A RESEARCH PROJECT REPORT On “Impact of Micro Finance on Living

Standard Empowerment and Poverty Alleviation of Poor Women: A Case

Study of North India” Submitted to: Kurukshetra University, Kurukshetra in

partial fulfillment for the degree of Master of Business Administration

(Session -)Under the Supervision of: Submitted by:Ms. Shelly

SinghalFaculty MBA Uni. Roll. No.………..MAIMT MBA (F)MAHARAJA

AGRASEN INSTITUTE OF MANAGEMENT & TECHNOLOGY (ISO 9001-

2008),JAGADHRI-135003 (YAMUNA NAGAR), Approved by AICTE and

HRD Ministry, affiliated to Kurukshetra University, Kurukshetra 1

DECLARTIONI hereby declare that this research project report entitled

"Impact of Micro Finance onLiving Standard Empowerment and Poverty

Alleviation of Poor Women: A CaseStudy of North India” submitted by me

for the partial fulfillment of the degree ofMaster of Business Administration,

submitted to Kurukshetra University,Kurukshetra is an original work done

by me.I also hereby declare that this project report has not been submitted

at any time to anyother university or institute for the award of any Degree

or Diploma. (student name) 2

ACKNOWLEDGEMENTThe project on “Impact of Micro Finance on Living

Standard Empowerment andPoverty Alleviation of Poor Women: A Case

Study of North India’’ would not haveseen the light of the day without the

following people and their priceless support andcooperation. Hence I

extend my gratitude to all of them.As a student of MAHARAJA AGARSEN

INSTITUTE OF MGT & TECH,JAGADHRI. I would first of all like to express

my gratitude to Dr. Raj Kumar,Director, MAIMTfor granting me permission

to undertake the project report in theiresteemed organization.I would also

like to express my sincere thanks to Mr.AdarshAggarwal (H.O.D -

MBADepartment) for supporting me and being always there for me

whenever I needed.During the actual research work, Ms. Shelly Singhal

(Research Guide) and other officestaff who set the ball rolling for my

project. They had been a source of inspirationthrough their constant

guidance; personal interest; encouragement and help. I conveymy sincere

thanks to them. In spite of their busy schedule they always found time

toguide me throughout the project. I am also grateful to them for reposing

confidence inmy abilities and giving me the freedom to work on my project.

Without their invaluablehelp I would not have been able to do justice to the

project.I express my sincere thanks to Ms. Shelly Singhal, Faculty MBA,

MAIMT for thevaluable suggestion & making this project a real successful.

