MICRO FINANCE & SHG – UNIT

IV PART I
Lecture Notes Series
By
Prof. Dr. Rajesh Mankani
(Strictly For Private Circulation)
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INTRODUCTION – MICRO FINANCE

 Finance provided to benefit the low income women & men is call “micro finance”
 Micro finance is not simply a banking activity, it is a development tool
 The liberalization & globalization policies of the Indian government have opened
up new vistas in the realm of credit delivery system in India
 For instance, there has been more emphasis on empowering the hitherto
powerless of rural women
 Micro financing aims at improving the tot of the rural women by effectively
organizing women to work for women
 Micro financial services refer to the provision of financial services to low income
clients including self-employed
 Micro financial services include both financial intermediation & social
intermediation
 In India, micro finance interventions commonly happen through self-help groups

DEFINITION OF MICRO FINANCE

 Micro finance is defined as “provision of thrift, credit & other financial

services & products of very small amounts to the poor in rural, semi-urban
& urban areas for enabling to raise their income levels & improve their
living standards”
 Micro finance is meant to reaching those people such as women, small &
marginal farmers, rural artisans, etc who work in (i) farm/fish/land (ii) Operate
micro/small businesses where goods are produced, cycled, repaired (iii) work for
wages or commission by providing sales (iv) gain income from renting small
place of land, vehicles, machine tools, etc

FEATURES OF MICRO FINANCE

(1) Micro finance is micro in character. It is characterized by small size of savings,

small size of loans, shorter repayment period, small repayment dues, micro
enterprises & smaller risk
(2) Loans are micro in nature
(3) Target users are micro entrepreneurs & poor people belonging to weaker section
(4) It is aimed to help the poor people to improve their lot
(5) The use of the funds is for income generation or improvement
(6) Terms & conditions for micro credit loans are flexible & simple to understand
(7) It is designed to tap the local capital in a significant manner
(8) It is also aimed to help the poor to make financially self-sufficient

NEED OF MICRO FINANCE

(1) Poverty Alleviation: The basic reason for making available micro financial
services is to alleviate property. It can be accomplished through the promotion of
 sustainable livelihood by providing easy & affordable access to credit & other
services required for livelihood

(2) Harnessing Talents: Micro financial services need to help harness the talent,
leadership & entrepreneurial abilities of the poor. Further, micro financial services
facilitate enterprise development & provide employment generation in remote
rural areas where the poor can get employment

(3) Women empowerment: Micro finance services are essential for the
empowerment & upliftment of women in rural areas. This happens by gathering
women, organizing them into groups, building their capacity into self-mangement
at the grass roots & enabling to access many services including credits

(4) Credit Delivery: Micro financial services take care of the distribution of credit to
the rural poor. This system ensures rational allocation of resources in the form of
subsidized credit especially in rural areas

ROLE OF MICRO FINANCE

 Micro finance is the provision of financial service to low-income groups who

traditionally lack access to banking & related services

(1) Micro Finance & Individual / Households:

• Micro finance helps poor people. Even a small loan of Rs.5000 or Rs.10000 can
help someone living in poverty to start/grow his own small business. Eg.
(i) It helps the women to buy sewing machines to start tailoring business, or
(ii) It helps the person to buy Grinder to start the business of making Readymade Idli
Atta making, etc

 Various studies of the impact of micro finance have been carried out. World bank
also studied the impact of micro finance. Based on the various studies, benefits
of micro finance to individuals/households are:
(1) Making regular income & saving
(2) Increasing Regular income & saving
(3) Better nutrition
(4) Access to healthcare
(5) Better housing
(6) Women empowerment & upliftment
(7) Education provided to children

(2) Micro Finance & Women:

• Micro finance experts generally agree that women should be the primary focus of
service delivery
• Micro finance generally targets poor women because they have proven to be
reliable credit risks & when they have the financial means, they invest that money
 back into their families, resulting in better health & education & stronger local
economies
• Micro finance is attractive one to women who are prepared to work hard to give
their children a bright future

(3) Micro Finance & Social Interventions:

• There are a few social interventions that have been combined with micro finance
to increase the awareness of HIV/AIDS, & gender quality
• Such interventions educate on different gender roles, gender-based violence,
HIV/AIDS infections, strengthen the communication skills & leadership of women
• In India, micro finance program has a crucial role to play in upliftment people
living below poverty line

(4) Micro Finance & the Economy:

• Micro finance provides finance to entrepreneurs & small businesses through two
delivery mechanisms:
(i) Relationship based banking for individual entrepreneurs & small businessmen;
and
(ii) Group based models, where several entrepreneurs come together to apply for
loans & other services as a group
• With an increased income & therefore more money spent on items such as food,
clothes, etc
• Micro finance clients become active participants in their local economies

MICRO FINANCE INSTITUTIONS (MFI)

 In India, micro finance operates through two channels:

(1) Micro finance institutions (MFIs)

(2) Self-Help Groups – Bank Linkage Program (SBLP)

 Those institutions which have micro finance as their main operation are known as
micro finance institutions
 A micro finance institution is a registered organization that offers financial
services to people living in poverty within the micro finance industry, the term
micro finance institution has come to refer to a wide range of organizations
dedicated to providing these services such as non-governmental organization
(NGOs) credit unions, co-operative, private commercial banks & non-banking
financial institution

 In April 1999, RBI setup micro credit special cell for micro finance sector. MFI is
classified as:
(1) NOG engaged in promoting SHGs & their federations & linking SHGs with bank
(2) NGOs directly lending to borrowers organized as SHGs. NGO get funds from
SDBI & borrow from various donors
(3) MFIs organized as co-operatives mutually aided cooperative societies
(4) MFIs organized as Non-Banking Finance Companies (NBFCs)

 It is estimated that more than 1000 NGOs, MFIs & more than 20 companies have
MFIs
 The MFIs account for over 80% of their micro finance loans portfolio

 Other institutions that provide micro finance are:

(1) NABARD – NABARD refinance MFIs engaged in Micro finance
(2) Small Industries Development Bank of India (SIDBI)
(3) Housing Development Finance Corporation (HDFC)
(4) Commercial Banks
(5) Regional Rural Banks (RRBs)
(6) Cooperative Credit Societies

 Forbes Magazine named 7 micro finance institutions in India is the list of world
top 50 micro finance institutions. They are:
(1) Bandhan
(2) Micro Credit Foundation of India
(3) Saadhana Microfin Society
(4) Grameen Koota
(5) Sharada’s Women’s association for weaker section
(6) Asmitha Microfin Ltd.,
(7) SKS Micro Finance Pvt. Ltd.,

 Most MFIs lend on this basis of the past record of the group i.e. Self-Help Group
or joint liability Group (JLG) & also on the individuals repayment performance
 A JLG is an informal group of 4 to 10 individuals join together for the purposes of
availing bank loan against mutual guarantee
 The JLG members are expected to engage in similar type of economic activities
 MFIs also provide non-finance service such as business development to
strengthen enterprises, & financial literacy training to empower families to look
after their own finances

 Code of Conduct of Micro Finance Institutions:

 In 1998, NABARD formed a task force on supportive policy & regulatory
framework for micro finance. It recommended the following regulation &
supervision:
(1) NGO & MFI should be registered with a competent authority
(2) NGO & MFIs should provide information to an authority designated for the
purpose
(3) NGO & MFIs should also be subjected to supervision right from the beginning
like any other agency in the financial sector
(4) NBFCs engaged in micro finance are subjected to the same regulations are
applicable to other NBFCs
(5) The cut-off level of business for the NGO-MFIs may, for the present, be fixed at
mobilized savings of Rs.25lacs
 (6) If the saving operations of an MFI exceed a pre-obtained cut-off limit, the MFI will
have to register itself with the RBI
(7) As regards compliance with regulation requirements, statutory auditors of the
NGO-MFIs may be required to file a special report along with the audit report

