IMS UNISON UNIVERSITY, DEHRADUN

BATCH- 2016-19

PROJECT REPORT

ON

MICROFINANCE

SUBMITTED IN PARTIAL FUFILLMENT OF THE

REQUIREMENT FOR THE DEGREE

IN

BACHELOR OF COMMERCE (HONS.)

SUBMITTED TO: SUBMITTED BY:

DR. P.G. DANGWAL HARNOOR SHAHI

ASSISTANT PROFESSOR B.COM. (HONS.)

IUU, DEHRADUN 16BCO024

1
 INDEX

CONTENT PAGE NO.

CERTIFICATE (i)

DECLARATION (ii)

ACKNOWLEGEMENT (iii)

CHAPTER-1 INTRODUCTION 1

CHAPTER-2 MICROFINANCE 2-11

CHAPTER-3 ORIGIN OF MICROFINANCE IN INDIA 12-15

CHAPTER-4 MICROFINANCE IN INDIA 16-23

CHAPTER-5 MICROFINANCE MODELS IN INDIA 24-31

CHAPTER-6 GROWING MICROFINANCE IN INDIA 32-36

CHAPTER-7 CHALLENGES AND ISSUES OF MICROFINANCE

IN INDIA 37-42

CHAPTER-8 GOVERNMENT SCHEME OF MICROFINANCE

PROGRAMME 43-47

BIBLIOGRAPHY 48

2
 CERTIFICATE

This is to certify that the project work titled “Microfinance” which is being submitted by
Harnoor Shahi ID No. 16BCO024 for the partial fulfillment of the requirements for the
Bachelor of Commerce (Hons.) at IMS Unison University, Dehradun is a record of her
own work carried by her under my supervision. The matter embodied in the research
work has not been submitted for the award of any degree elsewhere.

I recommend this project for submission and evaluation for the award of degree of the
student.

Signature……………………………………………………

Name of the Supervisor- Dr. P.G Dangwal

Designation- Assistant Professor

Date-

3
 DECLARATION

This is to certify that the project work titled “Women Entrepreneur” which is being
submitted by me for the partial fulfillment of the requirements for the Bachelor of
Commerce Honors at IMS Unison University, Dehradun is a record of my original work
and due acknowledgments have been made in the text to all other materials used. The
matter embodied in the research work has not been submitted for the award of any
degree elsewhere.

Signature…………………………………………………….

Student Name- Harnoor Shahi

Student ID No- 16BCO024

Date-

4
 ACKNOWLEDGEMENT

I am thankful to IMS Unison University, Dehradun and specially B.Com department

who provided me the opportunity for carrying out the study. It is a moment of pleasure
for me to acknowledge the help and support for those people who made me able to
present this report for evaluation of “Bachelor of Commerce (Hons.)”.

Further, I extent my earnest thanks and gratefulness to my internal guide Dr. P.G
Dangwal Asst. Professor, IMS Unison University, Dehradun for his precious guidance
and monitoring but for which my report here would not been so rewarding and fruitful.

I am also thankful to those who have helped me intellectual in preparation of this report
directly or indirectly. At last it is my pious duty to record my heartiest gratitude to my
parents and my family who taught first lessons of life and inspired me to face the
hardships of life. At last, I would like to thanks all my IMS friends for their love, faith and
support.

HARNOOR SHAHI
16BCO024

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 CHAPTER-1

INTRODUCTION

Up until around a decade ago, Micro-finance was associated almost exclusively with
small scale loans to individuals and businesses in poor communities. Today it is used to
describe a selection of financial products such as payments, savings and insurance,
that are adapted to meet the needs of low income individuals, businesses and NGOs.
Micro-finance also serves people who do not have access to typical banking services.

Micro-finance is also the idea that low-income individuals are capable of lifting
themselves out of poverty if given access to financial services. While some studies
indicate that micro-finance can play a role in the battle against poverty, it is also
recognized that is not always the appropriate method, and that it should never be seen
as the only tool for ending poverty.

Poor people often do not have access to cost effective money-lending facilities and face
having to take on often unaffordable fees and interest rates on loans available in their
local community. This limits growth and development, puts additional financial pressure
on low income families and serves to perpetuate the cycle of poverty.

Like borrowing, savings options for people in low income areas are only available
through insecure and sometimes erratic schemes including credit associations, rotating
savings and credit associations. Financial insecurity denies families and businesses the
opportunity to develop suitably, limiting the incomes of entire communities.

6
 CHAPTER-2

MICROFINANCE

Microfinance is a very popular term in today’s financial market scenario. As the name
suggests, microfinance refers to microcredit or micro-loan. Microfinance refers to a
banking or financial service that is offered by banks or other financial institutions to
individuals who belong to the low-income or underprivileged sections of the society.
Microfinance can be in the form of loans, insurance, and savings deposits.

It is very helpful to small-sized enterprise owners as well as entrepreneurs with low

capital. There are many people across the world, especially in India, who do not have
access to proper financial assistance. They live in rural areas as well as in urban areas
of India and do not have sufficient knowledge and access to take help from conventional
sources of finance such as banks and investors.

Microfinancing is a great way to help poor individuals to be financially independent.

They can use these funds offered by banks at very low rates of interest to start their
own small venture or to make their other dreams come true. Many of the
underprivileged people in the nation do not have any idea about saving money or
managing their finances. When they acquire microfinance from a reliable institution,
they will get exposure to managing money on their own and also about utilising funds in
a sensible manner.

Microfinance is also offered to people who are interested in purchasing equipment or

vehicles of high value that are required for carrying out their business activities. These
can be tractors for agriculture, machines for manufacturing textiles, trucks for
transportation of the goods created by the small entrepreneurs, etc.

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 DEFINITION OF MICROFINANCING

Microfinancing is typically defined as the process of providing loans, credit, savings, and
other necessary financial services and products to individuals who are extremely poor to
get access to the regular sources of finance such as banks or other financial institutions.

Microfinance is provided to the underprivileged people with the belief that charity or
philanthropy is not the solution to poverty.

FEATURES OF MICROFINANCE

 Microfinance is typically offered to anyone who does not have a stable source of
income due to unemployment. It is also given to those who are involved in contract
labour or who work part-time.

 It is also given to anyone who does not have a proper credit history that can be
verified. Lack of credit history will be mostly due to lack of access to acquire credit.

 There are also some applicants who may have a poor credit history due to high debts.
They may have entered into debt situations due to shortage of funds to repay. They
may also have got into debt troubles due to scams planned by unregistered
moneylenders who tend to take advantage of poor people since they do not have
much financial knowledge.

 Microfinance typically does not require loan applicants to submit any collateral while
applying for the loan. These loans are usually unsecured in nature. Even if a
microfinance institution does ask for a collateral, they are very reasonable. They
understand the financial condition of the applicant.

 Microfinance is also offered to people living below poverty line (BPL) since they do
not have access to other forms of financing.

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 Microfinancing promotes simplified and small savings among poor people. It
encourages them to build their funds step-by-step.

 Microfinancing offers repeat loans to applicants. This helps borrowers repay their loan
promptly as the repayment tenure is very short. Once the small loan is repaid on time,
the applicants will receive their next loan. A repeat loan is always offered to someone
who has already borrowed and shown their capability in repaying it on time.

 Microfinance also intends to assist to individuals in securing good medical treatment

when they have health issues.

 Generally, microfinance institutions approach clients instead of waiting for clients to

approach them. They want impoverished people to be aware that there are
inexpensive forms of financing.

 Microfinance institutions have easy and quick loan application processes.

 The interest rate for microfinance is very low.

