------------- stage of development and therefore it becomes imperative for the government
to frame policies for development of entrepreneurship among women. The long-
----------------------
term objectives of the development programmes for women should aim to raise
---------------------- their economic and social status in order to bring them into the mainstream of
national life and development. For this, due recognition has to be accorded to
---------------------- the role and contribution of women in the various social, economic, political
and cultural activities.
----------------------
Women entrepreneurs can achieve the following:
----------------------
●● Establish their creative idea.
---------------------- ●● Establish their identity.
---------------------- ●● Economic independence.
●● Build confidence.
----------------------
●● Develop risk-taking ability.
----------------------
●● Greater freedom and mobility.
---------------------- ●● Equal status in society.
148 Micro Financing

9.5 ROLE OF WOMEN ENTREPRENEURS Notes
Women’s role in traditional society was naturally limited to the family. She ----------------------
was the bearer of children and was fully occupied with her duties as a mother
and homemaker. This was no small feat, since the traditional household may be ----------------------
described as both a production and a consumption unit. The man’s responsibility
----------------------
was to provide the household with the raw materials, which were then converted
by the woman into consumable products or objects, under precarious housing ----------------------
conditions and by means of rudimentary methods and tools.
----------------------
More factors such as urbanisation, technical progress, women’s education,
etc. have profoundly changed these traditional conditions even in developing ----------------------
countries like India. Nowadays women’s participation outside home has
tremendously increased especially in metropolitan cities. ----------------------
The participation of women in the economic development process can be ----------------------

classified into the following four segments:
----------------------
●● Employment in the unorganised sector
----------------------
●● Employment in the organised sector
●● Self-employment ----------------------
●● Entrepreneurs ----------------------
Women are increasingly seeking entrepreneurship as an avenue for economic
----------------------
growth. With the government and semi-government organisations playing
important role in mobilising women to become entrepreneurs through different ----------------------
programmes, the number of women entrepreneurs is increasing and is expected
to increase much more. ----------------------
Women enterprises are rapidly increasing in almost all countries. The hidden ----------------------
entrepreneurial status of women has gradually been changing with the growing
sensitivity to the role and economic status in the society. Skill, knowledge and ----------------------
adaptability in business are the main reasons for the emergence of women in ----------------------
business ventures. A woman entrepreneur is a person who accepts challenging
role to meet her personal needs and become economically independent. A strong ----------------------
desire to do something positive is an inbuilt quality of entrepreneurial women,
who is capable of contributing values in both family and social life. With the ----------------------
advent of media, women are aware of their own rights and the work situations. The ----------------------
glass ceiling is shattered and women are found engaged in very line of business
from pappad to power cables. In India, although women constitute the majority ----------------------
of the total population, the entrepreneurial world is still a male dominated one.
Women in advanced countries are recognised and are more prominent in the ----------------------
business world. ----------------------
9.6 PROBLEMS OF WOMEN ENTREPRENUERS ----------------------
Though women have now ventured into entrepreneurship, there is still a lot ----------------------
to be done in terms of breaking the social barriers and introduction of government ----------------------

Notes policies to support and develop women’s enterprises. Therefore, to support
them it is very essential to know the difficulties faced by women in the field of
---------------------- entrepreneurship and suggest ways to overcome the same and become successful.
The following are some of the challenges faced by women entrepreneurs in India:
----------------------
1. Traditions and customs: In Indian society, men are considered superior
---------------------- to women. Indian customs and traditions distinguish women from men.
Generally, the husband or the elder members of the family do not allow
----------------------
women to venture into the outside world. This is the major problem for
---------------------- women entrepreneurs, which leads to their potentials not being properly
utilised.
----------------------
2. Lack of education: Women’s education in India has been very poor.
---------------------- In fact, female literacy rate of India is among the lowest in the world.
Due to the traditional reproductive role ascribed to their gender, women
---------------------- were confined to the house, thus leading to the supposed “redundancy”
of formal education. The gender bias in education has affected female
----------------------
enterprises severely. Girls were not allowed to study beyond the age of 10
---------------------- years, thus contributing to their ignorance of opportunity for employment,
development of skills, awareness of market functioning, etc.
----------------------
3. Lack of confidence: Women generally lack confidence in their own
---------------------- capabilities. Having accepted a subordinate status for long, even at home,
members of their family do not appear to have total confidence in their
---------------------- abilities and on their decision-making. Society in general also lacks
---------------------- confidence in women’s strength, traits and competence. This is quite
apparent in the family’s reluctance to finance a woman’s venture. Bankers
---------------------- are reluctant to take risks on projects set up by women, and individuals
are unwilling to stand guarantee for loans to women.
----------------------
4. Gender inequalities: Due to gender inequalities, women have been
---------------------- relegated to the position of “puppets” in the hands of men and it is one of
the major problems for a country in the process of development.
----------------------
5. Problems of finance and working capital: Another problem faced by
---------------------- women entrepreneurs is the lack of access to funds because they do not
possess any tangible security and credit in the market. Since women do
----------------------
not enjoy right over property of any form, they have limited access over
---------------------- external sources of funds. Even the members of her family have little
confidence in the capability of the woman to run a business. The chronic
---------------------- shortage of working capital leaves women entrepreneurs extremely
vulnerable to competition and other emergencies.
----------------------
6. Tough competition: Many women’s enterprises have imperfect
---------------------- organisational setup. They face severe competition from organised
industries, multinational companies, etc.
----------------------
7. Limited access to economic resources: Women entrepreneurs face
---------------------- difficulties in starting their own business because of the hardship in
finding and getting finance, including credits as well as high level of
----------------------
150 Micro Financing

corruption and difficulties in negotiation in attempts to get government Notes
credits.
----------------------
8. Low level of management skills: Another argument is that women
entrepreneurs have low-level of management skills. They have to depend ----------------------
on office staffs and intermediaries to get things done, especially, the
marketing and sales side of business. Here, there is more probability for ----------------------
business fallacies like the intermediaries taking major part of the surplus
----------------------
or profit.
9. Limited access to technology: Only a small percentage of women ----------------------
entrepreneurs have easy access to technology. Most women entrepreneurs
----------------------
face difficulty in acquiring the information they need regarding technology,
training, innovative schemes, concessional alternative markets, etc. ----------------------
Women entrepreneurs will not feel empowered unless they make use of
technology and update themselves accordingly. ----------------------
10. Production problems: The inability of women entrepreneurs to keep ----------------------
pace with the latest advances in technology and lack of technical
knowhow results in high cost of technology acquisition and machinery ----------------------
utilisation. These problems result in the increase in the cost of production
----------------------
and adversely affect the profitability of the unit.
11. Marketing problem: Access to market is as important as access to ----------------------
finance. In order to make the company successful and profitable, the ----------------------
entrepreneur must be able to sell his products or services. Women
entrepreneurs generally face the problem of marketing their products. For ----------------------
marketing the products, she takes the help of intermediaries who pocket
the chunk of the profit. ----------------------
12. Socio-cultural barriers: A woman has to perform her family duties ----------------------
irrespective of her career as a working person or an entrepreneur. In our
society, more importance is given to educating the male child as compared ----------------------
to the female child. This results in lack of schooling and vocational ----------------------
training of women, lack of technical skills and thereby lack of awareness
of opportunities available. This adds to the constraints in establishing ----------------------
enterprises by women.
----------------------
----------------------
Fill in the blanks.
1. Women in towns and cities take up ____________ as a challenge to ----------------------
do something new and to be economically independent.
----------------------
2. Numerous traditional occupations and activity open to women
were mainly based on _____________, creed and the nature of ----------------------
_____________ was based on the standard of living.
----------------------
3. Women are increasingly seeking _____________ as an avenue for
economic growth. ----------------------

Notes 9.7 PROMOTING WOMEN’S ENTERPRISES
---------------------- The importance of promoting women to engage in economic activities is
now being increasingly realised by all developing countries.
----------------------
The need is two-fold:
----------------------
i. To empower women by bringing them into mainstream of development
---------------------- and by improving their economic status.
ii. To provide new employment opportunities by self-employment and
----------------------
entrepreneurship development among them.
---------------------- Institutional support is very important for women entrepreneurs. In recent
times, because of active support from government and NGOs, women are
----------------------
undertaking entrepreneurial ventures as career options. Some of these institutional
---------------------- support bases are: District Industries Centre (DIC), National Small Industries
Corporations (NSIC), Small Industries Service Institutes (SISI), Technical
---------------------- Consultancy Organisation (TCS), National Bank for Agriculture and Rural
Development (NABARD) and nationalised commercial banks.
----------------------
9.7.1 Schemes for Development and Promotion of Women Entrepreneurs
----------------------
In order to encourage more and more women’s enterprises in the Micro
---------------------- and Small Enterprise (MSE) sector, several schemes have been formulated by
the Ministry of Micro, Small and Medium Enterprise. Some of the schemes are
----------------------
as follows:
---------------------- 1. Trade Related Entrepreneurship Assistance and Development
(TREAD) scheme for women: The scheme envisages that women’s
----------------------
associations/NGOs/Self-Help Groups (SHGs) should prepare composite
---------------------- bankable proposals for a group of women entrepreneurs, and submit to
the office of the Department Commission (DC), MSME for forwarding
---------------------- to the bank for their appraisal. The bank examines the proposal and
issues approval. 30% of the loan amount is sanctioned as grant and made
----------------------
available to the bank by office of DC (MSME) for further disbursement
---------------------- to NGOs.
---------------------- 2. Micro and Small Enterprises Cluster Development Programme (MSE-

CDP): The Cluster Development Programme (CDP) being implemented
---------------------- envisages diagnostic study of identified clusters of traditional skill-based
MSEs to identify appropriate technologies and their providers and to
---------------------- facilitate adoption of available technology meeting the specific needs of
---------------------- the end users. The CDP aims at enhanced competitiveness, technology
improvement, adoption of best manufacturing practices, marketing of
---------------------- products, employment generation, etc. The scheme provides assistance
for capacity building, common facilities, marketing, etc., delivery,
---------------------- assimilation and diffusion of the identified technology from its producers
---------------------- to the recipient user/cluster of small enterprises.
----------------------
152 Micro Financing

3. Credit guarantee fund scheme for MSEs: The scheme was launched in Notes
August 2000 to ensure better flow of credit to micro and small enterprises
by minimising the risk perception of financial institutions and banks in ----------------------
lending without collateral security. Under the scheme, guarantee cover is
provided to collateral-free credit facility extended by Member Lending ----------------------
Institutions (MLIs) to new as well as existing micro and small enterprises ----------------------
on loans up to Rs 50 lakh. The guarantee cover available is up to 75% of
the loans extended. The extent of guarantee cover is 80% for (i) micro ----------------------
enterprises for loans up to Rs 5 lakh; (ii) MSEs operated and/or owned by
women; and (iii) all loans in the North-East Region. ----------------------
4. Support for entrepreneurial and managerial development: Micro, ----------------------

Small and Medium Enterprises Development Institutes (MSME-DIs)
----------------------
regularly organise a number of Entrepreneurship Skill Development
Programmes (ESDPs)/Entrepreneurship Development Programmes ----------------------
(EDPs)/Management Development Programmes (MDPs) to train
the potential entrepreneurs in improving their technical/managerial ----------------------
knowledge and skill with a view to facilitating them to start MSEs in
----------------------
various fields. Many of the programmes are tailor-made for the target
group of SC, ST, OBC, women, minorities and other weaker sections and ----------------------
exclusively for women also. These programmes are also called “Outreach
Programmes” as they are conducted in rural/less developed areas. ----------------------
5. Exhibitions for women under promotional package for micro and ----------------------
small enterprises approved by Cabinet Committee on Economic
Affairs (CCEA) under marketing support: DC (MSME) has ----------------------
formulated a scheme for women entrepreneurs to encourage small
----------------------
and micro manufacturing units owned by women in their efforts at
tapping and developing overseas markets, to increase participation of ----------------------
representatives of small/micro manufacturing enterprises under MSME
stall at International Trade Fairs/Exhibitions, to enhance export from such ----------------------
units. Under this scheme, participation of women entrepreneurs in 25
----------------------
international exhibitions is envisaged during the 11th Plan (2007-2012).
----------------------
Activity 1
----------------------
Study the profile of the founder of Lijjat Papad and identify the problems ----------------------
she faced during the growth of the business.
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------

Notes Summary
---------------------- ●● Development of women’s enterprises is an essential part in India. More
than 96% of women workers are self-employed. Self-employed workers
----------------------
are those who earn a living through their own small business or through
---------------------- their own labour.
●● The last five decades have seen phenomenal changes in the status and
----------------------
workplace diversity of women in India.
---------------------- ●● Women entrepreneurs in India are broadly classified as affluent
entrepreneurs, small and medium entrepreneurs, self-employed
----------------------
entrepreneurs and rural entrepreneurs.
---------------------- ●● The role of women entrepreneurs needs to be considered in the economic
development of the nation for various reasons.
----------------------
●● Though women have now ventured into entrepreneurship, there is still a
---------------------- lot to be done in terms of breaking the social barriers and introduction of
government policies to support and develop women’s enterprises.
----------------------
●● Some of the problems and issues pertaining to the promotion of women’s
---------------------- enterprises are lack of education, lack of confidence, gender inequality,
low level of managerial skills, socio-cultural barriers, etc.
----------------------
●● Government of India has taken some major steps towards promoting
---------------------- women entrepreneurship by introducing schemes like Trade Related
Entrepreneurship Assistance and Development (TREAD) scheme for
---------------------- women credit guarantee fund scheme for micro and small entreprises,
---------------------- MSE-CDP, etc.
---------------------- Keywords
---------------------- ●● Women empowerment: The process by which the one’s (i.e., a woman)
---------------------- without power gain greater control over their lives.
●● Gender equality: Also known as sex equality or equality of the genders,
---------------------- which implies that men and women should receive equal treatment unless
---------------------- there is a sound biological reason for different treatment.
---------------------- Self-Assessment Questions

----------------------
1. Explain the role and importance of women’s enterprises in India.
---------------------- 2. Discuss the basic problems of women’s enterprises.
---------------------- 3. Explain the different schemes of the Government of India to promote
women’s enterprises.
----------------------
4. Describe the role of women’s enterprises in the process of economic
---------------------- growth.
----------------------
154 Micro Financing