SELF-HELP GROUP (SHG) – MEANING

 A Self-Help Group (SHG) is a small voluntary association of 10-20 poor people

from the same socio-economic background who come together for the purpose
of addressing their common socio-economic problems through self-help & mutual
help
 They collect small thrift (savings) on regular basis (mostly every month)
 Out of the collected amount, a portion of the amount is given as a loan to the
members for interest & remaining amount is deposited with a bank regularly
 SHG comprises mostly 90% of women
 In 1980s, NGOs played a key role in initiating & setting up SHGs by lending to
SHGs

SELF-HELP GROUP (SHG) – DEFINITION

 SHG is a silent revolutionary concept that is taking place in the credit delivery
system
 Micro finance through SHG offers best way of credit for reaching the unreached
& the unreached groups
 It is defined as “Self-Help Group is a voluntary association of poor, formed with
the common goal of social & economic empowerment”

 NEED FOR SHG:

(1) To mobilize the resources of the individual members for their collective economic
development
(2) To uplift their living condition
(3) To create the habit of saving
(4) To assist the members financially
(5) Development of Entrepreneurship
(6) To act as a medium for socio-economic development of the village
(7) To develop linkages with institutions of NGOs
(8) To organize training for skill development
(9) To gain self-confidence, mutual understanding
(10) To build-up teamwork
(11) To develop leadership qualities
(12) To identify problems & finding solutions in the group

FUNCTIONS OF SELF-HELP GROUP (SHG)

 SHGs normally function in the following manner:

 (1) Meeting: The groups conduct regular meetings with the members on a weekly or
monthly basis
(2) Common place & fixed day: The group fixes a common place to conduct the
meetings & fixed date or day is followed
(3) Members register: Attendance is compulsory for all the members & they
maintain members register & minutes of meeting
(4) Savings: Savings are deposited by all the members in the meeting itself & no
interest is paid on the deposits
(5) Accounts: Simple books of accounts are maintained by them. If any members is
unable to maintain accounts, outside people can help them to enter the
transaction details
(6) Resolution & authorization: If they wish to get funds from banks, they pass a
resolution in the meeting & authorize at least 3 members & among any 2 of them
to jointly operate the bank savings account. Through this they can also get credit
from banks
(7) Internal lending: After saving for a minimum period of 2 to 3 months, the
common savings funds are used by SHG for lending to its own members. The
purpose, terms & conditions for lending to its members, rate of interest, etc are
decided by the group through discussion during its meetings. The interest is
usually kept as 2 or 3 Rs. Per Rs.100 per month

MODELS OF SHG-BANK LINKAGE PROGRAM

 This is the bank-led micro finance channel which was initiated by NABARD in
1992
 Under the SHG model, women from villages form a small group
 They contribute their savings in the group and from the savings, loan are given to
the members
 In the later period, these SHGs are provided with bank loans generally for
income generation purposes
 The SHGs are self-sustaining & once the group becomes stable, it starts working
on its own with some support from NGOs & institutions like NABARD & SIDBI
 NABARD has been supporting the SHG-Bank Linkage Program
 In 1996, RBI made linkage of SHG with banks as a priority sector activity
 The government of India has been supporting the program by making special
budgetary provision for promotion of SHG since 1999
 Commercial banks, cooperative banks & RRBs alongwith NGOs are associated
with the program
 NABARD provides refinance & promotional support to these credit institutions
involved in the program
 There are 3 types of credit linkage of SHGs with the bank: (i) SHG formed &
financed by bank (ii) SHG formed by NGO/Govt. agencies (formal agencies) but
financed by banks (iii) SHG formed by bank & NGO, using NGO/formal agencies
as financial intermediaries

BENEFITS OF SHG
  There are various advantages of financing through SHG like poor individuals gain
strength, finance through SHG reduces transaction costs, etc

 Benefits of SHG are viewed from two angles:

(1) Benefits to member and (2) benefits of SHG to bank

BENEFITS

To Members To Banks

 Benefits to Members:
(1) Regular savings habits
(2) Easy availability of small loan (micro credit)
(3) Creation of productive assets
(4) Financial discipline
(5) Unity & co-operation among members
(6) Improvement in financial position
(7) Development of entrepreneurship
(8) Development of leadership
(9) Creating awareness like sanitation, family welfare, village cleanliness, etc
(10) Joint action for education, prevention of social evils such as dowry,
alcoholism, etc