 When a micro loan is offered, the lender does not ask the applicant for the purpose of
lending. The loan can be utilised for any purpose.

 Some microfinance options also come with micro insurance. Micro insurance is
offered as it helps the borrower in protecting his or her credit extensively. The micro
insurance facility is very reasonably priced.

 Microfinance aims at developing financial sustainability among economically

downtrodden people.

 Microfinance helps in creating more and more jobs. It enables uneducated people to
be involved in some source of employment instead of staying idle.

 Microfinance institutions aim to eliminate interest rate ceilings as they believe that
these ceilings can restrict poor people from securing finance.

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 Microfinance focuses on offering financial transparency by offering loans to
individuals without any hidden costs or fees or charges.

 Microfinance believes that poor people need a broad set of financial services apart
from just loans. It also holds that these financial services should be simplified, easily
accessible, economical, and flexible in nature. These services include cash transfer
facilities, savings schemes with minimal or zero deposit, and micro insurance.

OBJECTIVES AND GOALS OF MICROFINANCE

 Microfinance primarily works towards making the disadvantaged population self-

determined without having to depend on their relatives or friends for funds.

 It aims to bring a financial change among the poor people with the help of a
community-based approach.

 It intends to organise and conduct simple training programmes for unemployed

people so that they have some means of livelihood.

 Microfinance also intends to assist disabled people who are economically

underprivileged. It aims to help them find some source of employment or artistry so
that they can fend for themselves.

 Microfinance aims to help women of poor families. Institutions that offer microfinance
believe that women are more responsible with money and hence, they have exclusive
microfinance loan options specially designed for women borrowers.

 Microfinance intends to bring gender equality by encouraging women to equally take

part in household decision making, financial decision making, and also earn money
independently by engaging in any form of employment.

 It intends to enhance operations and activities at the grass root level.

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 Microfinance lays emphasis on optimum utilisation of local resources available in
nearby areas and villages in order to minimise transportation costs for bringing
resources, etc.

 Microfinance aims to raise the wages of the underprivileged people so that their lives
can be improved at least a little.

 Microfinance aims at attaining socio-economic development at the most basic level of

the society.

 It serves as a great instrument to eradicate poverty.

 It aims to offer loans, accounts, and other financial services to people without asking
them for collaterals such as a mortgage or any immovable property or guarantors.

ROLE OF MICROFINANCE

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

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

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

household economic welfare and enterprise stability and growth.

3. By supporting women’s economic participation, microfinance empowers women,

thereby promoting gender-equity and improving household well-being.

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

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ACTIVITIES IN MICROFINANCE

Micro credit:

It is a small amount of money loaned to a client by a bank or other institution. Micro

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

Micro savings:

These are deposit services that allow one to save small amounts of money for future
use. Often without minimum balance requirements, these savings accounts allow
households to save in order to meet unexpected expenses and plan for future expenses
Micro insurance: It is a system by which people, businesses and other organizations
make a payment to share risk. Access to insurance enables entrepreneurs to
concentrate more on developing their businesses while mitigating other risks affecting
property, health or the ability to work.

Remittances:

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

Product Design:

The starting point is: how do MFIs decide what product s to offer? The actual loan
products need to be designed according to the demand of the target market. Besides
the important question of what risks to cover, organizations also have to decide whether
they want to bundle many different benefits into one basket policy, or whether it is more
appropriate to keep the product simple. For marketing purposes, MFI‘s sometimes
prefer the basket cover, since it can make the policies sound comprehensive, but is that
the right approach for the low-income market? After picking products, one must also
understand how they are priced. What assumptions do the organizations make with

12
regard to operating costs, risk premiums, and reinsurance, and how did they come to
those conclusions? Would their clients be willing to pay more for greater benefits? From
price, the logical next set of questions involves efficiency. Indeed, given the relative high
costs of delivering large volumes of small policies, maximizing efficiency is a critical
strategy to ensuring that the products are affordable to the low-income market. One way
is to make the products mandatory, which increases volumes, reduces transaction costs
and minimizes adverse selection. What does an organization lose by offering mandatory
insurance, and how does it overcome the disadvantages? MFI‘s can combine a
mandatory product with some voluntary features to make the service more us to mar-
oriented while.

Techniques of Product Design:

To design a loan product to meet borrower needs it is important to understand the cash
pattern of the borrowers. Cash pattern is important so far as they affect the debt
capacity of the borrowers. Lenders must ensure that borrowers have sufficient cash
inflow to cover loan payments when they are due efficiency depends less on the
delivery model than on the simplicity of the product or product menu. Simple products
work best because they are easier to administer and easier for clients to understand.
Another efficiency strategy is to use technology to reduce paperwork, manual
processing and errors.

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DIFFERENCE BETWEEN MICROCREDIT AND
MICROFINANCE

MICROCREDIT

 Microcredit is the small credit facility provided to the needy people whose earning
capacity is very less. The loan is provided to the borrowers who are unemployed,
lacking collateral and whose credit history is not sound.
 The loan is mainly granted to help people earn their livelihood, especially, women
who can start their business and become independent.

 Microcredit not only increases the income level of the poor people but also raise
their standard of living and provides the financial assistance to the poor class of
people in rural areas to help them become self-employed rather than depending
on loan sharks for raising finance who charge inflated interest rates.

 The best thing about microcredit is that the loan does not require any asset as
collateral. The loan is granted for a short period only.

MICROFINANCE

 Microfinance is a broad spectrum of financial services provided to the people of

low-income groups who cannot take bank’s assistance banking and allied
services. The service is available to extremely poor people, no matter where they
live.

 The purpose of Microfinance Company Registration is to raise the earnings of

low-class people and let them access to deposits and loans. The clients may
include women, farmers, and pensioners.

 Microfinance plays a revolutionary role in any country’s economy. It helps the

poor people to fulfil their basic needs and safeguard them from any risks. It

14
 raises the per capita income. It encourages women empowerment by providing
term economic assistance and hence promotes gender equality.

 Micro-finance institutions not only provide capital to the start-ups or small

businessman but also deliver such financial services to the poor people who are
constantly avoided by the formal financial sector.

Sr.
Microcredit Microfinance
No.

Microfinance refers to the number of

Microcredit is the small loan facility
financial services provided to the small
provided to the people with less earning,
1. entrepreneurs and enterprises who
to motivate them to become self-
cannot take shelter of banks for
employed.
banking and other services.

Microcredit alludes to a small loan

Microfinance means the broad
provided, at a low-interest rate, to the
spectrum of financial services such as
persons of below poverty line to make
2. loans, insurance, savings, etc.
them self-employed, i.e., to help the
provided to the people of low-income
small entrepreneurs start their own
groups.
business.

Micro-finance includes credit activities

3. Micro-credit includes credit activities and non-credit activities like savings,
pension, insurance, etc.

Microcredits are small size loans with
shorter repayment periods. They are
4.
granted for small-scale activities which
direct to serve local needs.
Microfinance services help to low-
income individuals and start-up in
developing countries to start running a
small business, increase assets,

15
 diminish risk, raise productivity,
increase return on investments,
increase incomes, improve access to
education and eventually increase the
welfare.

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 CHAPTER-3

ORIGIN OF MICROFINANCE IN INDIA

Microfinance has been quite a popular and effective mode of financing in the Indian
subcontinent. From an early period, people in India used to be involved in lending and
credit operations through individual money lending, chit funds, and other indigenous
financial institutions. All these modes practiced the system of microfinance very
successfully.

The modern and systematic method of offering microfinance or microcredit to

individuals started in the 1970s in India.