(Student name) PREFACE 3

MBA Students of Kurukshetra University are required to undergo Research

Project asan integral part of curriculum.To accomplish this project as

“Impact of Micro Financeon Living Standard Empowerment and Poverty

Alleviation of Poor Women: ACase Study of North India” there is need to

become familiar with the project.It can be possible through theoretical

inputs as well as practical exposure in which mypractical knowledge is

helpful acquired at the college. I have also done this study fromsecondary

sources. 4

CHAPTER 1INTRODUCTION 5

IntroductionMicrofinance is defined as any activity that includes the

provision of financial services such as credit,savings, and insurance to low

income individuals which fall just above the nationally defined povertyline,

and poor individuals which fall below that poverty line, with the goal of

creating social value. Thecreation of social value includes poverty

alleviation and the broader impact of improving livelihoodopportunities

through the provision of capital for micro enterprise, and insurance and

savings for riskmitigation and consumption smoothing. A large variety of

sectors provide microfinance in India, usinga range of microfinance

delivery methods. Since the ICICI Bank in India, various actors

haveendeavored to provide access to financial services to the poor in

creative ways. Governments also havepiloted national programs, NGOs

have undertaken the activity of raising donor funds for on-lending,and

some banks have partnered with public organizations or made small

inroads themselves inproviding such services. This has resulted in a rather

broad definition of microfinance as any activitythat targets poor and low-

income individuals for the provision of financial services. The range

ofactivities undertaken in microfinance include group lending, individual

lending, the provision ofsavings and insurance, capacity building, and

agricultural business development services. Whateverthe form of activity

however, the overarching goal that unifies all actors in the provision

ofmicrofinance is the creation of social value.Microfinance

DefinitionAccording to International Labor Organization (ILO),

“Microfinance is an economic developmentapproach that involves providing

financial services through institutions to low income clients”.In India,

Microfinance has been defined by “The National Microfinance Taskforce,

1999” as“provision of thrift, credit and other financial services and products

of very small amounts to the poorin rural, semi-urban or urban areas for

enabling them to raise their income levels and improve

livingstandards”."The poor stay poor, not because they are lazy but

because they have no access to capital."The dictionary meaning of

„finance‟ is management of money. The management of money

denotesacquiring & using money. Micro Finance is buzzing word, used

when financing for microentrepreneurs. Concept of micro finance is

emerged in need of meeting special goal to empower under-privileged

class of society, women, and poor, downtrodden by natural reasons or men

made; caste,creed, religion or otherwise. The principles of Micro Finance

are founded on the philosophy ofcooperation and its central values of

equality, equity and mutual self-help. At the heart of theseprinciples are the

concept of human development and the brotherhood of man expressed

throughpeople working together to achieve a better life for themselves and

their children. 6

Traditionally micro finance was focused on providing a very standardized

credit product. The poor,just like anyone else, (in fact need like thirst) need

a diverse range of financial instruments to be ableto build assets, stabilize

consumption and protect themselves against risks. Thus, we see a

broadeningof the concept of micro finance--- our current challenge is to find

efficient and reliable ways ofproviding a richer menu of micro finance

products. Micro Finance is not merely extending credit, butextending credit

to those who require most for their and family‟s survival. It cannot be

measured interm of quantity, but due weightage to quality measurement.

How credit availed is used to survive andgrow with limited means.Concept

and Features of Micro-finance: 1. It is a tool for empowerment of the

poorest. 2. Delivery is normally through Self Help Groups (SHGs). 3. It is

essentially for promoting self-employment, generally used for: (a) Direct

income generation (b) Rearrangement of assets and liabilities for the

household to participate in future opportunities and (c) Consumption

smoothing. 4. It is not just a financing system, but a tool for social change,

specially for women. 5. Because micro credit is aimed at the poorest,

micro-finance lending technology needs to mimic the informal lenders

rather than the formal sector lending. It has to: (a) Provide for seasonality

(b) Allow repayment flexibility (c) Fix a ceiling on loan sizes. 7

Microfinance approach is based on certain proven truths which are not

always recognized. These are: 1. That the poor are bankable; successful

initiatives in micro finance demonstrate that there need not be a tradeoff

between reaching the poor and profitability - micro finance constitutes a

statement that the borrowers are not „weaker sections‟ in need of charity,

but can be treated as responsible people on business terms for mutual

profit . 2. That almost all poor households need to save, have the inherent

capacity to save small amounts regularly and are willing to save provided

they are motivated and facilitated to do so. 3. That easy access to credit is

more important than cheap subsidized credit which involves lengthy

bureaucratic procedures - (some institutions in India are already lending to

groups or SHGs at higher rates - this may prevent the groups from

enjoying a sufficient margin and rapidly accumulating their own funds, but

members continue to borrow at these high rates, even those who can

borrow individually from banks). 4. Peer pressure in groups helps in

improving recoveries. 8

CHAPTER 2LITRATURE REVIEW 9

Mohammed AnisurRahaman (2007)Has examined that about microfinance

and to investigate the impact of microfinance on the poorpeople of the

society with the main focus on Bangladesh. We mainly concise our thesis

throughclient‟s (the poor people, who borrowed loan from microfinance

institutions) perspective and build upour research based on it. Therefore,

the objective of this study is to show how microfinance works, byusing

group lending methodology for reducing poverty and how it affects the

living standard (income,saving etc.) of the poor people in Bangladesh.