 Benefits to Banks:
(1) Reduction of transaction cost due to group deposits & finance. There is a benefit
of less paper work
(2) Loan recovery improves due to peer pressure
(3) Bank has huge scope for expansion of their business due to growing SHG-Bank
Linkage Program

PROBLEMS OF SHG

 SHG Programs has the following limitations:

 (1) Lack of support: Lack of support from the family members discourages women
to join the SHG. In case of mixed groups, male members do not extend support
& cooperative to female members
(2) Low Income: Economic activities undertaken by the members are traditional.
Hence the activities generate low income. Therefore, the micro finance
movement is losing one of their main objectives of empowering poor people
(3) Political Interference: Political interference on the group disturbs its activities. It
has been observed that political leaders are taking interest in the formation of
SHGs to add their vote bank

ROLE OF NABARD & SIDBI

 The two apex level financial institutions, which are promoting, supporting
& financing micro finance programs in India are:

(1) NABARD, and

(2) SIDBI

(1) NABARD: National Bank for Agricultural & Rural Development in promoting
micro finance through the concept of SHG stated in 1987 with a sanction of Rs.10
lacs as grant assistance from its R&D fund to Mysore Resettlement & Development
Agency for providing seed money to the Credit Management Groups promoted by it
• The objective was to facilitate building up a thrift fund
• The success of this leads to launch of the pilot testing during 1992 to 1995 for
linking 500 SHGs with banks
• The linkage program promoted by NABARD is unique as it facilitates as
“relationship banking” under the relationship banking improvements in the
existing relationship between the poor & the banks are attempted with
intermediation by the NGOs who either play the role of promoters of SHG or
financial intermediaries
• The Credit Financial Services Fund was set up with NABARD in 1995, for
supporting banking & financial institutions for undertaking credit delivery
innovations & the access to financial services for the rural poor & women
• In addition to providing refinance to banks, NABARD has been supporting
various partner agencies for capacity building through grants & revolving fund
assistance for micro credit innovations
• NABARD played an important role in developing a simple but effective
accounting system & facilitated organizing of programs to train women volunteers
in management of groups

(1) The role of NABARD is:

(i) It is an apex institution which has power to deal with all matter concerning policy,
planning as well as operations to giving credit for agriculture & other economic
activities in rural areas
(ii) It is a refinancing agency for those institutions that provide finance for rural
development
(iii) It is improving the capacity of the credit delivery system in India
(iv) It coordinates the rural credit financing activities of all sorts of institutions
engaged in developmental work
(v) It prepares rural credit plans, annually, for all districts in the country
(vi) It also promotes research in rural banking & the field of agriculture & rural
development

(2) SIDBI: The Small Industries Development Bank of India (SIDBI) was established
in 1990, to serve as the principal institution for promotion & development of
industry in the small scale sector as well as to coordinate the functions of other
institutions engaged in these aspects in the sector
• The bank launched the Micro Credit Scheme (MCS) in 1994 for extending
financial help to the poor rural people particularly women through NGOs for doing
income generating activities at micro level
• It provides soft loans assistance to accredited NGOs for lending to poor women,
an amount not exceeding Rs.25000 per person at 9% interest for promoting
micro level enterprises
• The salient features of this scheme were silently developed by the NGO to run
credit program efficiently & enhanced credit capacity of the borrower/poor women
• The GOI has indentified the bank as a major partner of implementing UNDP
(United Nations Development Program) supported entrepreneurship program for
women
• Under this program, GOI provides financial support for capacity building to
financial intermediaries, while the loan component is provided by SIDBI

PORTFOLIO SECURITIZATION

 Securitization is a process under which a lender bundles loans together & sells
them to another financial institution, freeing up capital
• The risk of the loan is transferred the buyer in the process
• Financial institutions such as banks buy these portfolios in order to meet their
priority sector lending norms
• Loan pools can be securitized two ways-direct assignment or through issuing
pass through certificates
• Direct assignment involves directly transferring a bunch of loans to the buyer
• In a pass through certificate, the certificates are issued through a Special
Purpose Vehicle (SPV)
• Securitization volumes have reduced for micro finance segment on account of
the impact of demonetization because of that there is a pickup in Direct
Assignment, Housing loans & loans against property, commercial finance, small
business loans from major part of securitization volume apart from micro finance
• CRISIL estimated that total securitization portfolio of micro finance industry for
the financial year 2016 stood at Rs.11500 crores