It chiefly originated when the Grameen Bank was started by Professor Mohammed
Yunus in the year 1976 in Bangladesh. It was a pilot project of having a unique lending
system where micro loans are offered to the disadvantaged sections of the society,
especially the rural poor. This programme was launched to introduce the concept of
financial services to the rural poor who never had access to any form of credit.

This iconic event led to the conversion of the project into an autonomous bank. This
was done through a government legislation and it came to be known as Grameen Bank.
The bank has assisted several poor people in both Bangladesh and India to be
financially secure and to improve their financial conditions. This even resulted in the
creation of a ‘Grameen model’ which is used by many financial institutions and banks to
offer affordable loans to the poor.

There was also Self-Employed Women's Association (SEWA) that was started by Ela
Bhatt. This organisation was unique in its own way. It was an all-women’s bank. It is the
first microfinance bank in the country. It was set up in Ahmedabad, Gujarat in the year

17
1972. It was set up to help women of low-income groups to earn the rights that they are
entitled to. It works towards making women independent by offering them the right funds
at the right time to help them be self-employed. The institution also offers first-class
training to women to help them specialise in handicrafts and other forms of artistry.

India also saw the establishment of National Bank for Agriculture and Rural
Development (NABARD) which is exclusively committed to offering inexpensive modes
of credit and bank accounts to the people living in rural areas. These people are mainly
engaged in agriculture and other artistry activities in the country. The bank observed
many unique banking models in order to offer high-quality and affordable financial
solutions to the unbanked people. The bank also focused on including women by
encouraging them to open bank accounts in their names and taking small loans to meet
their requirements. The bank also promoted rural people to be involved in alternative
activities apart from agriculture in order to earn additional income.

The Regional Rural Banks (RRBs) were launched in 1975-76. These banks were
established to have banking operations in the rural areas and semi-urban areas of the
various states of the country. Some of the regional rural banks are also set up in urban
areas where they offer banking services to the poor people of the society.

There is also the Micro Finance Institution (MFI) that was set up in India in the year
1974. The operations of the institution started to pick up only in the 1990s.

All these institutions had a common objective and that was to provide financial
assistance to the unbanked people of the society. They worked on setting up many
bank branches in the most remote areas of the country. They mainly focuses on
empowering the disadvantaged sections of the society.

Until the banks in India were nationalised in the year 1969, co-operative banks were the
only banks that provided small loans to the economically underprivileged sections of the
society. Small borrowers did not have any other source of financial assistance. Loan
applicants had to furnish some form of security to the bank those days. They also had to
make arrangements for a guarantor in order to apply for a loan. The chief objective of

18
banking was profit, which is still prevalent in today’s commercial banks. Institutions
offering microfinance started to emerge and began to change this profit-oriented
banking scenario. Nationalisation of banks also changed the old banking setup and
started to build branches in different rural parts of the nation.

Microfinance institutions also enhanced the condition of self-help groups. More and
more self-help groups were created by impoverished people with the objective of
making them financially self-sufficient. With these groups, the members did not have to
go begging rich moneylender who mainly lent money solely to make profits. They also
did not have to depend on others to get any form of employment. They created their
own small venture by coming together by honing their skills.

HISTORY OF MODERN MICROFINANCE

In the late 1970s the concept of microfinance had evolved. Although, microfinance have
a long history from the beginning of the 20th century we will concentrate mainly on the
period after 1960.Many credit groups have been operating in many countries for several
years, for example, the "chit funds" (India), tontines" (West Africa), "susus" (Ghana),
"pasanaku" (Bolivia) etc. Besides, many formal saving and credit institutions have been
working for a long time throughout the world. During the early and mid 1990s various
credit institutions had been formed in Europe by some organized poor people from both
the rural and urban areas. These institutions were named Credit Unions, People's Bank
etc. The main aim of these institutions was to provide easy access to credit to the poor
people who were neglected by the big financial institutions and banks. In the early
1970s, few experimental programs had started in Bangladesh, Brazil and some
other countries. The poor people had been given some small loans to invest in micro-
business. This kind of micro credit was given on the basis of solidarity group lending,
that is, each and every member of that group guaranteed the repayment of the loan of
all the members. Many banks and financial institutions have been pioneering the
microfinance program after 1970. These are listed below:

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ACCION INTERNATIONAL

This institution had been established by a law student of Latin America to help the poor
people residing in the rural and urban areas of the Latin American countries. Today, in
2008, it is one of the most important microfinance institutions of the world. Its network of
lending partner comprises not only Latin America but also US and Africa.

SEWA BANK

In 1973, the Self Employed Women's Association (SEWA) of Gujarat (in India) formed a
bank, named as Mahila SEWA Cooperative Bank, to access certain financial services
easily. Almost 4thousand women contributed their share capital to form the bank. Today
the number of the SEWA Bank's active client is more than 30,000.

GRAMEEN BANK

Credit unions and lending cooperatives have been around hundreds of years. However,
the pioneering of modern microfinance is often credited to Dr. Mohammad Yunus, who
began experimenting with lending to poor women in the village of Jobra, Bangladesh
during his tenure as a professor of economics at Chittagong University in the 1970s. He
would go on to found Grameen Bank in 1983 and win the Nobel Peace Prize in 2006.
Since then, innovation in microfinance has continued and providers of financial services
to the poor continue to evolve. Today, the World Bank estimates that about 160 million
people in developing countries are served by microfinance. Grameen Bank
(Bangladesh) was formed by the Nobel Peace Prize (2006) winner Dr. Muhammad
Younus in 1983. This bank is now serving almost 400, 0000 poor people of Bangladesh.
Not only that, but also the success of Grameen Bank has stimulated the formation of
other several microfinance institutions like, ASA, BRAC and PROSHIKA.

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 CHAPTER-4

MICROFINANCE IN INDIA

HOW DOES MICROFINANCE WORK IN INDIA?

Both banks and non-banking financial corporations (NBFCs) offer microfinance in India.
There are also microfinance institutions in the country that are exclusively dedicated to
offering microfinance to people. Microfinance institutions aim at getting people out of
poverty and improving poor people’s financial conditions. Microfinance institutions target
poor people who are unemployed, who are or want to be entrepreneurs, and who are
into farming.

Microfinance is usually procured by loan applicants through 3 modules and they include:

 Through banks, non-banking financial corporations, and microfinance institutions.

 By establishing good relations with banks or other financial institutions.

 By getting together as a group with a common goal of obtaining finance to create and
develop new small business ventures or to make a living.

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 LIST OF MICROFINANCE INSTITUTIONS IN INDIA

In our country, there are a number of institutions that offer microfinance exclusively. We
will take a look at only a few select microfinance institutions in the country:

1. Annapurna Microfinance Pvt Ltd

2. BSS Microfinance Pvt Ltd

3. Asirvad Microfinance Pvt Ltd

4. Disha Microfin Pvt Ltd

5. Fusion Microfinance Pvt Ltd

6. Arohan Financial Services Pvt Ltd

7. Cashpor Micro Credit

8. Grama Vidiyal Micro Finance Ltd

9. ESAF Microfinance and Investments Pvt Ltd

10. Equitas Microfinance Pvt Ltd

11. Madura Micro Finance Ltd

12. Satin Creditcare Network Ltd

13. S.M.I.L.E Microfinance Ltd

14. Grameen Financial Services Pvt Ltd

15. Janalakshmi Financial Services Pvt Ltd

16. SKS Microfinance Ltd

17. ASA International India Pvt Ltd

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18. Sonata Finance Pvt Ltd

19. Shree Kshetra Dharmasthala Rural Development Project

20. RGVN (North East) Microfinance Limited

21. Swadhaar Fin Serve Pvt Ltd

22. Belstar Investment & Finance Pvt Ltd

23. Suryoday Micro Finance Pvt Ltd

24. SV Credit line Pvt Ltd

25. Future Financial Services Ltd

26. Ujjivan Financial Services Pvt Ltd

27. Utkarsh Micro Finance Pvt Ltd

28. Adhikar Microfinance Pvt Ltd

29. Uttrayan Financial Services Pvt Ltd

30. Chaitanya India Fin Credit Pvt Ltd

31. Indian Cooperative Network for Women Ltd

32. Growing Opportunity Finance (India) Pvt Ltd

33. M Power Micro Finance Pvt Ltd

34. Rashtriya Seva Samithi

35. IDF Financial Services Pvt Ltd

36. Mahasemam Trust

37. Pahal Financial Services Pvt Ltd

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38. Humana People to People India