Microfinance has the positive impact on the standard ofliving of the poor

people and on their life style. It has not only helped the poor people to

come over thepoverty line, but has also helped them to empower

themselves.SusyCheston (2002)Has examined that Microfinance has the

potential to have a powerful impact on women‟sempowerment. Although

microfinance is not always empowering for all women, most women

doexperience some degree of empowerment as a result. Empowerment is

a complex process of changethat is experienced by all individuals

somewhat differently. Women need, want, and profit from creditand other

financial services. Strengthening women‟s financial base and economic

contribution to theirfamilies and communities plays a role in empowering

them. Product design and program planningshould take women‟s needs

and assets into account. By building an awareness of the potential

impactsof their programs, MFIs can design products, services, and service

delivery mechanisms that mitigatenegative impacts and enhance positive

ones.Linda Mayoux (Feb 2006)Has examined that Micro-finance

programmes not only give women and men access to savings andcredit,

but reach millions of people worldwide bringing them together regularly in

organized groups.Through their contribution to women‟s ability to earn an

income, micro-finance programmes canpotentially initiate a series of

„virtuous spirals‟ of economic empowerment, increased well-being

forwomen and their families and wider social and political empowerment

Banks generally use individualrather than group-based lending and may

not have scope for introducing non-financial services. Thismeans that they

cannot be expected to have the type of the focused empowerment

strategies whichNGOs haveEoinWrenn (2005)Has examined that

microfinance creates access to productive capital for the poor, which

together withhuman capital, addressed through education and training, and

social capital, achieved through localorganization building, enables people

to move out of poverty (1999). By providing material capital to a 10

poor person, their sense of dignity is strengthened and this can help to

empower the person toparticipate in the economy and society. The impact

of microfinance on poverty alleviation is a keenlydebated issue as we have

seen and it is generally accepted that it is not a silver bullet, it has not

livedup in general to its expectation (Hulmeand Mosley, 1996). However,

when implemented and managedcarefully, and when services are

designed to meet the needs of clients, microfinance has had

positiveimpacts, not just on clients, but on their families and on the wider

community.Cheston& Kuhn (2004)Has examined that in their study

concluded that micro-finance programmes have been very successfulin

reaching women. This gives micro-finance institutions an extraordinary

opportunity to actintentionally to empower poor women and to minimize the

potentially negative impacts some womenexperiences. We also found

increased respect from and better relationships with extended family andin-

laws. While there have been some reports of increased domestic violence,

Hashemi and Schulerfound a reduced incidence of violence among women

who were members of credit organizations thanamong the general

population.Dr. JyotishPrakashBasu (2006)Has examined that the two basic

research questions. First, the paper tries to attempt to study how

awoman‟s tendency to invest in safer investment projects can be linked to

her desire to raise herbargaining position in the households. Second, in

addition to the project choice, women empowermentis examined with

respect to control of savings, control of income, control over loans, control

overpurchasing capacity and family planning in some sample household in

Hooghly district of WestBengal. The empowerment depends on the choice

of investment of project. The choice of safe projectleads to more empower

of women than the choice of uncertain projects. The Commercial Banks

andRegional Rural banks played a crucial role in the formation of groups in

the SHGs -Bank LinkageProgram in Andhra Pradesh whiles the

Cooperative Banks in West Bengal.Chintamani Prasad Patnaik (March

2012)Has examined that microfinance seems to have generated a view

that microfinance development couldprovide an answer to the problems of

rural financial market development. While the development ofmicrofinance

is undoubtedly critical in improving access to finance for the unserved and

underservedpoor and low-income households and their enterprises, it is

inadequate to address issues of ruralfinancial market development. It is

envisaged that self-help groups will play a vital role in suchstrategy. But

there is a need for structural orientation of the groups to suit the

requirements of newbusiness. Microcredit movement has to be viewed

from a long-term perspective under SHG 11

framework, which underlines the need for a deliberate policy implication in

favour of assurance interms of technology back-up, product market and

human resource development.Hunt, J &Kasynathan (2002)Has examined

that poor women and men in the developing world need access to

microfinance anddonors should continue to facilitate this. Research

suggests that equity and efficiency arguments fortargeting credit to women

remain powerful: the whole family is more likely to benefit from

credittargeted to women, where they control income, than when it is

targeted to men. Microfinance mustalso be re-assessed in the light of

evidence that the poorest families and the poorest women are notable to

access credit. A range of microfinance packages is required to meet the

needs of the poorest,both women and men. Donors need to revisit

arguments about the sustainability of microfinanceprogrammes. Financial

sustainability must be balanced against the need to ensure that some

creditpackages are accessible to the poorest.R.Prabhavathy (2012)Has

examined that collective strategies beyond micro-credit to increase the

endowments of thepoor/women enhance their exchange outcomes the

family, markets, state and community, and socio-cultural and political

spaces are required for both poverty reduction and women empowerment.

Eventhough there were many benefits due to micro-finance towards

women empowerment and povertyalleviation, there are some concerns.