SELF HELP GROUP – 2

 • The SHG program, which began as a women’s empowerment initiative through
financial inclusion in the 1980s added a significant component in 1992 when
NABARD had taken an initiative to link a small number of SHGs with banks
• Today, there are over 73.18 lacs savings linked SHG & 44.51 lacs credit linked
SHGs in India covering around 95 million households
• Despite the success of the SHG model, the impact of SHG programs on the liver
of the poor has been limited
• There are several reasons for this, ranging from inadequate support from the
self-help group promoting institutions to low quality of SHGs in terms of their
regular functions, such as serving, group meetings, borrowing, internal lending &
book-keeping
• In order to overcome the above limitations, NABARD proposed a revised form of
SHG referred as SHG 2 in a circular dated March 2012
• Under this, NABARD proposed several changes like one of the changes was to
enable Joint Liability Group (JLG) within SHGs to facilitate higher loan amounts
to group members who wanted to finance their individual economic activity
• Other significant revision proposed under SHG 2 was bringing modification in
credit products

• Special Features of SHG 2:

(1) Creating space for voluntary savings: The propensity to save has increased
with improvement in income levels of SHG members. Consequently, compulsory
savings increased but the extent of compulsory savings has been the minimum
for some members in view of substantial rise in their income levels
(2) Cash credit as preferred mode of financing: This facility is expected to provide
flexibility to SHGs in meeting their frequent & small needs as well as help them in
reducing their cost of borrowings. The loan limit could be sanctioned for a period
of 3 to 5 years based on the projected savings of the SHGs
(3) Scope for multiple loans: There is a scope for multiple loans by SHG members
but having linkage with the repayment capacity & meeting higher credit
requirements for livelihood activities
(4) SHG Federation: In the long-run, the federations should be demand based
rather supply driven. SHG federations may undertake non-financial or
developmental activities like social mobilization, arranging linkage for livelihood
activities, etc
(5) Promotion: Members of well-functioning or active members of SHGs & NGOs or
other entities engaged in promotion of SHGs can best provide the support
services to SHGs. Such services may be engaged by the banks to serve as
business facilitators for helping the bank in monitoring the functioning of SHGs &
take corrective action

NATIONAL RURAL LIVELIHOOD MISSION (NRLM) & SRLM

• NRLM was started by GOI in 2010 with the object to establish efficient
sustainable institutions of the rural poor that enable them to increase household
 income through livelihood enhancements & improved access to financial &
selected public services. In 2011, it was renamed as “Aajeevika”
• The special focus of NRLM is on poorest households
• It was launched in 12 states that account for 85% of the rural poor households in
India
• The Ministry of Rural Development has determined to re-design & re-structure
the continuing Swarna Jayanti Gram Swaraygan Yojana (SGSY) into NRLM
• NRLM has a three-tire dependent structure
• Ministry of Rural Development is the apex one & at the State level, there are
associative degree umbrella organizations under the State Department of Rural
Development for implementing self-employment/rural livelihood promotion
programs
• The total number of SHGs promoted under NRLM was 18,64,742 & 23,05,513 as
on March 31, 2014 & 2015 respectively
• The number of village organizations promoted under NRLM was 1,47,567 as on
31/07/2015

• SRLM: The State Rural Livelihood Mission (SRLM) with dedicated professional &
domain specialists under the State Dept. of Rural Dept. is financially & technically
supported by NRLM
• Under NRLM, all SHGs will be given credit at 7% interest per annum to meet
their livelihoods & essential needs like social mobilization, livelihood promotion,
financial inclusion, monitoring & evaluation, knowledge management &
communication
• In Orissa, NRLM provides revolving fund to SHG of Rs.10000-15000 as corpus
to meet the member’s credit needs directly
• NRLM provides various funds in order like Community Investment Fund,
Vulnerability Reduction Fund (VRF) & it introduced Micro Investment Plan (MIP)
• MIP is a participatory process of planning & appraisal at houseful & SHG level
• Orissa has been a pioneer in SHG-Bank Linkage
• As on 30th Nov, 2015, 31,611 SHGs have been credit linked with an amount of
Rs.351.85 crores
• In UP, the UP State Rural Livelihood Mission (UPSRLM) was constituted as an
autonomous society in 2011 for implementation of NRLM in state
• Under this mission, it formed many SHGs, provided revolving fund SHG,