39. Sahara Utsarga Welfare Society

40. Margdarshak Financial Services Ltd

41. Saija Finance Pvt Ltd

42. Samhita Community Development Services

43. Vedika Credit Capital Ltd

44. Sahayog Microfinance Ltd

45. Shikhar Microfinance Pvt Ltd

46. YVU Financial Services Pvt Ltd

47. Sanghamitra Rural Financial Services

48. Village Financial Services Pvt Ltd

49. Sarala Women Welfare Society

NEED OF MICROFINANCE IN INDIA

When an individual belonging to an underprivileged section of the society borrows

microfinance from a bank or an NBFC, he or she can make use of the funds for being
financially independent. It can help the borrower to be involved in a variety of activities
that he or she could not have done without the microfinancing.

Many poor adults in the country may not have had sufficient funds during the early
stages of their lives to be educated. Hence, they tend to miss out on the various
employment options that are offered to educated people. Therefore, many of them
remain unemployed.

24
There is another category of poor adults who are not educated, but are involved in
unskilled labour. Unskilled labour refers to working in the segment that requires limited
skills and that offers low wages to the labourers. Unskilled labourers have limited
qualification such as high school or diploma or no qualification. Unskilled labour can
include construction work, domestic help, security work, laundry, etc.

There is also a category of individuals who live in rural areas and semi-urban areas who
are dedicated to farming. They are agriculturists and many of them earn very low
incomes. Many of these farmers do not earn enough money for the hard work they put
in. They do not have adequate funds to buy a land for sowing crops. They have to rely
on rich landlords for renting land and they are forced to pay the little money that they
make, to the landlords.

There are also many people who are originally from rural India who move to urban
areas for alternative sources of employment apart from agriculture. They get into fields
such as cooking, construction, restaurants, housekeeping, etc. and earn low incomes.

HOW DOES MICROFINANCE HELPS BORROWERS IN INDIA?

There are many impoverished people in the country who do not have any knowledge
about alternative sources of finance apart from conventional bank loans. They also do
not know that they can engage in other sources of employment to earn a livelihood.
However, they do have the need for funds in order to meet their essential necessities.
With the help of microfinance, they can learn to procure inexpensive forms of credit for a
short period and also learn to manage their expenses efficiently. They will understand
how to allocate money for different purposes and save a particular amount for
emergencies. They can also save money to utilise it for other big purposes.

Microfinance will teach a less fortunate person to slowly get out of his or her economic
situation. A few poor people may also be in high-debt situations due to previous credit.

25
Microfinance can help them tackle previous debts proficiently as they will learn to
manage their finances.

Microfinance has succeeded in making poor people and poor enterprises sustainable
and strong by providing them with funds, training, production skills, access to market
platforms, insurance, innovation, technology, and equipment. They aim to continue to
work with the same goals by using advanced techniques and newer ideas.

MICROFINANCE FOR FARMERS

There are exclusive microfinance loans that are provided to marginal farmers who need
funds for enhancing their productivity of crops. This can be done when they invest in
superior quality fertilisers, excellent farming tools, quality check processes, marketing of
their crops, packaging of their output, transportation of their output, storage of their
output in safe and hygienic warehouses, and proper sales techniques in order to secure
the profits that they are entitled to after putting in so much effort for several months.

Many farmers in India do not have sufficient funds or knowledge to invest in these
aspects of farming. Microfinance loans aim to guide farmers by providing them with
accurate information and funds required to enhance their output.

MICROFINANCE OPTIONS FOR WOMEN

There are many households that have irresponsible male members who do not
contribute towards saving money for the family. They tend to use money senselessly on
things that are absolutely not required. Many of them spend money on alcohol,
gambling, tobacco, etc. without keeping in mind about other expenditures. In such
households, the female members are more responsible with money. They are very
careful with the little money that they earn and spend it very judiciously. They make sure
that the money is not within the reach of the men of the house.

26
Keeping this in mind, there are many banks, NBFCs, and microfinance institutions that
extend microfinance exclusively to women in India. These women borrowers treat
microfinance as their saviour and utilise the funds very sensibly.

These microfinance options for women also help in empowering women. There are
many households where the men do not permit women to handle money. They expect
women to only take care of domestic chores. However, the truth is that many women in
several households have proved to be more financially responsible when compared to
men. They do not waste money on unnecessary purposes.

Women also make sure that their children attend school sincerely without dropping out
of school. When these women take microfinance for their various needs, they will
ensure that the funds are utilised for a good purpose. They will ensure that their kids go
to school, and this, in turn, will help brighten the future of the society.

One thing is for sure that women will repay their micro finance loans on time. Each
installment of the loan will be paid promptly without any delay. This is a great relief for
microfinance lenders. Microfinance loans can be repaid through equated monthly
installments (EMIs) promptly. Moreover, women will make well-planned decisions for
the household.

There are many self-help groups in Indian rural places that are made by women for
women. Only women manage these groups and help each other in starting new low-
cost business ventures such as handicraft ventures, horticultural ventures, artistry,
pickle business ventures, paintings, trinket making activities, and many other business
activities that they are good at doing. Since many of them are naturally talented at
developing these creations at low costs, they can produce them on a large scale and
sell them on various platforms and make profits gradually. The capital for these small
business ventures can be generated from microfinance options. The borrower can
repay the funds on a monthly basis through installments.

Most importantly, microfinance helps in job creation for women. In most regions of the
country, women are forced to be unemployed and are not allowed to step out of their

27
homes. They are restricted to the limits of their house. With the generation of
microfinance, women are given an opportunity to showcase their entrepreneurial skills
and management abilities. Microfinance also brings women together and encourages
them to work as a team to achieve the ultimate goal of being independent. They do not
have to rely on men for money or for other aspects. They also do not have to wait for
the approval of the male member in the house.

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 CHAPTER-5

MICROFINANCE MODELS IN INDIA

India has a number of institutions that offer microfinance exclusively. Each institution
uses a particular model or a blend of different models in order to provide microfinance to
applicants. These microfinance institutions have embraced both conventional and
advanced ideas of lending in order to distribute credit evenly in the society without
uneven accumulation of credit among the rich people. There are many microfinance
models in the country and this could be because of the high number of social and
cultural groups, the large geographical size of the nation, the presence of multiple
economic classes, and a solid existence of non-governmental organisations that are
dedicated to uplifting the socio-economic condition of the disadvantaged people of the
country.

The main six categories of microfinance models that are followed in India include:

1. Self-help group model

A self-help group (SHG) is described as a group of 5 to 20 individuals who belong to the

low-income class. Each group member typically contributes funds from their own
savings and then this money is pooled in together. These funds are then utilised to
support their common goal of improving their lifestyles and to make themselves
financially secure.