Answers to Check your Progress Notes
State True and False. ----------------------
1. False
----------------------
2. False
----------------------
3. False
1. Women in towns and cities take up entrepreneurship as a challenge to do ----------------------
something new and to be economically independent.
2. Numerous traditional occupations and activity open to women were ----------------------
mainly based on caste, creed and the nature of self-employment was ----------------------
based on the standard of living.
----------------------
3. Women are increasingly seeking entrepreneurship as an avenue for
economic growth. ----------------------
----------------------
Suggested Reading
----------------------
1. Kristof, Nicholas D. and Sheryl WuDunn. 2010. Half the Sky: Turning
Oppression into Opportunity for Women Worldwide. New York: Alfred A ----------------------
Knopf.
----------------------
2. Todd, Helen. 1996. Women at the Center: Grameen Bank Borrowers After
One Decade. New York: Westview Press. ----------------------
3. http://zenithresearch.org.in/images/stories/pdf/2012/JULY/EIJMMS/6__ ----------------------
EIJMMS_VOL2_ISSUE7_JULY2012.pdf
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------

Notes
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
156 Micro Financing

Equitable and Sustainable Development
UNIT
10
Structure:
10.1 Introduction
10.2 Challenges in Equitable Development
10.3 Role of Microfinance in Equitable Development
10.4 Microfinance as a Sustainable Tool
10.5 Sustainability for MFIs
10.6 Dimensions of Sustainability
Summary
Key Words
Suggested Reading
Equitable and Sustainable Development 157

Notes
Objectives
----------------------
----------------------
●● Define equitable development
---------------------- ●● Analyse the importance of equitable development
---------------------- ●● Describe how microfinance helps in equitable development
---------------------- ●● Discuss sustainability
●● Explain the dimensions of sustainability
----------------------
----------------------
---------------------- 10.1 INTRODUCTION

---------------------- Equitable development is an approach that aims to utilise new investment
in low and middle-income communities with the objective of providing more
----------------------
direct benefit to residents of those communities.
---------------------- Sustainability is all about putting in place the appropriate systems and
---------------------- processes in an organisation so that it enable the MF services to be available
on a continuous basis and also ensure that its clients continue to get benefit
---------------------- from the services in a routine manner. So, sustainability refers to the long-term
continuation of the microfinance programme even after the project activities
---------------------- have been discontinued.
---------------------- Sustainability also mean self-sustainability, i.e., the programme would meet
the needs of the members through resources raised on their own strength, either
----------------------
from among themselves or from external sources. Figure 10.1 shows how social,
---------------------- economic and environmental factors together form sustainability.
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
---------------------- Fig 10.1 Sustainability Factors

----------------------
158 Micro Financing

10.2 CHALLENGES IN EQUITABLE DEVELOPMENT Notes
Equitable development is based on certain principles, policies, practices and ----------------------
strategies, which aim to create healthy and vibrant communities of opportunity.
Equitable development is characterised by a core set of principles that can help ----------------------
guide policy makers in decision-making about how development would proceed. ----------------------
It is an established truth that there are array of challenges, which are faced
by low-income, minority and tribal communities. Researchers have shown that ----------------------
about one billion people globally are living with per capita incomes of less ----------------------
than one dollar per day. So, there is an uphill battle for the policymakers and
practitioners to change the lives of those billion families. Moreover, in search ----------------------
of cheap shelter, these deprived communities are located in proximity to those
places, which are not conducive to their health and this causes a variety of health ----------------------
problems to them. ----------------------
These communities live in neighbourhoods with demerits, such as:
----------------------
i. Limited opportunities for education and jobs.
----------------------
ii. Inadequate services and infrastructure.
----------------------
iii. Lack of essential services, such as hospitals, parks, food joints etc.
----------------------
iv. Lack of access to good public transportation. ----------------------
v. Lack of roads, pedestrian paths, cycling paths etc. ----------------------
vi. Frequent displacement as the rates of property rises due to new investments ----------------------
in those areas.
----------------------
vii. Often have little role in decision-making due to a many factors, such as
educational, social, economical, lack of transparency, etc. ----------------------
----------------------
Despite decades of government assistance and aid, the families and
communities appear to be increasingly fractured on which it becomes increasingly ----------------------
difficult to build any foundation.
----------------------
Moreover, there is a growing general perception that liberal assistance from
government to the poor is creating dependency and disincentives. Therefore it ----------------------
is making the matters worse, not better. ----------------------
----------------------
10.3 ROLE OF MICROFINANCE IN EQUITABLE
DEVELOPMENT ----------------------
Microfinance programmes are not solely meant for mere access to money ----------------------
and distribution of money but these are also concerned with deeper issues
----------------------
involving proper utilisation of money and its justified investment by low and
middle-income communities. ----------------------

Notes Microfinance plays an important role in equitable development by
fostering and developing a micro community-based environment. It also helps
---------------------- in strengthening the existing networks and interlinks of the communities by
overlapping on existing developmental activities and thus contributing to the
---------------------- implementation of those activities.
---------------------- Any organisation cannot get success until it follows certain basic good
practices, which are followed globally, although these practices may be modified
----------------------
to suit local needs.
---------------------- The following are some beneficial aspects of microfinance programmes that
---------------------- contribute to equitable development:
1. Leadership development: Leadership training components are often built
----------------------
into many microfinance programmes. These programmes not only identify
---------------------- but also nourish good community leaders. Thus, it promotes the bonding
in the community by bringing the people together and also it supports the
---------------------- community to articulate its needs and wishes by having a representative
voice.
----------------------
---------------------- These leaders help in inculcating discipline among the borrowers too,
resulting into better financial management.
----------------------
2. Skill and vocational development: Access to good finance not only helps
---------------------- to develop new skills and vocations, but also strengthen existing skills
microfinance recipients possess. Thus, it provides to members the appropriate
---------------------- vocational resources and skills for optimum utilisation of the finances. This
---------------------- leads to more equitable economic development.
---------------------- 3. Community and kinship development: Research has shown that

microfinance programmes are helpful in building community cohesion,
---------------------- bringing them together and facilitating the development of kinship among
the residents with special focus on women.
----------------------
---------------------- Not only new networks are build but also existing networks become more
and more important as these become facilitators for implementation and
---------------------- success of MFI activities. In the long term, it results into a better quality of
life and well-being.
----------------------
4. Small enterprise management: Good management of an enterprise ensures
---------------------- that money is invested properly and in profitable manner. It leads to long-
---------------------- term financial independence.
---------------------- 5. Networking and information gathering: Networking and information links

incorporated into the programme – internally within the community in which
---------------------- it operates, and externally with the agencies and institutions − help in the
success of microfinance programmes and its development. Good networking
----------------------
and information gathering system leads to better-informed decisions and
---------------------- understanding of market operations.
160 Micro Financing

6. Trust building: Building trust among various participants of the programme, Notes
i.e. lenders, NGOs, borrowers, community leaders and other internal and
external stakeholders is a critical success factor of microfinance programmes. ----------------------
Building trust among the various stakeholders/individuals ensures good
repayment and recovery. ----------------------
----------------------
7. Organisational and operational aspects: Organisational and operational
systems, such as Community-Based Management (CBM), peer groups, ----------------------
etc. not only facilitate but also get facilitated by the development and
implementation of a microfinance programme. A good organisational and ----------------------
operational system results in better financial sustainability.
----------------------
8. Education and health: When financial resources are ploughed back to their ----------------------
household by borrowers, it takes care of education and health needs of the
family too. This results into an overall broad-based development. ----------------------
Thus, microfinance is an empowering and enabling bottom-up tool to ----------------------

poverty alleviation and equitable development. It has provided considerable
economic and non-economic externalities to low-income households in the ----------------------
developing countries. ----------------------
----------------------
----------------------
1. Equitable development is based on certain principles, policies,
----------------------
practices and strategies, those aims to create _______ and _________
communities of opportunity. ----------------------
2. Deprived communities are located in ________ to those places, which ----------------------

are not conducive to their health.
----------------------
3. There is a growing general perception that liberal assistance from
----------------------
government to the poor is creating ______ and ___________.
----------------------
4. Microfinance plays an important role in ______ development by
fostering and developing a micro __________ based environment. ----------------------
----------------------
Activity 1 ----------------------
----------------------
Visit any nearby village and find out whether microfinance is playing any role
in equitable development of community-based environment. ----------------------
----------------------
----------------------

Notes 10.4 MICROFINANCE AS A SUSTAINABLE TOOL
---------------------- Results have shown that microfinance may be a sustainable tool to bring
down poverty. It may be a good combination of a self-sustaining, for-profit
---------------------- approach and a focused poverty alleviation programme, which aims to empower
the low-income households.
----------------------
Microfinance is increasingly becoming a tool to exercise developmental
---------------------- priorities for governments in developing countries. Results in the develoiping
---------------------- countries have shown that mmicrofinance can bring the change in the lives of
the poor. There may not be a quantum jump in income but it is still possible to
---------------------- ensure a reasonable rise in the income of the poor.
---------------------- Fig. 10.3 shows microfinance programmes as a sustainable tool for poverty
alleviation and women empowerment.
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
---------------------- Fig. 10.3 Microfinance and Sustainable Development
162 Micro Financing

10.5 SUSTAINABILITY FOR MFIS Notes
Sustainability is a challenge for MFIs. Researchers have shown that if we ----------------------
compare the MFI model in terms of delivery of financial services with other
financial institutional models, then it is comparatively costlier. ----------------------
In an analysis of 36 leading MFIs by Jindal and Sharma, it has been shown ----------------------
that most of the MFI samples, i.e., about 89% were subsidy dependent and very
few, i.e., only nine were able to cover more than 80% of their costs. This is partly ----------------------
explained by the fact that the loan volume and loan size is low, while the cost of ----------------------
supervision of credit is high. It has also been found that though the higher cost
of credit are passed to the “interest insensitive” clients having smaller loans from ----------------------
MFIs, but it becomes increasingly difficult as the loan sizes increase.
----------------------
It becomes imperative for MFIs to develop such strategies, which may help
them to increase the volume and range of their financial services. ----------------------
[Source: Jindal, K. and Sharma, K.C. Issues in Sustainability of MFIs, BIRD, ----------------------
Lucknow]
----------------------
10.6 DIMENSIONS OF SUSTAINABILITY ----------------------
The sustainability should not be understood merely in terms of resource or ----------------------
finance. Financial sustainability is only one of the major dimensions out of the
different broader dimensions, which are mentioned below. ----------------------
The different dimensions of sustainability are as follows: ----------------------

1. Institutional sustainability: This dimension of internal environment is ----------------------
important in any microfinance organisation. It is taken care of by a well-
knitted internal institutional network. This transforms an organisation into ----------------------
a vibrant, wholesome and a growing concern.
----------------------
2. Mission sustainability: Vision and Mission are important for every
organisation. An organisation can maintain its position in long term in the ----------------------
chosen path only through sustainability of its mission. Every organisation ----------------------
must have a defined mission. Compatibilities of its activities with its defined
mission should be evaluated constantly as well. A well-articulated and ----------------------
participatory process in the organisation should be followed to bring any
changes in its mission. ----------------------
3. Programme sustainability: Sustainability of the programme is created ----------------------

by providing a feeling of sufficient importance and value to stakeholders ----------------------
(clients). The clients should perceive that the services they are receiving are
for them. Then they become readily willing to assume responsibility and ----------------------
ownership.
----------------------
The clients then readily support the programme and it does away with the
dependencies on the external subsidies or supports. A phasing out strategy ----------------------
can easily be developed by the MFI through programme sustainability.
----------------------

Notes 4. Human resource sustainability: HR sustainability occurs when the MFI is
capable of recruiting, inducting, training and maintaining well-qualified staff,
---------------------- which is capable of delivering the services as desired. The staff monitors and
maintains the organisation on the right path, by taking care of all parameters
---------------------- of sustainability.
---------------------- MFIs must not only have robust financials, but also invest in a strong
second line of management, training of field staff and a system to track
----------------------
and monitor the performance of their loan portfolio.
---------------------- [Source: imfr.co.in/Sucharita Mukherjee and Kirthi Rao]
---------------------- 5. Financial sustainability: It means that the MFI is capable of bearing
---------------------- expansion cost by not only covering all its present costs, but also the costs,
which it may incur in its future growth. These costs may consist of operating
---------------------- costs, financial costs adjusted for inflation and costs incurred in growth.
---------------------- 6. Market sustainability: Market sustainability is about making available a
large number of choices to its existing and prospect clientele. It deals with
---------------------- the demand and supply of microfinance. Since different types of clients
have different needs, it becomes imperative to design products that match
----------------------
with the needs of the individual client. By providing the desired product
---------------------- and services, which matches with the individual needs in the most friendly
manner will obviously result into the sustainability of the demand.
----------------------
A sustainable supply of resources is possible only when the MFI is financially
---------------------- self-sufficient and it is able to meet all its costs from operations. It must
have an access to both resources – internal from clients and external from
---------------------- other organisations − at commercially viable rates of interest.
---------------------- 7. Legal and policy environment sustainability: Successful market
sustainability largely depends on the existence of a stable and friendly legal
----------------------
and policy environment. It should not only promote but also protect the MFI.
---------------------- It covers all areas related to interest rates, legal forms of organisations,
---------------------- resource mobilisation, mobilisation of savings, etc. not only from capital
markets but also from overseas commercial sources as well.
----------------------
8. Impact sustainability: Microfinance has become a critical tool to alleviate
---------------------- poverty and uplift disadvantaged sections in the developing countries.
---------------------- A positive impact on poverty can be brought about by the services delivered
by the different MFIs. It is equally important to sustain in long term the
---------------------- positive changes those have been brought about in life of the poor families
so that they should gradually come out their poverty.
----------------------
----------------------
----------------------
----------------------
164 Micro Financing

