MICROFINANCE

GITAM School of International Business

Micro finance has a special place in the policy
environment of the Government.
Government constituted a Committee under the
Chairmanship of Dr. C.Ranagarajan to prepare a
comprehensive report on financial inclusion which
highlights the role played by MFIs, NGOs, SHGs in
attaining this goal
The Micro Financial Sector (Development and
Regulation) Bill, 2007 has been introduced in
Parliament in March 2007.(It is not yet made as an act)

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The informal and flexible services offered to low-income
borrowers for meeting their modest consumption and
livelihood needs have not only made micro finance movement
grow at a rapid pace across the world, but in turn has also
impacted the lives of millions of poor positively”, RBI
An SHG is a small homogenous affinity group of about 15 to
20 people who join together to address common issues.
Voluntary thrift activities are undertaken on a regular basis by
the group and these pooled savings are used to make interest
bearing loans to the group members. Apart from inculcating
the habit of thrift, the SHG activity also imbibes concepts like
financial intermediation and handling of resources.

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Once the group is stabilised, it gets linked to the banks
and avails financial services from banks. (RBI: Trend &
Progress 2008-9)

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 Cumulative funds flow under SHG-Bank linkage
model

Year No. of SHG s(in Bank Loans (Cr) Refinance (cr)

000)
1992-93 33 57 52
2002-03 717 2, 049 1, 412
2005-06 2239 11, 398 4, 153

Source: RBI

Loan outstanding under SBLP model: Rs 12, 366 cr. As at March 2007
Loan outstanding in r/o loans provided by Banks to MFIs : Rs. 1584 cr.
as at end-March 2007 and Rs. 5009 cr as at March 2009

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History Track:
 1992:
Self Help Group (SHG) – Bank Linkage Model (SBLP
Model) started by NABARD as a pilot project with 225 SHGs
linked to banking system. Nearly 4.2 million SHGs were
financed with an outstanding of Rs. 22, 680 crore (2009)
1993: SHGs, registered or unregistered were allowed by the
Reserve Bank to open savings bank account with banks. Micro
Finance Institution Model (MFIs) was started under which
the MFIs extend micro credit to individuals or to groups such
as SHGs/ Joint Liability Groups(JLGs). Under this, Rs. 3,732
crores were disbursed in 2008-09 by the banks to MFIs with
an outstanding amount of Rs. 5,009 crore as at end-March
2009 .

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2006: Scheme of Business Facilitators & Business
Correspondents (BCs). Under this, banks were
permitted to utilise the services of NGOs, MFIs
(other than NBFCs) and other civil society
organisations as intermediaries in providing
financial and banking services.

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 SBLP Model
Following models were popular under SBLP:
Model I: SHGs promoted, guided and financed by banks.
Model II: SHGs promoted by NGOs/Government agencies
and financed by banks.
 Model III: SHGs promoted by NGOs and financed by
banks using NGOs/formal agencies as financial
intermediaries.
Model II has emerged as the most popular model in India
under SBLP

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 RECOVERY PERFORMANCE OF SHGs

Percentage of Banks Range of Recovery

reporting NPAs
30 95% & above
38 80 – 94%
22 50 – 79%
10 Below 50%
Source: RBI - 267 banks reported their recovery of loans from the SHGs

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 RESOURCES
Based on the recommendations of the Advisory Committee on
Flow of Credit to Agriculture and Related Activities from the
Banking System (Chairman: Prof. V S Vyas), which submitted
its final report in June 2004, it was announced in the Annual
Policy Statement for the year 2004-05 that in view of the need
to protect the interest of depositors, MFIs would not be
permitted to accept public deposits unless they complied with
the extant regulatory framework of the Reserve Bank.
However, as an additional channel for resource mobilisation,
the Reserve Bank in April 2005 enabled NGOs engaged in
micro finance activities to access the external commercial
borrowings (ECBs) up to US$ 5 million during a financial year
for permitted end use, under the automatic route.

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SKS Microfinance (an NBFC non-deposit category) had
chosen equity route and raised a sum of Rs.1,654 crore
by issuing 16.7 mn. shares (9.3 mn shares of existing
shareholders –Sequoia Capital India II Llc and an
assortment of SKS Trusts and a fresh issue of 7.4 mn
shares) with a price band of Rs. 850 – 985. It was sold
at Rs. 985.

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 FACTORS AFFECTING PERFORMANCE OF SHGs

Factors which could influence performance are:

1. SHG Structure:
Number of members
Constitution
Joint liability obligations
Management of the groups
Demographics of the group
2. Activities of the Group:
Proper identification of economic activity by the members of
the group
availability of markets for the products/ services

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Single or multiple economic activities of the group
3. Purpose of loans:
Economic or social, and percentage of such loans
4. Linkages between MFI and SHG:
Meetings and periodicity, Monitoring mechanism etc.
Whether met by MFI & quality and aspects of training
5. Core Product structure
Initial payments, structure of loan amount, interest payments,
collaterals, if any, periodicity etc
Loan quantum, individual & group ceilings.
group and village dynamics
organizational abilities of the group etc.

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