They can use this money to obtain training to create superior-quality products. They
receive training not only to make products, they also get trained on how to market,
promote, and sell their products. Many of the poor people are not aware of how to reach

29
out to customers. Some of them may not know how to assess their creation and fix an
appropriate price for their product. Hence, many of them may fail to make profits when
they sell products without proper knowledge. Being a part of a self-help group will give
them proper awareness about how to make a product, price it, package it, promote it,
market it, and sell it to the end-customer efficiently.

In the self-help group model for microfinance, the members of the group are
encouraged to meet on a regular basis to discuss their savings, new developments, and
credit operations. The members can also plan future activities for achieving their big
goals step by step.

2. Grameen model

The Grameen model to distribute microfinance originated in Bangladesh. After seeing

the success of the model in Bangladesh, many institutions in India started to adopt it by
making some adjustments. A few of the institutions that acquired the principles of the
Grameen model are CASHPOR Financial and Technical Services Limited, SHARE
Microfinance Limited, Activists for Social Alternatives (ASA).

This particular model believes in providing a mandatory training course to the group
members for at least 7 days. The model will offer microfinance to an applicant without
asking for any collateral at low costs. The loan application process has minimum or zero
paperwork and is processed very quickly keeping in mind the urgency for funds.

Some groups that apply the Grameen model have a Group Recognition Test (GRT) that
refers to a screening process to divide group members into serious and non-serious
groups. Every member must compulsorily save some money every week. This model is
very particular about group discipline. This is generally achieved with the help of peer
pressure. Each group member motivates the other to be very careful with the money

30
that they borrow from their lender. Under this model, a loan typically ranges from
Rs.4,000 to Rs.10,000.

3. Co-operative credit union model

These organisations apply the co-operative model to offer microfinance in rural areas.
The Cooperative Development Forum (CDF), Hyderabad has applied the co-operative
credit union model successfully by giving primary importance to savings. The main
entities in the CDF are women’s or men’s thrift co-operatives (WTCs and MTCs). They
have small groups of individuals wherein each group has a particular leader who heads
group meetings, accumulates the savings of each group member, and looks into the
repayment of loans. The group leader is responsible for making sure all small loans are
repaid promptly by each member.

The Cooperative Development Forum (CDF), Hyderabad began functioning with units of
small size. Soon, they started to create larger units in order to increase the impact. The
CDF encourages members to focus more on their thrift cooperatives instead of the
group goals. Each group’s size can differ. This will depend on the group leader’s ability
and the leader will be appointed according to the votes of group members.

4. Federated self-help groups (SHGs) or SHG Federation model

A normal self-help group (SHG) is typically consistent of a few members with the aim of
making each member self-sufficient with adequate funds and high-quality equipment to
produce first-class output. It is usually small in size. Due to the success of these groups,
there was a need for a large-scale self-help group. This led to the establishment of
federated self-help groups. A federated self-help group refers to a large scale self-help
group with a large number of members. It is a federation of multiple self-help groups. A
federation of self-help groups will have around 1000 to 2000 members whereas a single
self-help group will have only up to 20 members.

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A federated self-help group model has a very interesting arrangement where there are 3
levels. The main and basic level is the self-help group. The middle level in this
arrangement is a cluster. The highest unit in this arrangement is a top body that
indicates the complete self-help group.

Since a federated self-help group is big in nature, at the cluster level, 2 members of
every self-help group will serve as representatives of that particular group. These
representatives will be required to get together on a frequent basis in order to update
statuses of the group. They will need to discuss funds, utilisation of funds, production,
changes in plans and schedules, etc. This cluster level is also responsible for providing
details and updates about the entire self-help group to the top body. If there are any
updates from the top body or apex body, then the cluster will communicate it to the
group.

The cluster level serves as a form of intermediary between the whole group and the
apex body. Leaders of these clusters are required to have excellent monitoring and
team building skills. They need to check the status of the group’s operations on a
regular basis. The daily and weekly productivity of each team will be checked and
feedback and support will be provided by the cluster leaders to the group members.
This cluster level in the federated self-help group model helps in making the entire
system decentralised.

Decentralisation is very effective and helpful as each member is responsible for his or
her duties. Also, there is no sense of unfair hierarchy in the system. Each person is
given an opportunity to showcase his or her skills. Moreover, every member has the
right to offer ideas for the development of his or her self-help group. The microfinance
funds allocated for such a model will help in the distribution of funds in an even manner.
There will be no scope for misappropriation or misuse of funds. Each member will make
sure that the money is used for the overall development of the self-help group.

32
The apex body or the executive body in a federated self-help group has an important
responsibility of being the intermediary between the entire self-help group and the non-
government organisation (NGO) or any other organisation that is committed to assisting
the group in carrying out its activities. This apex body will have around 10 to 15
members.

The best part about federations of self-help groups is that these groups also help certain
NGOs as there are many NGOs in our country that have fewer funds and resources but
that aim at reaching out to the less fortunate masses of the society. These federations
of self-help groups assist these NGOs to bring a change to the society effectively even
though they do not have adequate resources.

Some of the organisations in the nation that apply the federated self-help group model
include Chaitanya, PRADAN, Dhan Foundation, SEWA, and lots more. These federated
self-help groups have the competency to handle the constraints experienced by single
self-help groups. Most of these federations are incorporated under the Societies
Registration Act.

These federated self-help groups enable members to apply for bigger loan amounts.
Moreover, these groups assist members to save more money efficiently. Due to the
large scale at which these groups function, they have the ability to offer additional
financial services to members such as micro insurance.

Micro insurance for microfinance is extremely necessary and helpful. It protects the
borrower’s funds against damage, loss, or any other troubles. When there is micro
insurance, the borrower need not worry about its security. When one takes a loan,
especially a micro loan, he or she will need to be very careful and ensure that it is safe
and secure. One needs to understand that a micro loan is offered to the less fortunate
sections of the society. In such a case, when the funds are stolen or lost or misplaced, it
is very tough for the borrower to get a loan again. He or she will also have difficulty in
recovering the lost funds.

33
With a micro insurance policy which is offered at very low premium rates, the borrower
can have a peace of mind without worrying about the safety of the funds. Even if
something unfortunate happens with the microfinance borrowed from a federation of
self-help groups, then this micro insurance cover will take care of everything. The
unforeseen losses and costs will be compensated and reimbursed by the micro
insurance policy at an affordable price.

A federation of self-help groups also takes care of something very important, which is
the prevention of idle funds. Many small self-help groups sometimes face the issue of
having too many idle funds or even insufficient amount of funds. With a federated self-
help group, there is no scope for the formation of idle funds. They use well-planned
techniques to direct the flow of money accurately. When there is a proper flow of funds,
there will not be any chance for the creation of idle funds. These federations always
work to make sure that the demand for micro loans is lesser than the actual supply of
funds that is obtainable. In single self-help groups, demand for credit is more when
compared to the availability of funds. A federation of self-help groups works towards
maximising the distribution of local capital in order to gain maximum returns on this
capital.

Federations of self-help groups also assist individual self-help groups in recovering

loans proficiently. They also encourage and promote new or upcoming self-help groups.
They function in a very flexible and relaxed manner. They promote financial as well as
non-financial exchanges between different groups. They encourage collaboration of
various groups in order to achieve goals together. They also help other self-help groups
in establishing and sustaining relations with agencies and NGOs.

These federations encourage self-help group members to save money in different ways.
The federations recommend multiple savings methods to members so that they can
make savings with the help of the group and also through other modes. A few of these
federations have designed certain savings schemes that allow members to deposit their

34
money and earn savings over a particular period. They also attract funds from external
sources and lend them to members.