Notes
----------------------
State True or False. ----------------------
1. Access to good finance only develops new skills and vocations.
----------------------
2. Leadership training components are not built into any microfinance ----------------------
programme.
----------------------
3. When financial resources are ploughed back to their household by
borrowers, then these take care of education and health needs too. ----------------------
----------------------
Activity 2 ----------------------
1. Search the Internet and read more on how microfinance programmes are ----------------------
building community cohesion and facilitating the development of kinship
----------------------
among the residents with special focus on women.
----------------------
2. Read more on the Internet about the following:
----------------------
i) How microfinance in Bangladesh has helped in bringing down
poverty? ----------------------
ii) How MFIs in Bangladesh have sustained themselves? ----------------------
----------------------
Summary
----------------------
• Equitable development is an approach that aims to utilise new investment
in low and middle-income communities with objectives of providing more ----------------------
direct benefit to residents of those communities.
----------------------
• Microfinance has come to mean the provision of credit and other financial
services to the poor so that they can reduce their poverty and raise their ----------------------
living standards.
----------------------
• Microfinance has the potential to become an important component of a
successful and sustainable poverty alleviation programme. ----------------------
• Microfinance is increasingly becoming a tool to exercise developmental ----------------------
priorities for governments in developing countries.
----------------------
• Microfinance play a important role in equitable development by fostering
and developing a micro community-based environment. ----------------------
• Sustainability refers to the long-term continuation of the microfinance
----------------------
programme even after the project activities have been discontinued.
• Sustainability is a challenge for MFIs. ----------------------
----------------------

Notes Keywords
----------------------
• Networking: Networking is a socioeconomic activity by which groups
---------------------- of like-minded businesspeople recognise, create or act upon business
opportunities.
----------------------
• Community-based Management (CBM): It is a bottom-up approach
---------------------- of organisation which can be facilitated by an upper government or NGO
structure but it aims for local stakeholder participation in the planning,
---------------------- research, development, management and policy making for a community
as a whole.
----------------------
----------------------
----------------------
1. Liberal assistance from government to the poor is creating dependency and
---------------------- disincentives. Comment.
---------------------- 2. How are microfinance programmes able to build community cohesion?
---------------------- 3. Define sustainability and explain its different dimensions.
----------------------
----------------------

Fill in the blanks.
----------------------
1. Equitable development is based on certain principles, policies, practices
---------------------- and strategies, those aims to create healthy and vibrant communities of
opportunity.
----------------------
---------------------- 2. Deprived communities are located in proximity to those places, which are
not conducive to their health.
----------------------
3. There is growing general perception that liberal assistance from government
---------------------- to the poor is creating dependency and disincentives.
---------------------- 4. Microfinance plays a important role in equitable development by fostering
and developing a micro community-based environment.
----------------------

----------------------
1. False
----------------------
2. False
---------------------- 3. True
----------------------
166 Micro Financing

Notes
Suggested Reading
----------------------
1. The Micro Finance Institutions (Development and Regulation) Bill, 2012
(Bill No. 62 of 2012) ----------------------
2. http://www.un.org/esa/ffd/doha/documents/Doha_Declaration_FFD.pdf ----------------------
3. http://www.cgdev.org/files/10742_file_Microfinance_as_Business.pdf ----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------

Notes
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
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----------------------
----------------------
----------------------
----------------------
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168 Micro Financing

Microfinance and Social Entrepreneurship
UNIT
11
Structure:
11.1 Introduction
11.2 Micro and Rural Entrepreneurship and SHGs
11.3 A Historical Perspective of Microfinance
11.4 Strategy for Micro Enterprise Development
11.5 Problems of Rural Microfinance and Entrepreneurs
11.6 Growth of Social Entrepreneurship
Summary
Key Words
Suggested Reading
Microfinance and Social Entrepreneurship 169

Notes
Objectives
----------------------
----------------------
●● Discuss the concept of microfinance and social entrepreneurship
---------------------- ●● Analyse the limitations of microfinance in India
---------------------- ●● Describe the growth of social entrepreneurship
----------------------
---------------------- 11.1 INTRODUCTION
---------------------- The growth of the microfinance sector in alignment with the rest of the
economy continued in the year 2010 but less vigorously than in the previous
---------------------- years. The macroeconomic environment changed marginally for the better during
2010 as compared to the previous year. Across the world, reports were of painful
----------------------
and slow recovery from the financial sector meltdown of the previous year, and
---------------------- there was a continuous flow of bad and some good news.
---------------------- The bailouts of financial institutions elaborately designed by different

governments had run their course and gave way to a great deal of attention for
---------------------- improving regulation and supervision of the financial sector, and especially of
the conglomerates. Pessimism and distrust gave way to cautious attention to
----------------------
set things right. The impact, if any, on the microfinance sector had not been
---------------------- overly negative. Of course, the initial withdrawal of funds—both of equity and
of loans—was a predictable reaction of investors to consolidate their liquidity
---------------------- to minimise risks. With the passage of time, both loan and capital funds have
started to flow to the sector but with more circumspection and caution. It is only
----------------------
a matter of time before the investors return to the marketplace with full force.
---------------------- The Indian economic environment recovered from slower growth rate of the
previous year to post a GDP growth of 7.4% in 2009–10. Industrial production
---------------------- continued to record double-digit growth with year-on-year (YOY) growth at
14% during April–May 2010. However, the inflation scenario according to the
----------------------
Reserve Bank of India (RBI) is a cause for concern.
----------------------
As mentioned in Microfinance India: State of the Sector Report 2009,
---------------------- inflation did play a major role in pushing up food prices as also different
commodity prices. The freeing of retail prices of oil from state control saw a
---------------------- spike in the price of fuel, which led to downstream effects on the prices of other
---------------------- commodities, either on account of increased manufacturing cost or transportation
cost. The continuing rise in the prices of food articles places the poor under
---------------------- considerable stress. Though inflation rates have moderated, they are still in double
digits, reflecting a strong upward pressure on prices and, thereby, affordability
---------------------- of food for the consumers.
----------------------
----------------------
170 Micro Financing

11.2 MICRO AND RURAL ENTREPRENEURSHIP AND Notes
SHGS
----------------------
The microfinance sector has traversed a long journey from micro savings
to micro credit and then to micro enterprises and now entered the field of micro ----------------------
insurance, micro remittance and micro pension. This gradual and evolutionary ----------------------
growth process has given a great opportunity to the rural poor in India to attain
reasonable economic, social and cultural empowerment, leading to better living ----------------------
standard and quality of life for participating households. Financial institutions
in the country continued to play a leading role in the microfinance programme ----------------------
for nearly two decades now. They have joined hands proactively with informal ----------------------
delivery channels to give microfinance sector the necessary momentum. During
the current year too, microfinance has registered an impressive expansion at the ----------------------
grass-roots level.
----------------------
A self-help group is a registered or unregistered voluntary association of poor
----------------------
people of 10 to 20, from the same socio-economic backgrounds and it involves
primarily in saving and credit activities. An SHG is formed independently without ----------------------
any political influences. It can be all-women group, all men-group or even a mixed
group. However, it is found that over 90% of these groups have only women ----------------------
members. The SHG provides not only savings mechanism, which suits the needs
----------------------
of the members but also provides a cost-effective delivery mechanism for small
credit to its members (Tangirala, 2008). These groups start with saving and not ----------------------
with credit; the group then uses its savings to give loans to members to meet
their emergency and other needs. The members decide on savings per members, ----------------------
maximum size of loans, guarantee mechanisms in loan sanction (Kour, 2008).
----------------------
Development of a nation is very much dependent on the development of ----------------------
rural masses. But the
----------------------
real problem faced by developing countries like India is poverty. Even
after more than 50 years of planning, various poverty alleviation programmes, ----------------------
official estimates shows that around 26.1% of total population still lives below
----------------------
the poverty line in India. Financial requirement is one of the basic needs of the
poor rural people of the society for their socio-economic upliftment. Amongst ----------------------
the poor the most disadvantageous group are the women and they constitute
almost half of the population of India. Nowadays in India, the contribution of ----------------------
the women population towards the socio-economic development is vital. As per
----------------------
2001 census 48.2% ( 49.60 crore) of total population are women, while the 2011
census provisional figures released on March 31, 2011 reveals that the female ----------------------
population has risen by 18.12% to reach 586.5 million (58 crore). Microfinance
to SHGs may be considered as a vital tool for meeting the financial requirement ----------------------
of those poorer sections of the society living in the rural areas. In India, in the
----------------------
ninth and tenth five-year plans, proper emphasis was given on the empowerment
of women through SHGs by the Planning Commission. The NABARD is the main ----------------------
initiator of the SHG movement since 1986−87. Nowadays both central and state
governments, nationalised commercial banks, regional rural banks, cooperative ----------------------

Notes banks, NGOs, non-banking financial corporation (NBFC), etc. have joined in
the SHG movement as promoters.
----------------------

----------------------
---------------------- 1. An SHG is formed depending on political influences.
---------------------- 2. A self-help group is a mandatorily registered association of poor people
of 10 to 20.
----------------------
3. Microfinance has not registered an expansion at the grassroots level in
---------------------- 2011.
---------------------- 4. Inflation does not play any role in pushing up food prices as also different
commodity prices.
----------------------
----------------------
11.3 A HISTORICAL PERSPECTIVE OF MICROFINANCE
----------------------
The rural finance policy pursued in most developing countries beginning
----------------------
from 1950s was based on providing subsidised credit through state controlled or
---------------------- directed institutions to rural segments of population. Expansion of credit coverage
through state interventions was based on various theoretical assumptions. Seibel
---------------------- & Parhusip (1990) mention that this approach was based on the premise that rural
micro-entrepreneurs are unable to organise themselves, they need subsidised
----------------------
credit for increasing their income and are too poor to save. Yaron, Benjamin &
---------------------- Piprek (1997) have traced this traditional approach in rural finance leaning heavily
towards direct interventions to Keynesian influence. Under this approach, in
---------------------- addition to the assumptions mentioned above, the key problem areas visualised in
rural financial markets included a lack of credit in rural areas, absence of modern
----------------------
technology in agriculture, low savings capacity in rural areas and prevalence of
---------------------- usurious moneylenders.
---------------------- These distortions and imperfections in rural credit markets were sought
to be addressed through Government interventions. With difference of range
---------------------- and degree, most developing countries from 1950s to the 1980s were home to
interventions ranging from establishing state-owned financial institutions, interest
----------------------
rate ceiling on deposits and credit, credit subsidy, directing credit to particular
---------------------- sectors and nationalisation of private banks.
---------------------- In India, microfinance has been defined as a 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.
---------------------- This “supply-led” approach in rural finance caused various qualitative issues,
172 Micro Financing

such as concerns about financial viability of institutions on account of high rate Notes
of loan delinquency, cornering of subsidy by well-off people in what has been
described as “rent-seeking” behaviour, continued presence of moneylenders, ----------------------
inability to reach the core poor and led to a reorientation in thinking around
1980s. United State’s Agency for International Development’s (USAID) spring ----------------------
review of Small Farmer Credit in 1972/73, covering 60 reports on specific farm ----------------------
credit programmes in developing countries followed by a World Conference
on Credit for Farmers in Developing Countries in 1975 organised by the Food ----------------------
and Agriculture Organisation (FAO) were the first landmark events pointing
the deficiencies of directed and subsidised credit approach. These thoughts ----------------------
got crystallised during the “Colloquium on Rural Finance in Low Income ----------------------
Countries” by USAID and World Bank in 1981 and shaped the emergence
of new thinking in rural finance. Hulme & Mosley (1996) credit the counter ----------------------
revolution against Development Financial Institutions (DFIs) which were a prime
symbol of Government intervention in rural credit markets to “Ohio school” as ----------------------
the economists at Ohio State University provided the theoretical underpinnings ----------------------
to the critique of past approach and contributed to transfer of these ideas into
operational policies of World Bank. The resultant shift in rural finance discourse ----------------------
and operational paradigm on account of the above developments is shown in
Table 11.1. ----------------------
----------------------
Table 11.1 Paradigm Shift in Rural Finance
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
11.4 STRATEGY FOR MICRO ENTERPRISE
----------------------
DEVELOPMENT
----------------------
A study in Orissa, India, examining SHGs of women entrepreneurs engaged
in fishing activities under the Swarnjayanti Gram Swarozgar Yojana (SGSY) ----------------------
programme found that internal loans did not match with the demand for loans
of the members (Tietze et al, 2007). It was found that there was a huge demand ----------------------
for training and capacity building, but the training was provided only to three ----------------------
members per SHGs. Authors observed that members especially fisherwomen had
low education, lack of access to health facilities and lack of adequate housing ----------------------
facilities and other necessary infrastructure facilities. The study recommended
----------------------