First, these are dependent on the programmatic and institutionalstrategies

adopted by the intermediaries, second, there are limits to how far micro-

credit interventionscan alone reach the ultra-poor, third the extent of

positive results varies across household headship,caste and religion and

fourth the regulation of both public and private infrastructure in the context

ofLPG to sustain the benefits of social service providers.Reginald Indon

(2007)Has examined that informal businesses represent a very large

cross-section of economic enterprisesoperating in the country. Informal

businesses may be classified as either the livelihood/ survival typeor the

entrepreneurial/ growth-oriented type. Livelihood enterprises are those

which show very limitedpotential for growth in both income and

employment generation. There are existing policies, programand services

that directly/ indirectly cover informal. Variety of support programs, services

andinformation are currently being offered by different institutions. These

programs and support servicesfail to reach or remain inaccessible to

informal business operators and owners. This is borne out of

andperpetuated by lopsided economic policies and poor governance that

inadvertently encumber informalbusinesses from accessing mainstream

resources and services. 12

Mallory A. Owen (2006)Has examined that microfinance has signaled a

paradigm shift in development ideology. Using myexperiences with

microfinance in a fishing village in Senegal, this study will address the

claims drivingthe microfinance movement, debate its pros and cons and

pose further questions about its validity andwidespread implementation.