5. Rotating Savings and Credit Associations (ROSCAs) model

Under this model, funds are offered to groups of individuals through unconventional
means. The members of such associations include individuals who have certain
common features such as ethnicity, community, language, professions, occupations,
etc. These members contribute funds on a regular basis and utilise them for attaining a
common goal.

The whole model works according to a systematic way where every member receives
funds within a particular time frame and he or she is required to repay it before the
deadline. After this member, another member will start the whole micro loan process. It
functions in the form of a cycle. Unless one member completes the repayment cycle on
time, a new member cannot procure a loan. Hence, with the help of peer pressure and
efficient monitoring skills from the association’s leaders, each member will make sure
that the loan is repaid promptly without any delay. Due to fear if the loan cycle will stop
because of any one person, every member ensures that each loan is repaid on time.

Chit fund companies in India carry out their lending operations just like ROSCAs. They
encourage the underprivileged people of the society to save money and accumulate
lump sums for the purpose of purchasing high-value products. A chit fund scheme will
have a fixed tenure and a fixed value. Every member will be required to pool in money
on a monthly basis and this will be utilised for the goals of a company. These ROSCAs
or chit fund models help in eliminating the gap between different sections of the society
that is present due to conventional banking ways.

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6. Microfinance companies

In India, microfinance companies can be registered as a non-banking financial company

(NBFC) under Companies Act or Reserve Bank of India (RBI). An NBFC engages in
accumulating funds and using them for offering credit and other financial services to
other people. An NBFC generally provides personal loans, car loans, two-wheeler
loans, crop loans, agricultural loans, and lots more. Non-banking financial companies
can offer both regular loans as well as micro loans to the less fortunate people of the
society. These NBFCs can be regulated by the Reserve Bank of India (RBI) or the
Companies Act.

Microfinance companies function as separate legal entities that offer microfinance to the
needy. Nowadays, microfinance companies are not seen as organisations that are only
involved in social service. They are seen as proper business entities that work towards
offering concrete financial solutions to the impoverished people of the society. These
companies hold that the poor people do not need charity but ways to be financially
independent. They are committed to improving the socio-economic situation of the poor
individuals of the society.

Microfinance companies can be non-profit organisations, profit organisations, or mutual

benefit institutions. Non-profit organisations work solely for empowering the needy by
concentrating on their economic and societal conditions. Profit organisations work by
registering themselves as an investment trust, an association of persons, or a company
that will be a bank or an NBFC. Mutual benefit institutions function for the purpose of
helping only its members.

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 CHAPTER-6

GROWING MICROFINANCE IN INDIA

In India there is much talk about the growth of microfinance possibly causing a repeat of
the 2010 crisis, when the sector grew fast and there were allegations that multiple
lending led to the overleveraging of clients. Having largely recovered from the 2010
crisis, the growth of microfinance today creates a new set of challenges. The findings of
the recently released Inclusive Finance India Report 2016 suggest that these
challenges should be addressed soon.

Growth of debt is concentrated in a few client segments

There is a consensus based on interviews conducted for the report that the growth of
microfinance is aggressive, putting strain on the credit officers. The data on regulated
microfinance institutions (MFIs) that submitted their numbers to the Network indicates
that over the past year, loan portfolios grew by 84 percent and loan disbursements grew
45 percent. In comparison, consider these numbers:

 22 percent growth in branches

 38 percent growth in staff strength
 44 percent growth in number of clients
 45 percent growth in number of loans

37
Together, these numbers indicate that the loan portfolio grew at a substantially higher
rate than branches, employees or clients. This means more debt within the same client
segments, leading to overleveraging, which could end up in a large-scale default.

Graph showing growth of microfinance loan portfolio in India. Source: Inclusive

Finance India Report 2016.

Growth of loans is heavily concentrated in a few MFIs, and staff load is increasing

In addition, 22 of 71 registered MFIs have a portfolio of more than $73 million, and
these represent 90 percent of the sector on all parameters. The typical employee at one
of these providers is possibly managing more clients with larger loans, which leads to a
larger concern about the quality of the growing portfolio.

38
How could these challenges play out?

Compared to 2010, there are better customer protection measures in place: caps on
loan size, repayment frequency, tenor, margins and lending rates. Also, the MFIs report
loans to credit bureaus and use credit reports in disbursement decisions. Due to MFIs’
aggressive growth targets, however, growth is being pushed in areas with limited debt
absorption capacity. These include areas with limited credit off-take, little urbanisation,
thin diversification in non-farm activities, and no robust banking system.

As the figures above show, India is seeing a concentration of loan portfolios across a
modestly expanding branch network and rising loan amounts. All of this suggests some
serious pockets of concentration risks for MFIs. The data point to three possible
scenarios:

 Stress in a given MFI because of excessive growth. If large defaults are in a

single MFI, the contagion could be managed. If the MFI is systemically important
and its products are difficult to differentiate, then the problem might spread to
other MFIs.

 Stress in isolated geographies. In 2006, there were isolated incidents of

default and stress in Kolar, Krishna and Nizamabad districts. They were brought
under control, but they were precursors of the 2010 crisis. Any instance of
regionally focused stress events should ring alarm bells.

 Stress in a geographical area spreads with a domino effect. Uttar Pradesh

province, which is seeing aggressive growth and anecdotal reports of stress, will
have elections soon. Any stress-induced crisis there would likely have wider
consequences.

39
Worry, but don’t panic

While there are worries, there might not be cause for panic. For instance, Bengaluru
district has the highest portfolio, but as it subsumes the large city of Bengaluru, there
are opportunities to lend for diversified livelihoods. Stress represents the ability to cope
and changes contextually. The loan size of $400 in Bengaluru is easier to absorb than
in remote areas.

A paper issued by Microfinance Institutions Network flagged issues that are causing
stress:

 Ambitious targets for field staff in areas of over penetration and concentration
 Undue influence exerted by members and leaders due to excessive reliance on
them
 Inadequate time spent by MFI staff on compulsory group training
 Proxy and ghost clients

India’s newspapers report debt stress from eastern Uttar Pradesh, Madhya Pradesh,
Chhattisgarh and Jharkhand provinces. Interestingly, these reports do not match the list
of districts that have the largest MFI exposure, suggesting that concentration may be in
areas with greater capacity to absorb debt. For example, the district of Azamgarh in
Uttar Pradesh was featured as a debt stress area in news articles but does not feature
in the top 100 districts in terms of concentration. However, the district has reported
incidents that are flagged by the Microfinance Institutions Network. These anecdotal
incidents, plus instances such as suicides or attempted suicides due to indebtedness
and coercive recovery practices, obstruction by ring leaders, mass default, or the
closure of branches by government officials, could snowball into a crisis.

A crisis could be averted if the MFI sector investigates such instances and takes
measures to prevent them from spreading. MFIs, in particular, should be concerned
about reputational risk. For instance, the data in the Inclusive Finance India Report
2016 is only from regulated MFIs; however, self-help group programs exist alongside
providers regulated by the state law (co-ops, nidhis, chitfunds). Some providers pretend

40
to be mainstream but are unincorporated. Any negative news about them is also going
to affect the regulated MFIs, so it is important for regulated MFIs to demonstrate
superior practices that differentiate themselves from the others.

Do MFIs have manageable default levels in spite of the overall stress in the banking
sector, continuous droughts across the country, and now demonetisation? The
microfinance sector is having a dream run: great valuations, two successful IPOs and
eight new small finance banks. Is this euphoria going to last?

The microfinance sector should now be careful and pause to ensure that it does.
Slowing down, pausing, and taking stock of the negatives is important. Otherwise, they
could have a far-reaching effect.