PRIORITY SECTOR & ITS CLASSIFICATION

• The RBI set up a committee to study issues & concerns in the micro finance
sector under the chairmanship of Y.H. Malegam
• Based on the recommendation RBI advised that bank credit to MFIs extended on
or after April 1, 2011, for lending to individuals & also to members of SHG/JLGs
will be eligible for categorization as priority sector advance under the category of
agriculture, MSE & Micro Credit as direct finance, provided not less than 85% of
total assets of the MFI are in the nature of qualifying assets
 • In addition, the aggregate amount of loan, extended for income-generating
activity, should not be less than 75% of the total loans given by MFIs

• Priority sectors include the following classification:

(1) Agriculture
(2) Micro, small & medium enterprises
(3) Export credit
(4) Education
(5) Housing
(6) Social infrastructure
(7) Renewable energy
(8) Others

• Bank loan upto Rs.5 crores per unit to micro & small enterprises & Rs.10 crores
to medium enterprises engaged in providing or rendering of services & defined in
terms of investment in equipment & MSMED Act 2006 are eligible for
classification under priority sector
• Bank credit to micro finance institutions extended for lending to
individuals/members of SHG/JLG for water & sanitation facilities is also eligible
for classification as priority sector loans under ‘social infrastructure’ subject to
certain criteria
• The priority sector registered a strong growth of 16% during 2015-16 as
compared to 9.3% in the previous year
• Credit for housing loans increased significantly
• Scheduled Commercial banks as a whole could achieve the priority sector target
of 40% (of adjusted net bank credit (ANBC) or credit equivalent amount of off-
balance sheet exposure, whichever is higher)
• At the end of Mar 2016, the achievement of priority sector by public sector bank
was 39.3%, private sector bank was 45.1% & foreign bank was 35.3%

CHALLENGES IN MICRO FINANCE

• The obstacles of challenges to building a sound commercial micro finance

industry including the following:

(1) High cost of loans: Providing small loans at a affordable cost is one of the
principal challenges of micro finance movement. The reason for high cost of
micro finance loan is the high transaction cost of traditional micro finance
operations for small amount of loan
(2) Repayment Problems: Major factors which adversely influence repayment are
environment factors (drought, flood, etc) social factors (religious festival,
elections, etc) & major events in a client’s life like family wedding, etc
(3) Financial illiteracy: Financial illiteracy of the people makes it difficult to create
awareness of micro finance & even more difficult to serve them as micro finance
clients
(4) Migration of Group Members: Majority of the micro finance loans are disbursed
on group lending concepts. The two major problems with the group concept are
dropout i.e. one or more members leave the group & migration i.e. one or more
members move to another group
(5) Non-transparent pricing: It has been observed that MFIs are employing
different patterns of changing interest rates & a few are also charging additional
charges & interest free deposits. All this makes the pricing very confusing &
hence the borrower feels incompetent in terms of bargaining power
(6) Cluster formation in Established Market: The cluster formation is restricting
MFIs from reaching to rural areas where there is the actual need for micro
finance. People in urban & semi-urban areas are already having access to micro
finance but in rural areas people do not have access to banks but they are not
much active in such areas because initial cost involved to serve in new location
(7) Poor regulation & supervision: The regulation & supervision on MFIs is not
upto the mark. It has been seen that in lieu of reducing the initial cost, MFIs are
opening branches in places which already MFI is running. Hence, it does not
serve as per the purpose of aim of MFI
(8) Incomplete range of products: Many MFIs provide only credit facilities. MFIs
should provide complete range of products including credit, savings, remittances,
financial advice, training & support