Instead of lifting people out of poverty and empowering

women,microfinance may have regressive long term potential for

borrowers. How loans get used is a centraltheme of this essay. How

microfinance and the notion of the “entrepreneur” fit into the

rural,Senegalese cultural context is also addressed. Microfinance

programs should be implemented withcomplementary measures that

challenge the systematic causes of inequality examined in this article.The

microfinance model (group lending based on joint liability) uses the social

capital generated bygroup membership to ensure that loans get re-

financed. If one woman fails to pay back her loan, sheputs her entire loan

group at jeopardy. As a result, “Women‟s participation in microenterprise

does notshow any signs of creating the new forms of solidarity among

women that the advocates ofempowerment desire. Instead, women are

placed under enormous pressure to maintain existing modesof social

relationships, on which depends not only the high rates of loan repayments

but also thesurvival of families.”Jennifer Meehan (2004)Has examined that

it will need to do three things simultaneously. First, it will need to rapidly

scale up,in key markets, like India, home to high numbers of the world‟s

poor. Second, in this process, clearpriority is needed for philanthropic,

quasi-commercial and commercial financing for the business plansof MFIs

targeting the poorest segments of the population, especially women. Third,

microfinance willneed to realize its possibility as a broad platform and

movement, more than simply an intervention andindustry. The pioneering

financings completed by leading, poverty-focused MFIs have shown

theindustry what is possible – large amounts of financing that allows for

rapid expansion of financialservices to new poor customers. The MFIs offer

a model to others that are interested in tapping thefinancial markets. If

leading MFIs continue on their present course and adopt some or all of

thesuggestions offered, financial market interest – or more specifically,

debt capital market interest – inleading, poverty-focused MFIs is expected

to grow.Jacob Levitsky and Leny van Oyen (1999)Has examined that

micro-businesses to large corporations, located in large urban centres, in

rural areasand in the formal and informal sectors. Financing needs are

therefore of varying nature. In describingexperiences, a link is made

between size of enterprises, financing schemes/instruments and

typicaldelivery channels. When referring to enterprises in this paper, focus

is predominantly on businesses, 13

both existing and potential, in the manufacturing sector and related

services. It is clear from this paperthat increasing the volume of finance

available and the delivery of such funds in various appropriateforms, to

support enterprises in Africa, is a difficult challenge. Central banks have to

be given moreindependence, strengthened with qualified, experienced

personnel, able to fulfil adequately the role ofsupervising and monitoring

the performance of commercial banks in the provision of loans to

thoseenterprises able to make effective use of them. Formal financial

institutions such as commercial banksand, in a few cases, development

banks, have to be encouraged and pressed to make appropriate loansto

those who have proved themselves by paying off a number of loans they

have received from NGOsor from formal financial institutions. The

minimalist credit approach has clear limitations, and forcredit schemes to

be effective and have impact, complementary services are

needed.Marguerite S. Robinson (1995)Has examined that HIIDs role in the

formulation of the initial hypotheses and HIIDs contributions inplanning and

coordinating the underlying research, advising on the policies and

implementationstrategies that put concept into practice, analysing the

results, and disseminating the findings. Drawingon work in Asia, Africa, and

Latin America, the paper analyses the paradigm shift in microfinancefrom

government and donor-funded subsidized credit to sustainable financial

intermediation. This shifthas occurred because of the work of many people

in many countries. This paper, however, is limited toHIIDs contribution. The

policy implications of the new microfinance for governments, donors,

banks,and NGOs are explored. HIID is advising BRI on its program for

international visitors. In addition,HIID is analysing and teaching - in

universities, financial institutions, donor agencies, banksuperintendence‟s,

and NGOs - the principles and the results of the new microfinance

paradigm.Pillai (1995)Has examined that the emergence of liberalization

and globalization in early 1990s aggravated theproblem of women workers

in unorganized sectors from bad to worse as most of the women who

wereengaged in various self-employment activities have lost their

livelihood. Microfinance is emerging as apowerful instrument for poverty

alleviation in the new economy. In India, Microfinance scene isdominated

by Self Help Group (SHGs)-Bank Linkage Programme as a cost effective

mechanism forproviding financial services to the "Unreached Poor" which

has been successful not only in meetingfinancial needs of the rural poor

women but also in strengthening collective self-help capacities of thepoor

leading to their empowerment. Micro finance is necessary to overcome

exploitation, createconfidence for economic self-reliance of the rural poor,

particularly among rural women who aremostly invisible in the social

structure. Micro finance can contribute to solving the problems

ofinadequate housing and urban services as an integral part of poverty

alleviation programmes. Thechallenge lies in finding the level of flexibility in

the credit instrument that could make it match the 14

multiple credit requirements of the low income borrower without imposing

unbearably high cost ofmonitoring its end use upon the lenders.Crabb, P.

(2008)Has examined that the relationship between the success of

microfinance institutions and the degree ofeconomic freedom in their host

countries. Many microfinance institutions are currently not self-sustaining

and research suggests that the economic environment in which the

institution operates is animportant factor in the ability of the institution to

reach this goal, furthering its mission of outreach tothe poor. The

sustainability of the micro lending institutions is analyzed here using a large

cross-section of institutions and countries. The results show that

microfinance institutions operate primarilyin countries with a relatively low

degree of overall economic freedom and that various economicpolicy

factors are important to sustainability.Fehr, D. and G. Hishigsuren.

(2006)Has examined that microfinance institutions (MFIs) provide financial

services to the pooresthouseholds. To date, funding of MFI activities has

come primarily from outright donor grants,government subsidies, and often

debt capital, including debt with non-market terms favorable to theMFI.

These traditional sources of MFI financing may not be sufficient to allow

MFIs to providemaximum services. There is a subset of the pool of

mainstream equity investors who would considerinvesting in MFI

opportunities, even knowing that they would not expect to earn the full

economic rateof return that such investments would otherwise require.

However, as part of their investmentevaluation process, these investors

would ask: What would the market determine required expectedrate of

return for my MFI investment be? What return on investment (ROI) do I

expect to earn on myMFI investment? Is the difference in the above two

returns acceptable given my level of socialmotivation? How will I

"monetize" my investment and when? The purpose of this article is to

employmodern corporate finance techniques to address these

questions.Demirguc-Kunt, A. and Martinez, P.M.S. (2005)Has examined

that this paper (i) presents new indicators of banking sector penetration

across 99countries, based on a survey of bank regulatory authorities, (ii)

shows that these indicators predicthousehold and firm use of banking

services, (iii) explores the association between the outreachindicators and

measures of financial, institutional, and infrastructure development across

countries, and(iv) relates these banking outreach indicators to measures of

firms „financing constraints. In particular,we find that greater outreach is

correlated with standard measures of financial development, as well aswith

economic activity. Controlling for these factors, we find that better

communication and transport 15

infrastructure, and better governance are also associated with greater

outreach. Government ownershipof financial institutions translates into

lower access, while more concentrated banking systems areassociated

with greater outreach. Finally, firms in countries with higher branch and

ATM penetrationand higher use of loan services report lower financing

obstacles, thus linking banking sector outreachto the alleviation of firms‟

financing constraints.Srinivasan, Sunderasan (2007)Has examined that

micro banking facilities have helped large numbers of developing country

nationalsby supporting the establishment and growth of microenterprises.