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 CHAPTER-7

CHALLENGES AND ISSUES OF MICROFINANCE IN INDIA

Poverty, a raging economic issue, exists in most of the developing countries. The actual
reason for severe poverty lies in the inequality in income distribution, which is chronic in
developing countries, especially in India. Agricultural sector still plays a major role in
Indian economy, despite the remarkable progress made in the service and
manufacturing sector in last two decades. According to Census 2011, still 50% of the
Indian population depend on agriculture and allied activities and approximately 69% of
India’s population is in rural areas. This population has been largely deprived of formal
financial services leading to lackluster performance of the agricultural sector (Karthik,
2017). For this reason the concept of microfinance was introduced. The main aim of
introducing Indian microfinance industry was financial inclusion of poorer and backward
section of the society.

In the previous articles it was reviewed how micro finance is important for rural
India, especially women. The growth of Indian microfinance industry has been
remarkable. In addition support of National Bank for Agriculture and Rural Development
(NABARD) to link banking system with the self-help groups led to further success in the
sphere of micro finance in India. But compared to the roaring success of commercial
banks, micro finance institutions have a long way to go. They lag behind in terms of

42
structural, operational, and financial processes. In this article the challenges faced by
Indian microfinance industry which restrain it from achieving their full benefits, are
reviewed.

Financial Struggles of the Poor People in India

All the above-mentioned low-income individuals struggle to meet even the basic
necessities to lead a life. They have very limited funds to get access to food, clothing,
shelter, and proper healthcare facilities. Many of them are unable to send their children
to school even for basic education.

Many of these people also cannot open bank accounts or apply for traditional loan
options as they generally do not meet the minimum eligibility criteria. Banks have
specific eligibility criteria where loan applicants or prospective depositors need to meet
minimum income, age, and employment requirements. They also need to furnish
relevant documents as proofs of identity that are issued by the central government.
Many of these underprivileged people may not have any identity proof, which is again
due to lack of access or lack of knowledge regarding the importance of government-
sanctioned documents. This is where microfinance comes into the picture.

Microcredit or microfinance is offered to people keeping in mind about these above-

mentioned requirements for regular bank loans. You can acquire small or micro loans at
economical interest rates. Microfinance institutions chiefly work to help people who
cannot acquire loans from normal banks. Hence, they make sure that loans are
provided to the applicants at very low rates. They ensure that microfinance loan
expenses are very minimal.

The purpose of microfinance is to assist low-income people who have the enthusiasm to
make their lives better. It provides the right amount of capital to low-income people to
start a new small business activity or to finance their child’s education or to buy a small
piece of land for carrying out agricultural operations. Microfinance not only supports an

43
individual in starting something new to earn better, it also helps in sustaining their
income to have a decent standard of living throughout their life.

Major challenges faced by Indian microfinance industry

As this sector mainly deals with the poorer section of the country, over-indebtedness is
a common and serious challenge. Some of the other challenges are:

 High rates of interest,

 Over-dependence on the banking system,
 Illiteracy and lack of awareness about the products.

Over-indebtedness due to multiple borrowings and inefficient risk management

Microfinance institutions (MFI) provide financial services to the poorer section of the
society in order to improve their standard of living. Therefore over-indebtedness is major
issue. Lack of risk management framework and multiple borrowings by most clients led
to micro-finance crisis in India in 2008. In some cases, it has been seen that there is no
apex control over the MFIs’. This sector gives loans without collateral which increases
the risk of bad debts. Moreover the fast paced growth of the sector has not been met
with proper infrastructure planning. This kind of problems has been reported in states
like Andhra Pradesh, Karnataka, and Madhya Pradesh (Singh, 2016). Over
indebtedness is a cause of concern for MFIs’ as it negatively affects their portfolio. It
also makes them vulnerable to credit risk and increases the cost of monitoring (Schicks
2013).

High rates of interest as compared to mainstream banks

MFIs’ when compared to commercial banks do not enjoy the same rate of financial
success. One of the reason is that while banking system is centuries old, micro finance

44
is only a few decades old in India (Pathneja, Narwal and Kumar, 2015). MFIs’ charge a
very high rate of interest (12-30%) as compared to commercial banks (8-12%).
Recently, the RBI (India’s regulatory bank) announced the removal of upper limit of 26%
interest on MFI loans (ET, 2014). This has benefited the industry’s players but left the
customers in a worse situation than before. Due to the issues of over-indebtedness
caused by the charging of high interest rate, rate of suicide of farmers increased in
states like Andhra Pradesh and Maharashtra

Over-dependence on banking system for funding

Majority of the MFIs’ in India are registered as Non-Governmental Organizations

(NGOs). They are dependent on financial institutions such as commercial banks for
stabilised funding for their own lending activities. Around 80% of their funds come from
banks. Most of these are private banks which charge a high rate of interest and also the
term of loans is of shorter period. Most of the times, banks lend to micro lending firms in
order to meet their so-called priority sector loan targets (Unnikrishnan, 2012). The over
dependence of Indian microfinance industry on banks make them incompetent and less
reactive towards dealing with default and delinquencies (Sapundzhieva 2011)).

Lack of awareness of financial services

Like all other developing and underdeveloped countries, the literacy rate in India is very
low and the rate is much lower in the rural areas. Nearly 76% of India’s adult population
does not understand basic financial concepts (Sud, 2017). Lack of awareness of
financial services provided by the Indian microfinance industry is a challenge for both,
customer and MFIs’. This factor not only causes hindrance for villagers to join hands
with MFIs’ to meet their financial needs but also makes them financially
excluded. MFIs’ are faced with the task of educating the people and establish trust
before selling their product. Micro finance institutions struggle to make their business
more financially viable due to this lack of awareness.

45
Regulatory issues

Presently the Reserve Bank of India (RBI) is the regulatory body for the microfinance
industry in India. However it has traditionally catered to commercial and traditional
banks rather than MFIs’. Moreover the needs and the anatomy of micro finance industry
is supremely different from that of banks (Business Standard, 2016). In the past the
industry has undergone sporadic and unprecedented regulatory changes. Some of
these have benefited the industry greatly, but a lot of issues were unaddressed, like
creating barriers for entry to restrict unworthy players (PwC, 2016). Not only has it led to
constant structural and operational changes but also created ambiguity in norms of
conduct. Therefore there is a need for a separate regulatory authority for this industry.
Regulatory issues have led to sub-optimal performance and failure in the development
of new financial products and services through which the poorer section can be
benefitted.

Problem in identification of appropriate model

In India, most of the MFIs’ follow Self-Help Group model (SHG model) or Joint Liability
Group model (JLG model). The problem is that most of the time, selection of model are
not scientific in nature. The models are selected randomly, not according to the situation
and also the decision of selection is irreversible in nature. So, it affects the sustainability
of the organisation in the long-run and also increases the risk of borrowings for the
poorer section beyond they can bear. This is also one of the main reasons of crisis of
micro lending in the state of Andhra Pradesh. It has been repeatedly stressed that the
industry needs to undergo business process reengineering to effectively reach out to
the under-financed (PwC, 2016).

Information technology can help in financial inclusion

46
Information and technology can induce massive impact on the state of credit market
accessibility which remains the most significant issue when it comes to availability of
formal loans at market price. Inaccessibility of credit at reasonable market price is the
reason behind weak financial inclusion of the backward section of the population. A lack
of suitable financial infrastructure provides the main bottleneck and it can be
successfully tackled with innovative implementation of information technology keeping
unique circumstances of rural population in mind. A very good example towards such a
step would be introduction of mobile banks, where the growing telecommunication
connectivity provides not only convenience but also reduction in cost of providing
financial service. This makes it feasible for different banking entities to provide special
services keeping the target market in mind.