Notes capacity-building programmes for these micro entrepreneurs, such as hygienic
fish drying with the use of solar dryers, shell-craft production and developing
---------------------- marketing strategies. Authors felt that there was an urgent need to identify
markets and marketing strategies for these products and need to develop a pilot
---------------------- production and marketing operations strategy. A comparative study that looked
---------------------- at responsiveness of training among women entrepreneurs belonging to different
social groups found that religious and caste sanctions imposed in India put
---------------------- restrictions on women’s entrepreneurial activities. It was found that the upper
caste women were more responsive to business training and training allowed
---------------------- them to challenge social norms that obstructed their businesses. Muslim women,
---------------------- who faced more social restrictions faced considerable discrimination in the
marketplace as the area in which they were operating had a history of communal
---------------------- tension. Interestingly, the study found that sanctions due to gender norms were
less restrictive for the lower castes than that for upper caste women. However,
---------------------- authors indicate that increasingly, the lower caste women follow the gender
---------------------- norms laid by the upper caste. Given these problems, the authors indicate that
the micro enterprise development programmes for women might fail to achieve
---------------------- sustained economic growth.
---------------------- A study on SARVODAYA ECONOMIC ENTERPRISE DEVELOPMENT
SERVICES (GUARANTEE) LTD. (SEEDS) in Sri Lanka found that not all the
----------------------
enterprises started through SEEDS loan were self-sustaining and some also failed.
---------------------- Further, enterprises were also of marginal scale and did not make any profit or
incur losses making the enterprises very vulnerable. The study noted that there was
---------------------- high social pressure from peers, family and friends to repay SEEDS loans. The
enterprises, which have been successful have helped in building material wealth
----------------------
of the entrepreneurs and their family. However, whenever there was a failure,
---------------------- it has pushed the entrepreneur and the concerned family into more poverty and
increased debt burden (Sear and Simon, 2001). Promotion of micro enterprise
---------------------- using microfinance has mixed outcome and opposing evidences exist. As seen
in the earlier section, micro enterprise is the occupation choice of millions of the
----------------------
poor who work individually or along with their unpaid family members to earn a
---------------------- decent living. It is seen that MFIs use micro enterprise as a strategy to address the
poverty of its members/clients. Several studies have found that income levels of
---------------------- households engaged in micro enterprises through their microfinance programmes
have improved and many successful cases can be seen in the global context. On
----------------------
the other hand, some studies have also pointed out the fact that micro enterprise
---------------------- with the help of microfinance has not had a very significant impact on poverty.
Further, it has also been pointed out that the poorest of the poor may not participate
---------------------- in the micro enterprise programmes supported by MFIs (Midgley, 2008).
----------------------
11.5 PROBLEMS OF RURAL MICROFINANCE AND
----------------------
ENTREPRENEURS
----------------------
Microfinance programme has shown impressive achievements, but a number
---------------------- of questions arise: Did this programme reach the underprivileged? Whether
174 Micro Financing

everyone in need of microfinance intervention has been reached by any of the Notes
agencies? Even if everyone had been reached, did they get the required quantum
of assistance to have sustainability? These questions are still very inconvenient to ----------------------
be answered because there are certain problems associated with this programme.
Some of the main problems have been discussed in the following paragraphs. ----------------------
----------------------
The microfinance delivery models are not exclusively focused on those who
are below the poverty line or very poor. Though the programme is spreading ----------------------
rapidly, it has a slow progress in targeting the bottom poor households. About
50% SHG members and only 30% MFI members are estimated to be below the ----------------------
poverty line. According to Ghate (2008), approximately 75 million households
----------------------
in India are poor and about 22% of these poor households (i.e., 16.5 million)
are currently receiving microfinance services. Studies have shown that just 19% ----------------------
of the programme participants were BPL at the time of joining microfinance
programme. Therefore, it can be said that substantial groups of poor population ----------------------
have been excluded from availing the benefits of the programme. It may be due
----------------------
to a variety of reasons on both the sides, i.e., institution and borrower.
----------------------
The SHG-BLP has no explicit social or economic benchmarks for inclusion
of members in the groups to be credit linked. Lack of specific benchmark for ----------------------
group membership leads to inadequate targeting of poverty. It is also found
that the microfinance promoting institutions are also biased while selecting the ----------------------
programme members. In order to run the groups successively and to achieve ----------------------
higher repayment rates, they generally select the people who are not that poor
as programme beneficiaries. A study by Hulme and Mosley (1996) also shows ----------------------
that the staff members of microfinance institutions prefer to exclude the core
poor since lending to them is seen as extremely risky. The study also finds that ----------------------
the core poor are often not accepted in group lending programmes by other ----------------------
group members because they are seen as a bad credit risk. Mosley (2001) and
Kirkpatrick & Maimbo (2002) also found various organisational problems, such ----------------------
as saving requirements, the minimum amount of loan that needs to be accepted,
etc., which restrict the poor people to join the microfinance programme. Many ----------------------
critics concluded that microfinance does not reach the poorest of the poor ----------------------
(Scully, 2004), or that the poorest are deliberately excluded from microfinance
programmes (Simanowitz, 2001). ----------------------
Apart from the various institutional barriers, several psychological problems ----------------------
of the poor people restrict them to join the programme. The extreme poor often
lack self-confidence so they hesitate to join a group where they have to deal with ----------------------
the other group members, bank officials and other promoting institutions. The core ----------------------
poor are generally too risk averse to borrow for investment in the future. They
will therefore benefit only to a very limited extent from microfinance schemes. ----------------------
It has been observed that the microfinance programme is mainly run by ----------------------
formal financial institutions with the help of SHGs. As a result, microfinance
----------------------
programme is progressing in those areas of the country where there is tremendous
growth of formal financial institutions. Microfinance institutions were expected ----------------------

Notes to reach those areas where the formal banking system failed to reach and the
poor people have to depend on the moneylenders in order to meet their financial
---------------------- requirements.
---------------------- However, actually, many big MFIs are activate in those states where the
banking network is very strong. In the Southern states, such as Andhra Pradesh,
----------------------
Tamil Nadu, Karnataka and Kerala, the spread of SHG-Bank Linkage Programme
---------------------- as well as the MFI programme is very large. But the North and northeastern
region are almost neglected. In southern India the spread of branch network of
---------------------- commercial banks is the highest (27.94%) and the southern states cover 48.15%
of the country’s total SHG members and 54.77% of the MFI members.
----------------------
---------------------- So, approximately 50% of the total beneficiaries of the microfinance

programme belong to the four south Indian states. In contrast to this, in the
---------------------- north-eastern region of India, the network of bank branches is very limited and
the coverage of microfinance programme is just 2.93%.
----------------------
----------------------
Fill in the blanks.
----------------------
1. MFIs use __________ as a strategy to address the poverty of its
---------------------- members/clients.
---------------------- 2. The microfinance delivery models are not exclusively focused on

those who are below the ___________ or very poor.
---------------------- 3. The ___________ model has no explicit social or economic
---------------------- benchmarks for inclusion of members in the groups to be credit
linked.
----------------------
----------------------
11.6 GROWTH OF SOCIAL ENTREPRENEURSHIP
----------------------
Microfinance programme has a wider prospect to expand both the outreach
---------------------- and the depth of services provided. According to Ghate (2008), microfinance
---------------------- programme has covered just 16.5 million of the total 75 million poor households.
So, there is an ample scope to cover these unreached poor people. Also, the average
---------------------- loans provided to the SHG members under both the SHG-BLM and MFI models
range between Rs 3,500 to 5,000 which can meet the liquidity requirements only
---------------------- and are not sufficient to help a member to start productive activities. So far, the
---------------------- government has succeeded in providing only Rs 2,000 crore annually against
a demand of over Rs 50,000 crore by the 75 million poor households (Ghate,
---------------------- 2007). Hence, there is a vast unmet demand in the rural and urban sectors, and
there is ample scope for the growth of different kinds of MFIs and microfinance
---------------------- service providers. In order to expand the microfinance programme, SHGs may be
---------------------- linked with the post offices for disbursement of credit to rural poor by utilising
176 Micro Financing

the vast network of post offices in rural areas. NABARD has launched a pilot Notes
project of this type in Tamil Nadu. MFIs are meant to play an important role in
reaching the poor people who are not served by the formal financial institutions. ----------------------
However, most of these institutions are restricted by RBI to collect savings
from their members and raise public funds. As these institutions do not publish ----------------------
their annual financial reports, it is difficult to determine their financial health. ----------------------
Therefore, the formal financial institutions also hesitate to provide loans to these
institutions. As a result, they face paucity of funds which becomes a hurdle in ----------------------
expanding the microfinance programme. To tackle this problem, some schemes
may be adopted to provide support and help for the capacity building of MFIs ----------------------
for the expansion of microfinance programme. ----------------------
----------------------
Activity 1
----------------------
Visit any nearby village and observe the impact of microfinance activities ----------------------
on the lives of the poor.
----------------------
Summary ----------------------
• The Indian economic environment recovered from slower growth rate of ----------------------
the previous year to post a GDP growth of 7.4% in 2009–10. Industrial ----------------------
production continued to record double-digit growth with year-on-year
(YOY) growth at 14% during April–May 2010. However, the inflation ----------------------
scenario according to the Reserve Bank of India (RBI) is a cause for concern.
----------------------
• The microfinance sector has traversed a long journey from micro savings
to micro credit and then to micro enterprises and now entered the field of ----------------------
micro insurance, micro remittance and micro pension.
----------------------
• Microfinance to SHGs may be considered as a vital tool for meeting the
----------------------
financial requirement of the poorer sections of the society living in the rural
areas. ----------------------
• In India, in the ninth and tenth five-year plans, proper emphasis was given ----------------------
on the empowerment of women through SHGs by the Planning Commission.
----------------------
• Microfinance programme has shown impressive achievements, but a number
of questions arise: Did this programme reach the underprivileged? Whether ----------------------
everyone in need of microfinance intervention has been reached by any of ----------------------
the agencies? Even if everyone had been reached, did they get the required
quantum of assistance to have sustainability? ----------------------
• There is a vast unmet demand in the rural and urban sectors, and there is ----------------------
ample scope for the growth of different kinds of MFIs and microfinance
----------------------
service providers.
----------------------

Notes • In order to expand the microfinance programme, SHGs may be linked with
the post offices for disbursement of credit to rural poor by utilising the vast
---------------------- network of post offices in rural areas.
----------------------
Keywords
----------------------
---------------------- • Sarvodaya Economic Enterprise Development Services (Guarantee)

Ltd.: As a microfinance practitioner, SEEDS offer a wide range of financial
---------------------- and non-financial services to poor, enterprising clients who have no access
to credit to capitalise their micro and small enterprises through formal banks
---------------------- and financial institutions.
---------------------- • Village banking: Village banking or community banking model essentially
---------------------- treats the whole community as one unit, and establishes semi-formal
or formal institutions through which microfinance is dispensed. Such
---------------------- institutions are usually formed by extensive help from NGOs and other
organisations, who also train the community members in various financial
---------------------- activities of the community bank.
----------------------
---------------------- Self-Assessment Questions

---------------------- 1. The microfinance delivery models are not exclusively focused on those who
are below the poverty line or very poor. Comment.
----------------------
2. “Development of a nation is very much dependent on the development of
----------------------
rural masses.” Do you agree with the statement? Justify.
----------------------
3. The microfinance sector has traversed a long journey has from micro savings
---------------------- to micro credit and then to micro enterprises and now entered the field of
micro insurance, micro remittance and micro pension. Discuss.
----------------------

---------------------- 1. False
2. False
----------------------
3. False
----------------------
4. False
----------------------
----------------------
----------------------
178 Micro Financing

Fill in the blanks.
----------------------
1. MFIs use micro enterprise as a strategy to address the poverty of its
members/clients. ----------------------
2. The microfinance delivery models are not exclusively focused on those ----------------------
who are below the poverty line or very poor.
----------------------
3. The SHG-BLP model has no explicit social or economic benchmarks for
inclusion of members in the groups to be credit linked. ----------------------
----------------------
Suggested Reading
----------------------
1. http://inm.org.bd/saarc/document/Sri%20Lanka.pdf
----------------------
2. http://www.seeds.lk/about_us.html
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------

Notes
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
180 Micro Financing

Corporate Values and Micro Financing
UNIT
12
Structure:
12.1 Introduction
12.2 Types of MFIs in India and their Regulatory Framework
12.3 Corporate Values and Micro Financing
12.4 Regulation and Supervision of MFIs in India
12.5 Good Governance and MFIs in India
12.6 Some Key Factors of Good Governance of MFIs in India
12.7 Impact of Good Governance
12.8 Challenges of Good Governance
Summary
Key Words
Suggested Reading
Corporate Values and Micro Financing 181

Notes
Objectives
----------------------
----------------------
●● Judge the importance of regulatory framework for governing MFIs
---------------------- ●● Identify the factors that are necessary for good governance of MFIs
---------------------- ●● Discuss the impact of good governance on MFIs
---------------------- ●● Analyse the challenges involved in good governance
----------------------
12.1 INTRODUCTION
----------------------
Microfinance Institutions (MFIs), whether non-profit or for profit, are
----------------------
institutions that combine a social mission— provision of financial services to
---------------------- the low-income population —with a financial objective that drives the institution
to achieve self-sufficiency. We have seen that MFIs are increasingly playing an
---------------------- important role in the delivery of financial services to the poor. The MF sector has
also emerged as an investment opportunity for the private equity players, venture
----------------------
capitalists and commercial banks. There is huge potential for microfinance in
---------------------- India’s economic scenario. By supporting the income-generating activities of poor
people, it contributes effectively to poverty alleviation programme envisaged in
---------------------- the 11th Five Year Plan (2007−12). No wonder that microfinance is high on the
public agenda in India.
----------------------
----------------------
12.2 TYPES OFMFIS IN INDIAAND THEIR REGULATORY
---------------------- FRAMEWORK
---------------------- A range of institutions in public sector as well as private sector offers
microfinance services in India. They can be broadly categorised as formal
---------------------- institutions and informal institutions. The former category comprises apex
---------------------- development financial institutions like National Bank for Agricultural and
Rural Development (NABARD), Small Industries Development Bank of India
---------------------- (SIDBI) and Rashtriya Mahila Kosh (RMK), commercial banks, Regional Rural
Banks (RRBs), and cooperative banks that provide microfinance services in
---------------------- addition to their general banking activities and are referred to as microfinance
---------------------- service providers. On the other hand, the informal institutions that undertake
microfinance services as their main activity are generally referred to as
---------------------- microfinance institutions. While both private and public ownership are found in
the case of formal financial institutions offering microfinance services, the MFIs
---------------------- are mainly in the non-government and private sector. We have already discussed
---------------------- the categories of MFIs in India in Unit 1.
---------------------- There is a growing trend in the MFIs for for-profit, limited liability
companies, the ownership of which is in the hands of multiple shareholders. In
---------------------- most cases, shares are privately held, i.e., not publicly traded. Most such MFIs
182 Micro Financing

are licensed financial institutions – finance companies and banks. Many are Notes
deposit takers.
----------------------
12.3 CORPORATE VALUES AND MICRO FINANCING ----------------------
Microfinance projects implemented in India have a wide range of ----------------------

organisational structures. The MFIs can accordingly be mapped along two
axes: the profit motive (profit vs. not-for-profit) and the decision-making style ----------------------
(centralized vs. un-centralized). Some MFIs base their interactions on rigid ----------------------
norms or rules; while others are based on values. While the private sector tends
to produce the operating rules of the microfinance system, the not-for-profit ----------------------
institutions that use an inclusive decision-making process are more likely to
influence the ethical norms in the sector. However, this is subject to change as ----------------------
evinced by the recent events in South India which show that norms, such as the ----------------------
interest rates, can be politically and emotionally invested to the point that they
are about to become values in the sector. ----------------------
However, corporate transformation is a complex and time-consuming process ----------------------

that requires expertise and skills in numerous areas, including organisational and
----------------------
financial management, risk management, human resources and internal auditing.
----------------------
12.4 REGULATION AND SUPERVISION OF MFIS IN ----------------------
INDIA
----------------------
In India, regulation and supervision of the formal banking institutions is well
organised under various Acts, viz., The Banking Regulation Act, Rural and ----------------------
Regional Banks Act, Cooperative Societies Acts, and the Reserve Bank of India ----------------------
Act. While the RBI supervises commercial and urban cooperative banks and the
Non-Banking Financial Companies (NBFCs), NABARD has been authorised to ----------------------
supervise RRBs and cooperative banks on behalf of RBI. As regards to MFIs, none
except those registered as NBFCs and cooperatives are currently treated as part ----------------------
of the financial sector. The question of their supervision and regulation from the ----------------------
financial angle had not yet arisen, since most of them are registered as societies
or trusts. Therefore, apart from submission of annual accounts and a report ----------------------
on their operations to the authorities under the Acts of their registration, these
agencies are not under any statutory compulsion to comply with specified norms ----------------------
or instructions in respect of their microfinance activities. Several stakeholders ----------------------
influence a not-for-profit organisation, but no particular group or person can
legally claim ownership or receive residual earnings from it. ----------------------
----------------------
Activity 1
----------------------
Using the Internet as a resource, list the main features of the Reserve Bank ----------------------
of India Act that regulates the functioning of MFIs.
----------------------