And yet, the microfinance movementhas grown on the back of passive

replication and needs to be revitalised with new product offeringsand

innovative service delivery. Renewable Energy systems viz., solar home

systems, biogas digesters,etc., serve to improve indoor air quality, provide

superior light and extend working and study hours.Such applications are

not inherently income generating and returns on such investments accrue

fromcost avoidance, but should qualify for micro funding, as such quality of

life investments, reflectborrower maturity and simultaneously contribute to

MFI sustainability.Basu, P., Srivastava (2005)Has examined that the

current level and pattern of access to finance for Indias rural poor and

examinessome of the key microfinance approaches in India, taking a close

look at the most dominant amongthese, the Self Help Group (SHG) Bank

Linkage initiative. It empirically analyzes the success withwhich SHG Bank

Linkage has been able to reach the poor, examines the reasons behind

this, and thelessons learned. The analysis in the paper draws heavily on a

recent rural access to finance survey of6,000 households in India,

undertaken by the authors. The main findings and implications of the

paperare as follows: Indias rural poor currently have very little access to

finance from formal sources.Microfinance approaches have tried to fill the

gap. Among these, the growth of SHG Bank Linkagehas been particularly

remarkable, but outreach remains modest in terms of the proportion of

poorhouseholds served. The paper recommends that, if SHG Bank

Linkage is to be scaled-up to offer massaccess to finance for the rural

poor, then much more attention will need to be paid towards: thepromotion

of high quality SHGs that are sustainable, clear targeting of clients, and

ensuring that bankslinked to SHGs price loans at cost-covering levels. At

the same time, the paper argues that, in aneconomy as vast and varied as

Indias, there is scope for diverse microfinance approaches to

coexist.Private sector micro financiers need to acquire greater

professionalism, and the government, too, canhelp by creating a flexible

architecture for microfinance innovations, including through a moreenabling

policy, legal and regulatory framework. Finally, the paper argues that, while

microfinancecan, at minimum, serve as a quick way to deliver finance to

the poor, the medium-term strategy toscale-up access to finance for the

poor should be to graduate microfinance clients to formal financial 16

institutions. The paper offers some suggestions on what it would take to

reform these institutions withan eye to improving access for the

poor.Robinson, M. (2001)Has examined that the timing of this book is

excellent it has few close substitutes in terms of itssweeping overview of

the terrain, and the revolution is now so advanced that the time is right for

ahistory, or at least a retrospective. As with any revolution, however, splits

have emerged within themovement. On one side are those who argue that

the way forward is to require microfinanceinstitutions to meet the test of

financial sustainability essentially, requiring these institutions to covertheir

costs, even if this means that the very poorest of the poor remain under-

served. Against this, thepoverty lending approach emphasizes the

importance of outreach, especially to the very poorestborrowers, as a

poverty fighting approach.Gallardo, Joselito (1999)Has examined that the

Bank should maximize opportunities to expand the use of leasing as

anapproach to financial intermediation in Bank projects to promote the

development of small businessesand microenterprises. In most developing

countries, capital markets are relatively undeveloped andbanks are often

unable or unwilling to undertake term lending. Operations in

microenterprises andsmall businesses are cash-flow-oriented but rarely

have organized historical financial records or theassets needed for

collateral for conventional bank financing. Gallardo explores the potential of

leasingas an option to expand small businesses access to medium-term

financing for capital equipment andnew technology. In a lease-financing

contract, the lessor-financier retains ownership of the asset,

leasepayments can be tailored to fit the cash-flow generation patterns of

the lessee-borrowers business, andthe security deposit is smaller than the

equity stake required in conventional bank financing. Othersmall

businesses require medium-term financing to acquire the tools and

equipment needed to supportproduction growth and expansion. Gallardo

examines and compares the Banks experience: Leasefinancing was used

to promote the development of small businesses in Pakistan, as part of

amicroenterprise development loan project. For a Bank-supported

alternative-energy project inIndonesia, a variant of lease financing-the hire-

purchase contract-is being used in marketing anddistribution by private

distributors of photovoltaic solar home systems. Lease financing was used

byGrameen Trust in Bangladesh to finance the purchase of small tools and

equipment and in othercountries to promote the growth of alternative

energy systems. This paper-a product of theDevelopment Research

Group-is part of a larger effort in the group to identify appropriate policies

forenvironmental regulation in developing countries. The study was funded

by the Banks ResearchSupport Budget under the research project "The

Economics of Industrial Pollution Control inDeveloping Countries" 17

Muhammad Yunus (1998)Has examined that this approach to poverty

reduction at the macro-level is inadequate. The primarycauses of poverty

are not lack of human capital or lack of demand for labor. Lack of demand

for laboris only a symptom, not a cause, of poverty. Poverty is caused by