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 CHAPTER-8

SCHEME OF MICROFINANCE PROGAMME BY

GOVERNMENT

BACKGROUND

Creating self-employment opportunities is one way of attacking poverty and solving the
problems of unemployment. There are over 24 crore people below the poverty line in
the country. The Scheme of Micro-Credit has been found as an effective instrument for
lifting the poor above the level of poverty by providing them increased self-employment
opportunities and making them credit worthy. Total requirement of micro-credit in the
country has been assessed at Rs.50,000 crore. Micro-credit programme works through
NGOs/SHGs and the merit lies in weekly monitoring and refund of instalments. The rate
of recovery under SIDBI’s Micro credit programme is as high as 98%. Though there are
various Departments and Organisations implementing micro-credit schemes in the
areas of activity falling under their purview but their total reach is very low i.e. not more
than Rs.5,000 crore. Thus the existing programmes cater to only 5 to 10% of total
requirements and there is considerable scope for expansion of such programmes.

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In India, Micro-credit programmes are run primarily by NABARD in the field of
agriculture and SIDBI in the field of Industry, Service and Business (ISB). The success
of Micro-credit programme lies in diversification of services. Micro Finance Scheme of
SIDBI is under operation since January, 1999 with a corpus of Rs. 100 crore and a
network of about 190 capacity assessed rated MFIs/NGOs. Under the programme, total
amount of Rs. 191 crore have been sanctioned upto 31st December, 2003, benefiting
over 9 lakh beneficiaries. Under the programme, NGOs/MFIs are supposed to provide
equity support in order to avail SIDBI finance. But they find it difficult to manage the
needed equity support because of their poor financial condition. The problem has got
aggravated due to declining interest rate on deposits. The Office of the Development
Commissioner (Small Scale Industries) under Ministry of MSME is launching a new
scheme of Micro Finance Programme to overcome the constraints in the existing
scheme of SIDBI, whose reach is currently very low. It is felt that Government’s role can
be critical in expanding reach of the scheme, ensuring long term sustainability of NGOs
/ MFIs and development of Intermediaries for identification of viable projects.

Salient features of Micro- Finance Programme

Under the Scheme of Micro-Finance Programme, the following activities would be

undertaken.

(A) Arranging Fixed Deposits for MFIs/NGOs:

The SIDBI is already running a Micro-Credit Programme with a network of capacity
assessed rated MFIs/NGOs. The scheme of Micro-Finance Programme has been tied-
up with SIDBI by way of contributing towards security deposits required from the
MFIs/NGOs to get loans from SIDBI as per details given under:

(i) The Government of India will provide funds for Micro-Finance Programme to SIDBI,
which shall be called ‘Portfolio Risk Fund’ (PRF). This fund would be used for security
deposit requirement of the loan amount from the MFIs/NGOs and to meet the cost of
interest loss. At present, SIDBI takes fixed deposit equal to 10% of the loan amount.

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The share of MFIs/NGOs would be 2.5% of the loan amount (i.e. 25% of security
deposit) and balance 7.5% (i.e. 75% of security deposit) would be adjusted from the
funds provided by the Government of India. The MFIs/NGOs may avail the loan from
the SIDBI for further on lending on the support of the security deposit.

(ii) The Government would provide the needed fund in four years of the Xth Plan and
release the fund on half-yearly basis based on demands for security deposit. By
contributing an amount of Rs.6 crore during the Xth Plan under Micro-Finance
Programme, SIDBI can provide loan of Rs.80.00 crore to MFIs/NGOs. This would
benefit approximately 1.60 lakhs beneficiaries, assuming an average loan of Rs. 5,000/-
per beneficiary.

(iii) The SIDBI will pay interest to the Govt. on the fixed deposit made available by the
Government at the same rate as allowed to NGOs. Other terms and conditions will be
fixed mutually by SIDBI and GOI.

(iv) The recovery of loan/interests will be the sole responsibility of the SIDBI. In case of
non-recovery of loan, SIDBI would first adjust fixed deposit and interest accrued thereon
for 2.5% security deposit of the loan pledged by the MFIs / NGOs and thereafter adjust
7.5% security deposit of the loan amount provided by the Government of India and the
interest accrued thereon with the approval of Committee of Govt. of India.

(v) After full recovery of loan from the MFIs/NGOs, the 7.5% security deposit of the loan
amount provided by Govt. of India and interest accrued thereon would be rotated further
as a security deposit for MFIs/NGOs with the approval of Committee of the Govt. of
India or the same will be returned to the Govt. of India.

(vi) As SIDBI is already running the Micro-Credit Programme, they will monitor the
scheme. They would also provide the monthly/ quarterly progress report along with
details of beneficiaries, utilization of funds provided by Government of India and loan
sanctioned/ utilized by the beneficiaries.

(vii) The activities covered under the scheme are manufacturing, service sector and
non-farming activities.

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(B) Training and Studies on Micro-Finance Programme:

The Government of India would help SIDBI in meeting the training needs of NGOs,
SHGs, intermediaries and entrepreneurs and also in enhancing awareness about the
programme. This task would be performed through National Level Entrepreneurship
Development Institutes (EDIs) and Small Industries Service Institutes (SISIs). The
Research Studies would also be arranged through reputed agencies.

(C) Institution Building for ‘Intermediaries’ for identification of viable projects:

The Government of India would help in institution building through identification and
development of ‘intermediary organization’, which would help the NGOs/SHGs in
identification of product, preparation of project report, working out forward and backward
linkages and in fixing marketing/ technology tie-ups. The SISIs would help in the
identification of such intermediaries in different areas.

Budgetary Provision for the Scheme during 10th Plan

The Budgetary provision for the scheme in the Tenth Five Year Plan is Rs. 7 crore and
the provision in the current financial year 2003-04 is Rs. 0.25 crore. The entire amout of
Rs. 0.25 crore is to be provided to SIDBI as ‘Portfolio Risk Fund’ (PRF) during the year
2003-04. Under the scheme, allocation of an amount of Rs. 1 crore is for studies,
training, awareness, etc. and amount of Rs. 6 crore is for contribution to SIDBI as
‘Portfolio Risk Fund’ (PRF). Savings if any, under any activity would be utilized on other
activity of the scheme so that the budget allocated may be fully utilized.

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Administrative Arrangement

A Committee under the Chairmanship of Additional Secretary & Development

Commissioner (MSME) is to be constituted. Other members of the Committee would be
Additional Development Commissioner & EA, Director (IFW), Chairman-cum- Managing
Director (SIDBI) and Director (EA). Any other member can be co-opted by the
Committee, if required. The Committee would review the progress made under the
scheme, approve the adjustment of security provided by the Government of India and
interest accrued thereon in case of non-recovery of loan by SIDBI, approve further
rotation of funds provided by the Government of India and other related matters.

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 BIBLIOGRAPHY

 https://www.bankbazaar.com/personal-loan/microfinance.html

 https://www.cgap.org/blog/microfinance-india-growing-fast-again-should-we-be-

concerned

 https://www.slideshare.net/mobile/ishanparekh/microfinance-in-india-24928293

 https://enterslice.com/learning/difference-between-microcredit-and-microfinance/

 http://www.dcmsme.gov.in/schemes/microfinance.htm

 https://www.worldscientific.com/doi/abs/10.1142/9789813140745_0001

 https://www.projectguru.in/publications/challenges-indian-microfinance-industry/

 http://shodhganga.inflibnet.ac.in/bitstream/10603/110401/11/11_chapter%204.pd

 https://www.scribd.com/doc/48947731/A-PROJECT-REPORT-ON-

MICROFINANCE-IN-INDIA

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