Notes 12.5 GOOD GOVERNANCE AND MFIS IN INDIA
---------------------- The term governance has become an unavoidable concept when discussing
economic and social development issues. Initially used only in the context of
---------------------- governments and companies, the term now finds usage in the field of microfinance
as well. In microfinance literature, the term governance first appeared in 1997.
----------------------
(In the context of corporate governance, CGAP- Consultative Group to Assist
---------------------- the Poor- group devised ways and means to help poor through CG efforts.)
It usually refers to the relationships between the board of directors and the
---------------------- management of an MFI. However, the “good functioning” of the board of
directors is not enough to guarantee the mission and assets of an MFI. When
----------------------
discussing governance, it is necessary to broaden the scope of study to include
---------------------- all stakeholders involved (employees, managers, elected officials, clients, donors,
bank partners, shareholders, the government, etc.) as well as any organisational
---------------------- form with a “governing” role that may have been set up at the onset of the
institution. Furthermore, it is critical to understand how these elements can
----------------------
change in different socio-economic contexts.
----------------------
Governance in microfinance lies at the crossroads of two approaches: a
---------------------- political/ethical approach, which emphasises the strategic vision of the institution,
the legitimacy of its decision-makers and the integration of the institution into its
---------------------- environment; and an economic/managerial approach, which regards governance
---------------------- as a way to improve efficiency, reduce costs and optimise means.
---------------------- Microfinance is now a public agenda and good governance holds the
key for sustainability of growth in this sector. Therefore, it is imperative that
---------------------- the MFIs transform themselves to bring about transparency of systems and
procedures, which in turn will promote sound decision- making. A transparent,
----------------------
accountable and well-documented structure and policies would in turn attract
---------------------- larger investments and help to retain customers.
---------------------- Microfinance in India is currently provided through diverse organisational

types, which can be distinguished by their ownership structures: private capital,
---------------------- state-owned enterprises and non-profits. Nonetheless, these are not homogeneous
---------------------- clusters and significant variance can be observed within each institutional
grouping with respect to: ownership composition, strategy, operations,
---------------------- sustainability, impact and outreach. The extent to which microfinance institutions
seek to maintain the dual focus of profitability and outreach to poor clients is
---------------------- directly shaped by the promoters, composition of the boards of directors and the
---------------------- top management, and by the priorities established by them.
---------------------- Sa-Dhan, a voluntary association of Community Development Finance

Institutions (CDFIs), for example, started its operation in July, 1999. It provides
---------------------- a platform to disseminate and publish sound financial practices to strengthen
the capacities of CDFIs and to negotiate with different government forums to
---------------------- influence the policies related to microfinance development in India. They first
---------------------- published the core values for microfinance, voluntary mutual code of conduct for
184 Micro Financing

microfinance institutions to abide by these values and process of compliance for Notes
all member microfinance institutions in order to establish a common minimum
regulation and supervision standard. In order to facilitate transparency and public ----------------------
reporting, Sa-Dhan in collaboration with the Institute of Chartered Accountants
of India (ICAI) published the accounting standards for microfinance institutions ----------------------
in 2008. ----------------------
----------------------
----------------------
Multiple Choice Single Response. ----------------------
1. In terms of MFIs, governance means:
----------------------
i. “good functioning” of the board of directors
----------------------
ii. relationships between the board of directors and the management
of MFIs ----------------------
iii. statutory provisions
----------------------
2. The criteria for dual focus concept in MFIs are:
----------------------
i. profitability and outreach to poor clients
ii. profitability and turnover ----------------------
iii. multiplicity of schemes and volume of financing ----------------------
----------------------
Activity 2 ----------------------
Observe the functioning of a microfinance institution and note down the ----------------------
measures taken by the same to increase their public outreach. ----------------------
----------------------
12.6 SOME KEY FACTORS OF GOOD GOVERNANCE OF
----------------------
MFIS IN INDIA
----------------------
The following are some important factors of good governance in relation
to MFIs in India: ----------------------
1. Size and role of the board: A microfinance board should be big enough ----------------------
to incorporate the various skills and perspectives and at the same time
----------------------
be small enough to accommodate the need for frequent meetings, given
the dynamic characteristics of the field of microfinance. Ideally, it should ----------------------
be between five to nine members. The need for MFIs to rope in domain
experts, professionals and independent directors on their boards is in the ----------------------
larger interest of all stakeholders. The composition of MFIs’ board/top
----------------------
management is very important to give direction to governance values and
processes. Some key factors to consider would be experience and expertise ----------------------

Notes of board members, commitment to the mission, vision, goals and objectives
of the institution, foresight and institution building capacity, a clause that
---------------------- evaluates performance of board members, etc. The board should establish
effective systems and processes of identifying, analysing and managing
---------------------- risks. There should be separation of responsibilities between the CEO and
---------------------- the chairperson/promoter to bring in transparency in the system. This view
has been proved correct in some of the big MFIs in India, which registered
---------------------- their success after splitting the position of chairperson and CEO. At the
same time, there should be a synergetic relationship between the executive
---------------------- and the board.
----------------------
2. Process and documentation: If MFIs need to become more transparent
---------------------- and accountable, first of all there should be clarity on process and
documentation. There should be well-drafted policies catering to all the
---------------------- structural and functional aspects of the MFI. The policies should also be
revisited on a regular interval to bring about necessary changes according to
----------------------
the suggestions received from the field-level functionaries. There should be
---------------------- proper documentation of all transactions and records should be maintained.
Management should provide the board with regular and detailed report and
---------------------- be available to clarify issues that may arise.
---------------------- 3. Systems of rating of MFIs: It should be made mandatory for all MFIs to
---------------------- get a rating of their organisation through external rating agencies at a regular
interval to assess different aspects of their operation and to improve their
---------------------- operational efficiency.
---------------------- 4. Social audit: The MFIs in general have additional public responsibilities
of maintaining goodwill in the market and building faith in the investors.
---------------------- Therefore, their performance should be assessed not solely on the
---------------------- organisations’ financial achievements but also on the fulfillment of their
social goals and objectives. In most cases, the MFI clientele comprises the
---------------------- poor or marginalised people and those excluded from access to financial
services. The social goal of the MFI instruments is to meet their needs
---------------------- and improve their lives. Therefore, it is even more important that the
---------------------- MFIs operate in an ethical and responsible way in relation to staff, clients,
communities and the environment within which they work. This can be
---------------------- achieved through social auditing which complements financial auditing by
reinforcing the institution’s accountability to the community it serves.
----------------------
5. Public policy on MFIs and enabling environment: There is an urgent
----------------------
need of a well-defined microfinance policy supported by regulatory and
---------------------- supervisory framework. The MFIs should also be encouraged to focus not
just on financial services (microcredit, micro insurance, micro pension,
---------------------- etc.), but also non-financial services (classes on literacy, nutrition, health,
environment, etc.). Experts in microfinance have expressed serious concern
----------------------
over the steep interest rates and are debating the need to evolve methods
---------------------- to bring down the cost of funds of MFIs, so that the needy sections of the
186 Micro Financing

society get access to low-cost finance. For this, the Microfinance Bill, 2006 Notes
has to be revisited and strengthened for expanding the provision of financial
services to the poor. ----------------------
----------------------
----------------------
1. The need for MFIs to rope in domain experts, professionals and ----------------------
independent directors on their boards is in the larger interest of all
__________. ----------------------
2. Experts in microfinance have expressed serious concern over the ----------------------
_______________.
----------------------
12.7 IMPACT OF GOOD GOVERNANCE ----------------------

----------------------
It is obvious that factors of good governance have direct impact on the
growth and development of microfinance in the emerging scenario of financial ----------------------
market in India. The impact of good governance is visible both in the financial
and non-financial areas of operation. ----------------------
In financial areas, the funds received by the MFIs in the form of donations, ----------------------
loans and venture capital/private equity investments have direct correlation with ----------------------
their governance of structures. Probability of getting funds for their microfinance
operation is more in case of an organisation with all well-defined systems and ----------------------
procedures put in place and no conflict on the ownership and governance.
Among the parameters on which the commercial banks in India appraise the ----------------------
MFIs, governance has been given maximum (>60%) weightage for sanctioning ----------------------
of loans. In the non-financial front, the governance issues of MFIs focus usually
on balancing social and commercial interests. Again, governance is the key and ----------------------
the board provides proper guidance to the management regarding the strategic
direction for the organisation and oversees the management effort to move in ----------------------
this direction. ----------------------
----------------------
12.8 CHALLENGES OF GOOD GOVERNANCE
----------------------
Due to the diversity of ownership structures, the separation of ownership from
management (whether in a public, private or cooperative form of organisation), ----------------------
as well as dispersion in ownership, introduce important problems of governance
(Mersland, 2008). One challenge in the governance of not-for-profit organisations ----------------------
is the fact that managers serving as agents are supervised by either the funding ----------------------
organisations or the lending organisations which calls for more transparency of the
systems and procedures and should be separated from ownership. Glaeser (2002) ----------------------
observed that due to the fact mentioned above the traditional board governance
might be less effective in not-for-profit MFIs. ----------------------

Notes The extent to which microfinance institutions seek to maintain the dual focus
of profitability and outreach to poor clients is directly shaped by the composition
---------------------- of the board of directors and by the priorities established by the board.
---------------------- The governance of the majority of the MFIs in India is driven by the vision
of the promoters, and the management committee or the board has very little
----------------------
say on the future direction of the organisation. They generally do not have
---------------------- written documents on various issues and policies being followed by them. The
organisational structure and roles are also not much defined and followed. This
---------------------- enables the promoter/CEO to change the policy and direction according to
the need of the organisation, which has always a negative impact on the field-
----------------------
level workers and managers. The major drawbacks of the MFIs in India are
---------------------- not differentiating the ownership and governance and they are in fact run and
managed by few people and do not follow the system of governance. Like other
---------------------- organisations, resolving the conflict of ownership and governance will play an
important role in the growth, development and sustainability of the MFIs. It has
----------------------
now become imperative to transform and restructure the governance of the MFIs
---------------------- in India to enhance their efficiency and to handle large portfolio and client base.
---------------------- According to Elizabeth Rhyne, Managing Director, Centre for Financial

Inclusion, “Good governance is the ability of the board members to monitor the
---------------------- status of the organisation, make good strategic decisions and hold executives
---------------------- accountable for their execution. Ultimately, that comes down to the qual¬ity of the
board members, the culture and practice of the board, and the power relationships
---------------------- among board members and executives.”
---------------------- In the context of this definition, good governance for MFIs can be defined
as the process by which a board of directors/top management, working through
---------------------- management principles, guides the MFI in fulfilling its mission and at the same
---------------------- time protecting the institution’s assets and goodwill. Good governance occurs
when a promoter/board provides proper guidance to management regarding the
---------------------- strategic direction for the institution, and oversees management’s efforts to move
in that direction to achieve the short-term, medium-term and long-term goals.
----------------------
The long-term future of the microfinance sector in India depends on MFIs
----------------------
ability to achieve operational, financial and institutional sustainability and good
---------------------- governance. The importance placed on microfinance as a development instrument,
combined with the increasing inflow of capital/funds to the industry, indicate a
---------------------- need to understand better the governance systems for MFIs.
----------------------
Summary
----------------------
• Microfinance is high on the public agenda in India and other developing
---------------------- countries.
---------------------- • While the private sector tends to produce the operating rules of the
microfinance system, the not-for-profit institutions that use an inclusive
----------------------
188 Micro Financing

decision-making process are more likely to influence the ethical norms of Notes
the sector.
----------------------
• In India, regulation and supervision of the formal banking institutions is
well organised under various Acts, viz. the Banking Regulation Act, Rural ----------------------
and Regional Banks Act, Cooperative Societies Acts, and the Reserve Bank
----------------------
of India Act.
----------------------
• In microfinance literature, the term governance first appeared in 1997
(CGAP- Consultative Group to Assist the Poor). It usually refers to the ----------------------
relationships between the board of directors and the management of an MFI.
----------------------
• The extent to which microfinance institutions seek to maintain the dual
focus of profitability and outreach to poor clients is directly shaped by the ----------------------
composition of the board of directors and by the priorities established by ----------------------
the board.
----------------------
• The key factors of good governance in relation to MFIs operating in India
are: size and role of the board, process and documentation, rating systems, ----------------------
social auditing, public policy, etc.
----------------------
• Good governance has a direct impact on the growth and development of ----------------------
microfinance and is visible both in the financial and non-financial areas of
operation. ----------------------
----------------------
Keywords
----------------------
• Microfinance Institutions: Institutions that offer financial services to the
----------------------
low-income population.
----------------------
• Corporate value: Good moral and ethical values that need to be followed
by corporate form of organisation. ----------------------
• Good governance: Organising the activities of an institution so that they ----------------------
are mutually beneficial to the owners and stakeholders.
----------------------
1. What do you understand by the word governance? Why is good governance ----------------------
important for MFIs?
----------------------
2. What are the challenges of balancing social and commercial objectives of
MFIs? ----------------------
3. Identify and elaborate the key factors of good governance for MFIs. ----------------------
4. Discuss the responsibility of the board in an MFI. Why is board’s performance ----------------------
evaluation an important factor in the institution’s governance?
----------------------