our inadequate understanding ofhuman capabilities and by our failure to

create enabling theoretical frameworks, concepts, institutionsand policies

to support those capabilities. My main argument is that economics as we

know it is notonly unhelpful in getting the poor out of poverty; it may even

be a hindrance. In this paper, I wouldlike to explore those institutions that

perpetuate poverty, share my experiences with an effectivepoverty

alleviation institution, and present my thoughts on the future of poverty

alleviation. Beforeaddressing these points, however, I would like to provide

a useful framework to define the concept of"the poor" more

concretely.Ashta, A. & De Selva, R. (2009)Hass examined that the

relationship between microfinance and religion, and provides future

researchdirections in this area. Religious institutions often play a crucial

role in establishing microfinancesystems, but interactions between

microfinance and religion have received little attention ofresearchers.

Some of the topics addressed by articles reviewed in this paper include the

impact of theGreat Irish Famine on Irish loan funds, indigenization within

support groups for chronically ill Haitianwomen, impact of religion on

borrowing patterns of Jordanian micro-entrepreneurs, Islamicmicrofinance

in Pakistan and Indonesia, spirituality as an asset in a Christian initiative

role of religiousleaders in identifying entrepreneurial talent, microfinance

and charity in Thailand and the Philippines,and extensive socio-economic

studies in Bangladesh and India.Ernest Aryeetey (2005)Has examined that

informal finance and microfinance suitable for financing growing small to

mediumsize enterprises (SMEs) in Sub-Saharan Africa? First, I present the

characteristics of informal finance,focusing on size, structure, and scope of

activities. Informal finance has not been very attractive for theprivate

sector. Indeed, the informal sector has considerable experience and

knowledge about dealingwith small borrowers, but there are significant

limitations to what it can lend to growingmicrobusinesses. Second, I

discuss some recent trends in microfinance. While externally

drivenmicrofinance projects have surfaced in Africa, their performance

relative to small business finance hasnot been as positive as in Asia and

Latin America. Third, I introduce some possible steps toward a newreform

agenda that will make informal and microfinance relevant to private sector

development,including focusing on links among formal, semi-formal and

informal finance and how these links canbe developed. 18

Yunus (2003)Has examined that count 130 McMaster School for

Advancing Humanity on women to spread theword to their neighbors and

friends about the success of these loans. The testimony is expected

toconvince others to seek out Grameen for help. Yunus also encourages

members to save some of theirmoney in case they fall on hard times, such

as natural disasters, or to use this money for otheropportunities. In 1977,

Yunus founded Grameen Bank after working for six months to get a loan

fromthe Janata Bank. Yunus realized that having groups of people take out

a loan was a better plan forsuccess than giving loans to individuals. He

describes the process by which Grameen Bank lendsmoney. Loan

repayments are to be made in very small amounts, and in the first project,

Yunus chose avillager to be in charge of collecting the

repayments.Monique Cohen (2002)Has examined that the ideas presented

in this paper are designed to direct the arena of discoursetowards a more

holistic market driven or client focused microfinance agenda. Currently, the

debate onmarket-driven microfinance is primarily framed by the „problems‟

of competition and dropouts amongestablished MFIs. The solutions to the

problems are defined in terms of more responsive products, thecreation of

new products, and the restructuring of existing ones. Appropriate products

will not onlybenefit the operations of an institution they will also have a

positive impact on the wellbeing of theclient, reducing the risk of borrowing

and the poor‟s vulnerability. In presenting current thinking on aclient-led

agenda, this paper finds itself in a precarious position in the midst of this

debate. Client-ledmodels are still in their infancy, and the fact that this topic

is the theme of this special edition of theJournal of Development Studies is

itself an important milestone. When this author began to focus onclients in

microfinance six years ago, the notion that clients deserved a voice in the

design and deliveryof services was dismissed out of hand.Shannon Doocy,

Dan Norell, ShimelesTeffera, and Gilbert Burnham (2005)Has examined

that Management decision making in MFIs is becoming increasingly tied to

collectinginformation about social performance. This paper examines the

impact of participation in an Ethiopianmicrofinance program on indicators

of socioeconomic status including wealth, income, and home orland

ownership. A survey assessing these outcomes was conducted in May

2003 in two predominantlyrural sites in Southern Ethiopia and included 819

households. The article discusses managementdecisions made as the

result of survey findings about socioeconomic status and food security

toincrease retention rates and to facilitate client savings. Additionally, the

management was prompted toincrease the number of female clients and

raise the proportion of female loan officers. This paperillustrates how data

from routine monitoring and evaluation can be linked to MFI management

19

decision making, which ultimately results in providing better microfinance

services. Household assetdata indicates that participation in the WISDOM

microfinance program did not result in increasedhousehold wealth.