1. In terms of MFIs, governance means:
----------------------
ii. Relationships between the board of directors and the management
---------------------- of MFIs
---------------------- 2. The criteria for dual focus concept in MFIs are:
i. Profitability and outreach to poor clients
----------------------
----------------------
Fill in the blanks
---------------------- 1. The need for MFIs to rope in domain experts, professionals and independent
---------------------- directors on their boards is in the larger interest of all stakeholders.
2. Experts in microfinance have expressed serious concern over the steep
----------------------
interest rates.
----------------------
----------------------
Suggested Reading
---------------------- 1. http://www.standardandpoors.com/ratingdirect
2. Bharat Microfinance Report – Side by Side. December, 2008 www.sa-
---------------------- dhan.net
---------------------- 3. Copestake, J. 2006. “Mainstreaming microfinance: social performance
management or mission drift?” Bath University Working Paper.
----------------------
4. Kaoma Mwenda, K. and G. Nkombo Muuka. 2004. “Towards best
---------------------- practices for micro-finance institutional engagement in African rural
areas: Selected cases and agenda for action”. International Journal of
----------------------
Social Economics. 31, pp. 143-158.
---------------------- 5. Karmakar, K G. 1999. Rural Credit and Self Help Groups: Microfinance
needs and concepts in India. New Delhi: Sage Publications.
----------------------
6. Lapenu, C. 2000. “The Role of the State in Promoting Microfinance
---------------------- Institutions”. Working Paper, International Food Policy Research Institute,
---------------------- Washington D.C.
7. Meyer, R. and G. Nagarajan. 2000. Rural Financial Markets in Asia:
---------------------- Policies, Paradigms, and Performance. New York: Oxford University
---------------------- Press.
8. McGuire, P., Conroy, J. and G. Thapa. 1998. Getting the Framework Right:
----------------------
Policy and Regulation for Microfinance in Asia. Brisbane: Foundation for
---------------------- Development Cooperation.
----------------------
190 Micro Financing

9. Microfinance World. 2009. Change can happen; Financial Express, India- Notes
Jan–March issue: pp 24-27
----------------------
10. Report on Status of Microfinance in India 2006-07 http:// www.nabard.
org ----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------

Notes
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
192 Micro Financing

Strategic Issues in Microfinance: Gender, Activism,
Scale and Management UNIT
Structure: 13
1
13.1 Introduction
13.2 Gender and Microfinance
13.2.1 Women and Microfinance
13.3 Gender Sensitivity
13.4 Organisational Strategies for Gender Mainstreaming
13.5 Activism and Microfinance
13.6 Scale and Management in Microfinance
Summary
Key Words
Suggested Reading
Strategic Issues in Microfinance: Gender, Activism, Scale and Management 193

Notes
Objectives
----------------------
----------------------
●● Appraise the need and importance of microfinance
---------------------- ●● Classify key enablers of microfinance in India
---------------------- ●● Analyse microfinance business model and determinants of interest
rates
----------------------
●● Select various products offered by MFIs and their target customers
---------------------- ●● Discuss the challenges faced by microfinance industry
----------------------
----------------------
13.1 INTRODUCTION
----------------------
Microfinance, as we have learnt so far, is a mechanism for promoting and
---------------------- sustaining socio-economic development by supporting entrepreneurial activities.
Microfinance institutions were set up to provide financial services including
---------------------- credit, savings and insurance to the poor. The definition of poor might vary, but
by and large, it covers those working in the informal economy in developing
----------------------
countries like India. However, while the benefits of microfinance need no
---------------------- elaboration, there are also certain strategic issues that call for a closer look before
implementation, especially in a country as diverse as India.
----------------------
---------------------- 13.2 GENDER AND MICROFINANCE

---------------------- Microfinance is considered an important mechanism for economically
empowering women. The financial self-sustainability model practiced by most
----------------------
Microfinance Institutions (MFIs) is assumed to increase women’s access to
---------------------- microfinance, thereby leading to “individual economic empowerment, well-being
and social and political empowerment.” (L. Mayoux 2002). As such, microfinance
---------------------- has an enormous potential to make a major contribution towards gender equality.
---------------------- 13.2.1 Women and Microfinance
---------------------- Women comprise over 70% of the world’s poor and at least half of the
population in rural areas. They have historically had very little access to credit
----------------------
or other financial services. By helping women meet their practical needs and
---------------------- increasing their efficacy in the traditional roles, microfinance helps women to
gain self- confidence and social respect, thereby inching towards empowerment.
---------------------- World microfinance data show women borrowers to have registered the highest
repayment rate. Women are found to accumulate substantial savings and use a
----------------------
range of other financial products, if adequately sensitised. Also, large portions of
---------------------- their income go into household consumption, thereby making it a strong business
case. Among the various spin-off benefits, it can result in an increase in rate of
---------------------- education amongst children (especially girls), better health and hygiene practices
194 Micro Financing

and a positive environmental impact (as most of the microfinance programmes Notes
support green jobs or renewable energy systems). Thus, on the whole, it results
in compliance to the Millennium Development Goals. Gender equality becomes ----------------------
a vital component of economic growth by enabling women to become more
effective in economic development. ----------------------
----------------------
Although the positive impact of microfinance on women is evident, one
must also exercise caution in overcoming the following possible negativities: ----------------------
1. Women often have no real control over the loans. Studies have shown that in ----------------------
many cases it is the male family members, who take all the decisions, given
the shallow social attitude towards women and their rights. Also, differences ----------------------
in levels of literacy and awareness limit the access to microfinance ----------------------
programmes.
----------------------
2. The responsibility of loan repayment may also increase the workload on
women, as they have to juggle their various roles both at home and outside. ----------------------
In rural areas, women usually have a heavy domestic workload leaving them
with very less time for the entrepreneurial activity. This can result in high ----------------------
stress level and diminished health. ----------------------
3. In some regions, women’s mobility is constrained that leave them out of ----------------------
the benefit circles of the microfinance schemes. Even if there is access, it
can result in underestimating the market potential or overlooking the profit ----------------------
adjustments that could be made to the products.
----------------------
4. Sometimes there can be resentment among the male members of the family, ----------------------
resulting in decrease in male contribution to household expenditure, which
is disproportionate to the small rise in income of the woman. ----------------------
5. It has been observed that in micro credit programmes, women do not gain ----------------------
much in terms of decision-making power within the household. However,
----------------------
if the loans are channelised through women’s self-help groups (SHGs),
substantial shift in decision-making patterns can be observed. ----------------------
Example 1: Promoting Gender Equality and Decent Work throughout ----------------------
all Stages of Life
----------------------
The International Labour Organisation (ILO) supported project, “Promoting
Gender Equality and Decent Work throughout All Stages of Life”, helped ----------------------
identify new economic activities and launched micro enterprises while training ----------------------
poor women in business management and marketing. Women gained new skills
from the training to increase their access to sustainable livelihood opportunities. ----------------------
The socio-economic empowerment of working mothers also led to direct
improvements in overall family welfare, including reduced child labour, increased ----------------------
school attendance and improved protection against illness and sudden shocks. By ----------------------
opening up the schooling and training activities to girls and young women, the
project helped break the generational transmission and feminisation of poverty. ----------------------

Notes Moreover, through microfinance, women previously excluded from the financial
sector gained access to credit and effectively learned how to borrow, make profit
---------------------- and repay loans.
---------------------- Salma Harub Abdala survived with her six children for years on less than
one US dollar per day. Her husband abandoned her in the early 1980s, and with
----------------------
only one income, Salma could not afford to pay for adequate housing or for
---------------------- her children’s education. The situation became even worse when her husband
returned home, invalid and paralysed, because his relatives refused to take care
---------------------- of him. So, Salma had to take care of him till his death in 1992. Things changed
when Salma started receiving loans from the ILO project titled “Promoting
----------------------
Gender Equality and Decent Work throughout All Stages of Life” in Tanzania.
---------------------- “With increased sales and profit, I am able to pay education requirements for
my younger children, I have improved the housing condition, and we are able to
---------------------- eat quality meals”, says Salma, adding that “two of my daughters have directly
benefited from the project.” Salma’s elder daughter joined a women’s group in
----------------------
Tanga, Tanzania that gave loans to its members, while the project allowed her
---------------------- younger daughter, aged 16, to attend a training course. Facilitating the transition
from school to productive employment through education, training, and provision
---------------------- of alternatives to youth facing an uncertain future, the project allowed increasing
numbers of young people to break the cycle of poverty.
----------------------
---------------------- They are not the only ones. Hundreds of disadvantaged women in Tanzania
are echoing such success stories as they benefit from the loans, microfinance,
---------------------- education, and literacy, entrepreneurial, and leadership training offered by the
project. Women who did not previously have access to loans have effectively
---------------------- learned to borrow, earn profit and repay loans.
---------------------- [Source:http://www.ilo.org/global/publications/magazines-and-journals/
---------------------- world-of-work-magazine/articles/WCMS_081357/lang--es/index.htm]
----------------------
----------------------

1. Women often have real control over the loans.
----------------------
2. By helping women meet their practical needs and increasing their
---------------------- efficacy in the traditional roles, microfinance helps women to
gain self-confidence and social respect, thereby inching towards
---------------------- empowerment.
---------------------- 3. Microfinance is a mechanism for promoting and sustaining socio-
economic development by supporting entrepreneurial activities.
----------------------
----------------------
----------------------
196 Micro Financing

13.3 GENDER SENSITIVITY Notes
The microfinance institutions should look into gender sensitivity rather than ----------------------
focusing solely on women. This would call for considering the relevant conditions
of men and women regarding access to financial services and improving their ----------------------
entrepreneurial activities. Once the inequalities are highlighted redressal
----------------------
mechanisms can be worked out to deal with the same. Thus, gender sensitivity in
the MFIs would mean acknowledgement of gender-based constraints that affect ----------------------
women in their entrepreneurship activities and plan services accordingly, all the
while striving not to perpetuate or enhance the existing gender inequality. It is also ----------------------
pertinent to remember that neither men nor women are a homogeneous group,
----------------------
calling for different needs for financial services. All microfinance initiatives
must consider the relevance of gender to the services they offer. As men can both ----------------------
constrain and expand women’s options, both should be involved in the decision-
making process to address the relevant issues in service delivery. ----------------------
As a first step, it is important to understand and acknowledge the gender- ----------------------

based differences between men and women’s approaches to businesses and ----------------------
business models. Most women, for example, would prefer to set up their income-
generating activities at home. They are more likely to use family labour than ----------------------
hired labour. Usually their business models are based on traditional technologies
and services. Also due to lack of access to education, women are reluctant to ----------------------
try out new income-generating activities and they are not in a position to create ----------------------
business plans for their ventures. Lack of mobility among women also results in
a less diversified portfolio. Thus, women’s businesses take fewer risks leading ----------------------
to smaller start and slower growth.
----------------------
Activity 1 ----------------------
----------------------
Using the Internet as your resource, list the gender-based differences
between men and women’s approaches to businesses and business models. ----------------------
----------------------
13.4 ORGANISATIONAL STRATEGIES FOR GENDER ----------------------

MAINSTREAMING ----------------------
Gender mainstreaming is a strategy to promote gender equality and women’s ----------------------

empowerment. There are two approaches to it: (i) Integrationist approach and
(ii) Agenda setting approach. ----------------------
----------------------
The integrationist approach works within the given development context.
The overall development agenda is not transformed but each issue is adapted to ----------------------
take into account women and gender concerns. On the other hand, the agenda-
setting approach promotes women’s participation in decision-making in a manner ----------------------
to determine development priorities. In agenda-setting model, the emphasis is on
----------------------
reshaping the mainstream rather than adding activities at the margin.

Notes Gender inequalities are the results of discursive gender ideologies as
well as the gendered institutions. Sexual difference between male and female
---------------------- are converted into masculinity and femininity through the processes of social
construction of gender. Gender dualities are created and maintained through
---------------------- the ideology of sexual division of labour. Women are assigned the roles and
---------------------- responsibilities within the private sphere of home and men in the public sphere.
This discursive dichotomies of public-private, productive-reproductive create
---------------------- conditions of subordination by low investment in women’s human capital, giving
them unequal control and access to resources and opportunities in education,
---------------------- training and employment.
----------------------
The organisational strategies for gender mainstreaming will include:
---------------------- A. Internal staff awareness and policy Integration: Structural and cultural
changes in organisations dealing with microfinance are the first steps to
----------------------
gender mainstreaming. Organisations should build an institutional structure
---------------------- and culture that is women-friendly and empowering and exhibit the same in
the interactions with clients. Simply put, the organisational staff (both men
---------------------- and women) should treat women equally and with respect. There should be
active promotion of the vision of women’s empowerment. The staff should
----------------------
be sensitised to the needs and challenges of women and equipped to handle
---------------------- the same through organisational activities. Gender disaggregation and gender
analysis should be done for all research activities, and information on women
---------------------- thus collected should be shared both within and outside the organisation to
spread awareness.
----------------------
---------------------- B. Making information accessible: Organisations need to make all information

regarding the products and services and their associated benefits, available
---------------------- in local languages and easy-to-understand visual forms. The promotional
materials should be so designed as to pass on the benefits of gender equality.
----------------------
A fundamental part of ensuring good product design and consumer protection
----------------------
in this field is promoting financial literacy. A sound financial understanding helps
---------------------- clients make informed choices and give back informed inputs, which facilitate
new product development. Thus, financial literacy training programmes are
---------------------- extremely useful to generate awareness.
---------------------- Example 2: Financial Literacy
---------------------- Training by Self-Employed Women’s Association (SEWA), India uses
visual methods to explain its products and how to choose among them for
---------------------- various purposes. The training covers an introduction to financial planning,
---------------------- daily money management practices, planning for future events, borrowing and
loan management, insurance and risk management, and making a financial plan.
----------------------
[Source: http://coady.stfx.ca/resources/abcd/SEWA Financial Literacy
---------------------- Manual.pdf.]
----------------------
198 Micro Financing

C. Designing effective and sustainable financial services: Gender Notes
mainstreaming as part of microfinancing strategy should entail effective
methodologies for product design and provision for financial services at ----------------------
all levels. Organisations should undertake participatory market research
activities to be able to design products from the clients’ perspective. One ----------------------
needs to survey the activities in which there is more concentration of poor ----------------------
women and develop financing models for such activities. Examples from
the service market for this would be childcare and domestic help. ----------------------
The degree of credit contribution to increased income would depend on how ----------------------
well the delivery of credit is adapted to the economic activities being financed.
Agricultural loans, for example, that arrive late or are not substantial enough to ----------------------
take care of the cost of the inputs, would actually end up burdening the borrower
----------------------
with a debt that she cannot repay from the proceeds of the proposed economic
activity. Thus, a badly designed credit can become a worrisome debt for the ----------------------
already deprived women.
----------------------
Care should be taken that the compulsory savings and insurance policies
are designed in the interests of the borrowers and not just to lessen the risks ----------------------
and enhance the sustainability of the MFIs. Often during severe crises, the poor
----------------------
people are not in a position to continue to pay their insurance premiums, thereby
resulting in further losses. ----------------------
Loans should be designed to be of varying amounts, time and catering to ----------------------

a range of livelihood activities (including off-farm activities) and consumption
needs. Flexibilities can be incorporated keeping in mind the troubled loans. ----------------------
Group-based delivery is also an excellent means to reduce costs and increase ----------------------
empowerment. Pension schemes can be introduced to reduce long-term
vulnerability. ----------------------
Of late there have been many useful innovations in product design that are ----------------------
adapted to the needs of the client and are more capable of benefitting them in a
----------------------
financially sustainable way.
----------------------
Example 3: Innovative Financial Service Products
i. Loans for adolescent girls and changing the dowry system (India) ----------------------
----------------------
Some organisations involved in the Credit and Savings Household Enterprise
(CASHE) project in India decided to pilot a loan product for adolescent ----------------------
girls. The loan, available for both parents, enables the girls to purchase a
productive asset to help them earn an income, delay marriage, bring the asset ----------------------
to their in-laws’ house when they marry, and reduce the dowry required.
----------------------
[Source: http://www.microfinancegateway.org/p/site/m/template.rc/1.26.8700/]
----------------------
ii. Loans for services benefitting women (Sudan) ----------------------
Members of the women’s centres developed by Port Sudan Association ----------------------

Notes for Small Enterprise Development’s (PASED) Learning for Empowerment
against Poverty (LEAP) project identify their needs for services and are
---------------------- encouraged to set up viable businesses that can benefit other women, such as
day-care centres. Loans have been given for smokeless stoves, which have
---------------------- health, labour-saving and environmental benefits. The financial services
---------------------- provider is required to seek out potentially profitable services and assets
for which viable repayment schedules are devised; once that are done, the
---------------------- loan products become financially sustainable.
---------------------- [Source: http://pasedsud.org/LEAP.html]
---------------------- iii. Savings products, Grameen Phase II
---------------------- Grameen Phase II has diversified its savings products. The personal savings
---------------------- account is a liquid passbook account into which members can make deposits
or withdrawals of any amount each week. The account helps members
---------------------- manage money on a daily basis, including the payments of their Grameen
Bank loans. The commitment or contractual savings account also referred
---------------------- to as the Grameen Pension Savings or GPS, is a 5- or 10-year account with
---------------------- a minimum monthly deposit of less than US$1. These accounts help build
savings steadily over the long term.
----------------------
[Source: www.grameentrust.org]
----------------------
iv. Insurance products, Area Networking and Development Initiative (ANANDI)
----------------------
Village self-help groups have set up a fund that provides emergency loans to
----------------------
members to obtain healthcare services. Members obtain the funds at low or
---------------------- no interest on condition that they access services at a public facility staffed
by trained medical practitioners, who charge little or nothing to treat poor
---------------------- people. These are usually government-run secondary and tertiary healthcare
facilities, which may be from 50 to 300 km away from the village. The loans
----------------------
help members pay for the patient’s and the caregiver’s transport costs, food,
---------------------- medicine and lodging.
---------------------- [Source: www.sed.manchester.ac.uk/research/iarc/ediais/.../ANANDI_

final.doc]
----------------------
D. Non-financial Services: Rural microfinance services also need to look beyond
---------------------- product design and find ways of improving women’s livelihood, skills and
---------------------- empowerment. There has been a steady rise in the number of MFIs and
NGOs providing a range of separately funded initiatives for the poor, e.g.,
---------------------- literacy programmes, health awareness programmes, etc.
----------------------
----------------------
----------------------
200 Micro Financing

Example 4: Non-financial Services Notes
The IMAGE Project, South Africa
----------------------
The Intervention with Microfinance for AIDS and Gender Equity (IMAGE)
project was developed by Small Enterprise Foundation (SEF) and Rural AIDS ----------------------
and Development Action Research (RADAR) Programme for integrating it into
----------------------
an existing microfinance programme. This is an example of an initiative that
combined a microfinance scheme with training on gender equality and HIV/AIDS. ----------------------
The microfinance initiative was provided through the NGO, Small Enterprise
Foundation. SEF provided credit and savings services for income-generating ----------------------
projects among disadvantaged groups, particularly women, who were often
----------------------
overlooked in more conventional microfinance programmes. While individual
women ran income-generating projects, the members of a group of five women ----------------------
acted as guarantors of one another’s loans. All five women had to repay together
to move up to the next loan cycle. Eight groups of five women comprised one ----------------------
loan centre. Loan centres met fortnightly to discuss business ideas, repay and
----------------------
apply for new loans.
----------------------
In response to HIV/AIDS and gender-based violence, IMAGE’s approach
was to identify a reputable NGO to provide gender awareness and HIV education ----------------------
to their microfinance clients. The “sisters-for-life” element of the programme
integrated training on gender and HIV into the social networks formed as part of ----------------------
the microfinance programme. Training was provided during regular microfinance ----------------------
centre meetings. Topics in the training covered a broad range of issues that were
identified as priorities for rural women including gender roles, gender inequality, ----------------------
culture, HIV transmission and prevention. A rigorous impact assessment found
that the project’s impact on women’s empowerment and their interactions with ----------------------
partners, including sexual behaviour, was impressive. The intervention also ----------------------
demonstrated significant economic benefits: increased assets, income, savings,
housing and access to basic goods. [Source:http://www.preventgbvafrica.org/ ----------------------
featured-member/intervention- microfinance-aids-and-gender-equity-image]
----------------------
E. Networking and Collaboration: For a holistic approach, the MFIs need to
get involved in networks that advocate the women clients’ interests and work for ----------------------
increasing the sustainability of their livelihoods. This can include promotion of ----------------------
women’s property rights, or right to education and health, etc. MFIs that are not
in a position to introduce non-financial services themselves can collaborate with ----------------------
other service providers. Such inter-organisational collaboration can take several
forms, e.g., an MFI can advertise the complementary services provided by other ----------------------
organisations or refer clients for the same or share the cost of developing training ----------------------
programmes, etc. In rural areas with poor infrastructure, it is not cost-effective
to separate the delivery of financial services from other complementary support ----------------------
services. A number of microfinance programmers have succeeded in providing
a large and organised platform for promoting advocacy, participation and ----------------------
empowerment of women. The process of empowerment can also be reinforced ----------------------
through the creation of women’s groups, which in turn would facilitate greater
access to information and support networks for economic activity, movements ----------------------

Notes for changes in women’s socio-economic positions, health and education-related
awareness, etc.
----------------------
Example 5: Political Education Networking – ANANDI, India
----------------------
A particularly innovative strategy of ANANDI is to facilitate area networking
---------------------- through events or melas (fairs), which bring together representatives of their
SHGs. The first mela, on political rights and panchayats (local councils), was held
---------------------- for three days in December 1999 in Rajkot. The 16 collaborating organisations
brought together over 600 women leaders from 211 mandals (SHGs) and
----------------------
organisers from NGOs. Melas have proved an extremely powerful means to
---------------------- stimulate discussion, mutual learning and collective action among women. These
melas are used for leadership training, for raising awareness of the political
---------------------- process, and for bringing attention to other issues, such as food security, ethnic
diversity and culture. The focus in 2008 was on value chain development and
----------------------
economic advocacy.
----------------------
[Source: www.ifad.org/gender/pub/gender_finance.pdf]
----------------------
Example 6: Empowerment through Microfinance Groups
----------------------
Micro-finance has also been strategically used by some NGOs as an entry
---------------------- point for wider social and political mobilisation of women around gender issues.
For example SEWA in India, CODEC in Bangladesh and CIPCRE in Cameroon,
---------------------- indicate the potential of microfinance to form a basis for organisation against
other issues like domestic violence, male alcohol abuse and dowry.
----------------------
---------------------- There have been positive changes in household and community perceptions
of women’s productive role, as well as changes at the individual level.
----------------------
In societies such as Sudan and Bangladesh where women’s role has been
---------------------- very circumscribed and women previously had little opportunity to meet women
outside their immediate family, there have sometimes been significant changes.
----------------------
It is likely that changes at the individual, household and community levels are
---------------------- interlinked and that individual women who gain respect in their households then
act as role models for others leading to a wider process of change in community
---------------------- perceptions and male willingness to accept change (Lakshman, 1996).
---------------------- Last but not the least, the gender mainstreaming measures must complement
rather than replace the gender-specific services. Regular impact assessment
----------------------
should be carried out to understand the negative and positive outcomes, both
---------------------- expected and unexpected.
---------------------- Internal learning system

---------------------- In a methodology developed by Helzi Noponen and used by a number
of microfinance programmes in India – Dhan Foundation, SEWA, Handloom
---------------------- Weavers’ Development Society, Activists for Social Alternatives (ASA) and
Professional Assistance for Development Action (PRADAN) – individuals and
----------------------
202 Micro Financing

groups keep diaries based on simple questionnaires through a participatory Notes
process.
----------------------
These have had a strong catalytic effect in increasing women’s confidence
and motivation to improve their situation, especially regarding the problems of ----------------------
domestic violence and male alcoholism. Key information recorded in the diaries
----------------------
are aggregated into a system for the ongoing monitoring and evaluation of the
impact of the programme. ----------------------
[Source: Noponen (2003)] ----------------------
----------------------
----------------------
1. MFIs that are not in a position to introduce non-financial services
----------------------
themselves can ___________ with other service providers.
2. Organisations should build an ______________ structure and culture ----------------------
that is _____________ and empowering and exhibit the same in the ----------------------
interactions with clients.
3. All microfinance initiatives must consider the relevance of _________ ----------------------
to the services they offer. ----------------------
4. Gender sensitivity in the MFIs would mean ___________ of gender-
based constraints that affect women in their ___________ activities ----------------------
and plan services accordingly, all the while striving not to perpetuate ----------------------
or enhance the existing gender inequality.
----------------------
5. The microfinance institutions should look into gender _____________
rather than focusing solely on women. ----------------------
----------------------
Activity 2 ----------------------
Create a plan for raising staff awareness on gender issues in microfinance. ----------------------
Justify the steps suggested. ----------------------
----------------------
13.5 ACTIVISM AND MICROFINANCE
----------------------
Microfinance as a field stands for a body of knowledge involving techniques,
sound practices, financing methodologies, client strategies and a growing body of ----------------------
shared knowledge about innovations happening in the field. On the other hand, ----------------------
microfinance as a movement refers to series of organised activity by people
towards realisation of the goal of microfinance. This is often synonymous with ----------------------
poverty elimination movements.
----------------------

Notes Activism plays a key role in the microfinance movement. The aim of activism
in microfinance has been primarily to create a political will to empower the poor.
---------------------- This is achieved through voluntary participation of citizens at the grassroots
level aiming at:
----------------------
i. Building the microfinance movement
----------------------
ii. Collaborating with key micro credit players
----------------------
iii. Keeping the focus of movement on the marginalised
---------------------- iv. Lobbying for grassroots empowerment
---------------------- In fact, widespread activism in microfinance had led the United Nations
(UN) to designate 2005 as the year of the microcredit. While citizen’s advocacy
---------------------- is not easy, there is no denying that effective citizen advocacy is what works best.
----------------------
Two contrasting examples of MFIs at work
---------------------- In 1972, BRAC in Bangladesh began as a post-war relief and rehabilitation
---------------------- project. It remained a social movement organisation for many years and is now
one of the top credit organisations in Bangladesh. However, in contrast with
---------------------- Grameen Bank’s focus on profitable lending to rural poor, BRAC’s focus has
been social empowerment and poverty alleviation. The organisation is credited for
---------------------- the implementation of some of the largest community development initiatives in
---------------------- health, education and livelihoods. Even though its focus is on credit disbursement,
its approach is more comprehensive, combining microfinance with health,
---------------------- education and other social development programmes.
---------------------- SEWA started in India as a social movement that grew out of political and
social struggles of women in the unorganised sector and emerged as the first trade
---------------------- union of informal workers not only in India, but also in the whole world. With the
---------------------- objective of “promoting self-reliance as well as economic and social security of
its members”, SEWA is an organisation that has been able to work consistently
---------------------- with a two-pronged mandate of social struggle and economic development.
Credit provision through SEWA Bank is a part of its larger holistic programme of
---------------------- addressing the socio-political and economic concerns of self-employed women.
----------------------
These examples help to highlight the difference in strategies and goals of
---------------------- organisations involved in microfinance.
---------------------- However, the point of concern is that with empowerment increasingly being
equated with quick disbursal of loans and excellent recovery rates, the road
---------------------- ahead is conducive for many more Grameen Banks than SEWAs. The irony in
---------------------- microfinance today is that while it is increasingly being realized that minimalist
credit approaches are not sufficient to tackle poverty, the imperative to scale up
---------------------- and become profitable poses enormous challenges for microfinance institutions
to reconcile the mandates of sustainability and development. The growing
---------------------- competition among MFIs and donor pressure to scale up leaves little room for
---------------------- development services.
204 Micro Financing

13.6 SCALE AND MANAGEMENT IN MICROFINANCE Notes
The MFI’s key to success lies in the scale of outreach to the diverse rural ----------------------
clientele. The problem of scale, of course, is the magnitude of global poverty.
More than 3 billion of the world’s people now live on less than $2 per day, and ----------------------
estimates of the number of poor entrepreneurs who use microfinance today range
----------------------
from only 30 million to 50 million worldwide; more optimistic practitioners
put the figure as high as 100 million. In Africa, a mere 4% of the population ----------------------
has access to bank accounts, according to the United Nations Development
Programme, with only 1% having obtained loans or other forms of credit from ----------------------
formal financial institutions.
----------------------
The challenge in scaling up is that microlending is a labour-intensive, ----------------------
one-on-one business, typically driven by mission-oriented non-profits. It starts
slowly at the community or village level and often grows only gradually out ----------------------
from there. Working through local non-profit organisations, it took ACCION’s
partner network 20 years to reach its first million clients. ----------------------
----------------------
Unfortunately, anywhere from 750 million to 1 billion of the world’s
poor could benefit from microfinance, provided they had access. If, therefore, ----------------------
microfinance is to achieve its enormous potential, lending must scale up
appropriately and that is where the private sector comes in. ----------------------
The challenges of promoting a successful microfinance intervention are ----------------------

enormous. For mature MFIs, the prime challenge is of scaling up for a larger ----------------------
impact. For an effective scaling up, MFIs have to set a clear goal and draw a
strategy in conformity with the mission. They have to explore whether they ----------------------
possess the required legal conformity or need to transform themselves. Further,
the MFIs need to work out a careful strategy for mobilizing the required resources ----------------------
and put in place sound systems for managing human resources and information. ----------------------
Lastly, there is the challenge of striking a balance between the goals of outreach
and sustainability. Lack of clarity on the above issues may come in the way of ----------------------
successfully managing a microfinance intervention.
----------------------
Microfinance has a double bottom line that marries social and financial goals.
But after years of getting non-profits to act more like businesses, the challenge ----------------------
now lies in encouraging the broader private sector to act more like non-profits – ----------------------
balancing social and financial interests to achieve suitable, but not excessive return
on investment. The development community often prefers its work to remain a ----------------------
purely social mission. Grameen Bank’s Muhammad Yunus reflected that not long
ago in The New Yorker, when he asked philanthropist Pierre Omidyar, “…why ----------------------
do you want to make money off the poor people? You make money somewhere ----------------------
else.” The private sector maintains that if microfinance is to reach scale, a profit
motive must exist for commercial entities to participate. Thus, microfinance ----------------------
holds enormous potential for alleviating poverty, but it will require substantial
and substantive collaboration between the public and the private sector – a ----------------------
collaboration that forever keeps the ultimate goal squarely in sight. ----------------------

Notes Caselet
In India, the southern state of Andhra Pradesh (AP) has been the hotbed of
----------------------
microfinance controversy. Andhra Pradesh, a sprawling, heavily populated state,
---------------------- is home to about 75% of the microfinance companies in India.
---------------------- Rama is an example of microfinance gone wrong. She makes her living
rolling bidis, the cheap little cigars smoked by India’s poorest people. She lives
---------------------- in the town of Warangal, a farming centre in Andhra Pradesh, one of the poorest
states in southern India.
----------------------
One woman cuts the leaves into shape, while Rama and others roll the smokes
---------------------- and bundle them into baskets. A quick, persistent worker can earn between 30
---------------------- and 40 rupees rolling bidis, less than $1 a day.
Rama says microfinance representatives offered her a loan, with almost no
----------------------
questions asked. She took it, though she did not have a plan to invest the money
---------------------- or pay it back. She used the money for household expenses, for medical treatment
of her family members and to celebrate a birthday. A second company offered
---------------------- her another loan, which she used to make payments for the first. Before long,
Rama had five loans from different companies, and no way to pay.
----------------------
Thus began a downward spiral that trapped her into the vicious debt cycle.
----------------------
Rama’s daughter Mounika, burned herself to death at the age of 17, driven to
---------------------- despair by microloan debt collectors who harassed the family for payment.
---------------------- Rama says the collectors from the finance companies hounded her day and
night, shaming her in front of her neighbours. They told her to get the money any
---------------------- way she could, by stealing if necessary. She says they told her she would be better
off dead. This is because, unknown to her, Rama’s loan payments had included
---------------------- a life-insurance premium, and if the people who borrow die, the microfinance
---------------------- companies get the insurance amount.
---------------------- Rama says her daughter Mounika took the threats to heart and believed that
if anyone in the family committed suicide, the debts would somehow be erased.
----------------------
There is no keeping count of the people, most of them women, who have
---------------------- committed suicide in Andhra Pradesh because of the burden of microfinance debt.
After the outcry over the suicides, the state assembly passed a law that makes
---------------------- it so difficult to provide loans that the microfinance companies say they would
not be able to do business.
----------------------
Subsequently, the local government outlawed microfinance provided
----------------------
by private organisations in late 2010, which led to the collapse of both non-
---------------------- governmental and (in time) public sector microfinance leading clients inevitably
back to moneylenders. It also caused funds to dry up for microfinance across the
---------------------- country, as investors and lenders feared contagion.
---------------------- [Adapted from http://www.npr.org/2010/12/31/132497267/indias-poor-reel-
under-microfinance-debt-burden]
----------------------
206 Micro Financing

Questions Notes
1. How and why microfinance has gone wrong in Andhra Pradesh?
----------------------
2. What should be done to instill confidence in public about microfinance?
----------------------
Summary
----------------------
• Microfinance is a mechanism for promoting and sustaining socio- economic
development by supporting entrepreneurial activities. Microfinance ----------------------
institutions were set up to provide financial services including credit, savings
----------------------
and insurance to the poor.
• The financial self-sustainability model practiced by most MFIs is assumed ----------------------
to increase women’s access to microfinance, thereby leading to individual
----------------------
economic empowerment, well-being, and social and political empowerment.
• Microfinance results in compliance to the Millennium Development Goals. ----------------------
Gender equality becomes a vital component of economic growth by enabling ----------------------
women to become more effective in economic development.
• There can be both positive and negative impact of microfinance on women. ----------------------
• The MFIs should look into gender sensitivity rather than focusing solely on ----------------------
women.
----------------------
• Different organisational strategies should be adopted for gender
mainstreaming, viz., increasing awareness level of internal staff about ----------------------
needs and challenges of women, making information accessible, designing
----------------------
effective and sustainable financial services, non-financial services, and
networking and collaboration. ----------------------
• Activism plays a key role in the microfinance movement. The aim of activism
----------------------
in microfinance has been primarily to create a political will to empower the
poor. ----------------------
• The MFI’s key to success lies in the scale of outreach to the diverse rural ----------------------
clientele. The problem of scale, of course, is the magnitude of global poverty.
• Microfinance has a double bottom line that marries social and financial ----------------------
goals. ----------------------
Keywords ----------------------
----------------------
• Micro credit: Micro credit is banking the unbankables, bringing credit,
savings and other essential financial services within the reach of millions ----------------------
of people who are too poor to be served by regular banks, in most cases
because they are unable to offer sufficient collateral. ----------------------
• Gender mainstreaming: Mainstreaming a gender means the process of ----------------------
assessing the implications for women and men of any planned action,
including legislation, policies or programmes, in all areas and at all ----------------------
levels. It is a strategy for making women’s as well as men’s concerns and
----------------------

Notes experiences an integral dimension of the design, implementation, monitoring
and evaluation of policies and programmes in all political, economic and
---------------------- societal spheres so that women and men benefit equally and inequality is
not perpetuated. The ultimate goal is to achieve gender equality.
----------------------
• Millennium development goals: The Millennium Development Goals
---------------------- (MDGs) are eight international development goals that all 193 United
Nations member states and at least 23 international organisations have
----------------------
agreed to achieve by 2015. The goals are: eradicating extreme poverty
---------------------- and hunger, achieving universal primary education, promoting gender
equality and empowering women, reducing child mortality rates, improving
---------------------- maternal health, combating HIV/AIDS, malaria, and other diseases, ensuring
environmental sustainability, and developing a global partnership for
----------------------
development
---------------------- • Advocacy: Active support of an idea or cause, etc. especially the act of
pleading or arguing for something.
----------------------
----------------------
----------------------
1. “Microfinance and women have always been intrinsically linked.” Comment.
----------------------
2. Should women continue to be the focus of microfinance in the future? Give
---------------------- your views.
3. “Female targeting in MFI might not be profitable enough and might lead to
----------------------
female exclusion.” What is your view?
---------------------- 4. What are the possible negative impacts of microfinance on women?
---------------------- 5. “Structural and cultural changes in organisations dealing with microfinance
are the first steps to gender mainstreaming.” Explain.
----------------------
6. “A badly designed credit can become a worrisome debt for the already
---------------------- deprived women.” Justify.
---------------------- 7. Why is inter-organisational collaboration and networking an important
strategy for MFIs?
----------------------

----------------------
1. False
----------------------
2. True
---------------------- 3. True
----------------------
----------------------
208 Micro Financing

Fill in the blanks.
----------------------
1. MFIs that are not in a position to introduce non-financial services themselves
can collaborate with other service providers. ----------------------
2. Organisations should build an institutional structure and culture that is ----------------------
women-friendly and empowering and exhibit the same in the interactions
with clients. ----------------------
3. All microfinance initiatives must consider the relevance of gender to the ----------------------
services they offer.
----------------------
4. Gender sensitivity in the MFIs would mean acknowledgement of gender-
based constraints that affect women in their entrepreneurship activities and ----------------------
plan services accordingly, all the while striving not to perpetuate or enhance
the existing gender inequality. ----------------------
5. The microfinance institutions should look into gender sensitivity rather than ----------------------
focusing solely on women.
----------------------
----------------------
Suggested Reading
----------------------
1. www.worldbank.org/gender/ prr/engendersummary.pdf.
----------------------
2. “From Charity to Business.” The Economist Nov 5th 2005.
----------------------
3. Mayoux, Linda. “Questioning Virtuous Spirals: Micro-finance and Women’s
empowerment in Africa”. Journal of International Development, Special ----------------------
Issue: DSA Special Issue -What Have they Achieved? What Have we
----------------------
Learned? Volume 11, Issue 7, pages 957–984, November/December 1999
----------------------
4. McIntosh, Craig and Bruce Wydick. 2005. “Competition and Microfinance”.
Journal of Development Economics 78(2), 271-298. ----------------------
5. Razavi, Shahra. “From Rags to Riches: Looking at Poverty from a Gender ----------------------
Perspective.” IDS Bulletin 28, no. 3 (1997): 49–62.
----------------------
6. World Bank. 2007. ‘Finance for All? Policies and Pitfalls in Expanding ----------------------
Access’. World Bank Policy
----------------------
7. Research Report, World Bank, Washington, DC.
----------------------
8. Yunus, M. 2002. ‘Grameen Bank II. Designed to Open New Possibilities’.
www.grameen-info.org/bank/bank2.html ----------------------
----------------------
----------------------
----------------------

Notes
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MICRO FINANCING

(FOR PRIVATE CIRCULATION ONLY)

COURSE DESIGN AND REVIEW COMMITTEE

Published by Symbiosis Centre for Distance Learning (SCDL), Pune

Copyright © 2016 Symbiosis Open Education Society

Mr. Dalip Mehra

8. Development of Microfinance Products 131 - 144

---------------------- ●● Identify the challenges faced by the microfinance industry

---------------------- Fig. 1.1 Need for Microfinance

---------------------- Visit http://www.ssmrae.com/admin/images/002bb5cc80ff9b289253ce9eee

---------------------- 1.3 KEY PLAYERS IN THE MICROFINANCE SYSTEM

---------------------- 1. National Bank for Agricultural and Rural Development (NABARD)

---------------------- 2. Reserve Bank of India

---------------------- 3. Self-help groups

---------------------- 4. Microfinance institutions

A high-powered Task Force on Supportive Policy and Regulatory Framework ----------------------

3. Self-help groups: The concept of SHG is the brainchild of Muhammad ----------------------

5. Non-governmental Organisations: Non-governmental organisations are ----------------------

Fig. 1.2 Microfinance Industry Structure ----------------------

---------------------- Fill in the blanks.

---------------------- 1. The corporate mission of NABARD is to make microfinance available

---------------------- 4. Microfinance is a ______________ model that can address the needs

---------------------- 1.4 THE MICROFINANCE BUSINESS MODEL

Fig. 1.4 ROE Range-wise Distribution of MFIs ----------------------

Fig. 1.6 Region-wise Shares – Loan Portfolio ----------------------

---------------------- • Majority of low-income population is located in rural areas, which are

Fill in the blanks. ----------------------

---------------------- • Inability to innovate, adapt and grow.

---------------------- • Lacking the capacity to provide backward linkages or create support

---------------------- • Microfinance is defined as a provision of financial services to the global

• NGO-MFIs: Not-for-profit entities to extend microcredit to self-help groups. ----------------------

Self-Assessment Questions ----------------------

---------------------- 1. Majority of low-income population is located in rural areas, which are

---------------------- 2.1 INTRODUCTION

---------------------- i. Those accepting public deposits.

---------------------- Fill in the blanks.

• Doorstep “savings and credit” facility for the poor. ----------------------

• Exploitation of the untapped business potential of the rural areas. ----------------------

---------------------- Fill in the blanks.

---------------------- Case Study

---------------------- • A cooperative can be defined as an autonomous association of persons united

---------------------- • Credit union: A non-profit, member-driven self-help financial institute, who

Answers to Check your Progress ----------------------

---------------------- 3.2 EMERGENCE OF SELF-HELP GROUPS

Check your Progress 1 ----------------------

3. The ___________ Linkage Programme has provided opportunity to ----------------------

---------------------- 5. Advocacy: SHGs advocate addressing problems or deficiencies that exist

---------------------- 4. Pooling of knowledge and resources: When different members come

SHG federation ----------------------

As discussed earlier, an SHG federation is a formal structure comprising ----------------------

• Knowledge and experience sharing. ----------------------

• Economies of scale. ----------------------

• Larger capital base. ----------------------

---------------------- Fig. 3.1 Structure of SHG Federation

Impact of SHG–Bank linkage programme ----------------------

• Women empowerment by helping them to contribute to household income, ----------------------

---------------------- Fill in the blanks.

---------------------- Therefore, SHGs can act as a director of community development. A women-

---------------------- 5. Livelihood: Livelihood, meaning a persons’ economic activity, is an area

SHGs should maintain a system of internal verification as well as external ----------------------

---------------------- Check your Progress 3

---------------------- 3.7 SHG–BANK LINKAGE PROGRAMME: AN

Fig. 3.3 SHG–Bank Linkage Programme – Amount of Savings and ----------------------