Significant differences in household income were not observed between

participantgroups in either survey site and client status was not a

significant predictor of income in univariate ormultivariate regression

models.John A. Brett. (2006)Has examined that having borrowed money

from a microfinance organization to start a small business,many women in

El Alto, Bolivia are unable to generate sufficient income to repay their loans

and somust draw upon household resources. Working from the womens

experience and words, this articleexplores the range of factors that

condition and constrain their success as entrepreneurs. The centraltheme

is that while providing the poor access to credit is currently very popular in

development circles,the social and structural context within which some

women operate so strongly constrains theirproductive activity that they

realize a net income loss at the household level instead of the

promisedbenefits of entrepreneurship. This paper explores the social and

structural realities in which womenseek out and accept debt beyond their

capacity to repay from the proceeds of their business enterprise.By

examining some of the "hidden costs" of microfinance participation, this

paper argues for a shiftfrom evaluation on outcomes at the institutional

level to outcomes at the household level to identify theforces and factors

that condition womens success as micro-entrepreneurs. While there has

been muchdiscussion on the benefits of microcredit lending and increasing

critique of it on both ideological andsubstantive grounds, there have been

few ethnographically informed studies on consequences to

users.NidhiyaMenon (2006)Has examined that this paper studies the

benefits of participation in micro-finance programs, wherebenefits are

measured in terms of the ability to smooth the effect of seasonal shocks

that causeconsumption fluctuations. It is shown that although membership

in these programs is an effectiveinstrument in combating inter-seasonal

consumption differences, there is a threshold level of length ofparticipation

beyond which benefits begin to diminish. Returns from membership are

modelled usingan Euler equation approach. Fixed effects non-linear least

squares estimation of parameters using datafrom 24 villages of the

Grameen Bank suggests that returns to participation, as measured by the

abilityto smooth seasonal shocks, begin to decline after approximately two

years of membership. Thisimplies that membership alone no longer has a

mitigating marginal effect on seasonal shocks to percapita consumption

after four years of participation. Such patterns suggest that the ability to

smoothconsumption as a function of length of membership, need not

accrue indefinitely in a linear fashion.;Reprinted by permission of Frank

Cass & Co. Ltd. 20

CHAPTER 3INDUSTRY PROFILE 21

The Origin of MicrofinanceAlthough neither of the terms microcredit or

microfinance were used in the academic literature nor bydevelopment aid

practitioners before the 1980s or 1990s, respectively, the concept of

providingfinancial services to low income people is much older.While the

emergence of informal financial institutions in Nigeria dates back to the

15th century, theywere first established in Europe during the 18th century

as a response to the enormous increase inpoverty since the end of the

extended European wars (1618 – 1648). In 1720 the first loan

fundtargeting poor people was founded in Ireland by the author Jonathan

Swift. After a special law waspassed in 1823, which allowed charity

institutions to become formal financial intermediaries a loanfund board was

established in 1836 and a big boom was initiated. Their outreach peaked

just before thegovernment introduced a cap on interest rates in 1843. At

this time, they provided financial services toalmost 20% of Irish

households. The credit cooperatives created in Germany in 1847 by

FriedrichWilhelm Raiffeisen served 1.4 million people by 1910. He stated

that the main objectives of thesecooperatives “should be to control the use

made of money for economic improvements, and to improvethe moral and

physical values of people and also, their will to act by themselves.”In the

1880s the British controlled government of Madras in South India, tried to

use the Germanexperience to address poverty which resulted in more than

nine million poor Indians belonging tocredit cooperatives by 1946. During

this same time the Dutch colonial administrators constructed acooperative

rural banking system in Indonesia based on the Raiffeisen model which

eventually becameBank Rakyat Indonesia (BRI), now known as the largest

MFI in the world.EVOLUTION OF MICROFINANCE IN INDIA (1960 TO

TODAY)Microfinance in India emerged as an effort to reach out to the un-

banked, lower income segments ofthe population 1960 to 1980 1990 2000

Phase 1: Social Banking Phase 2: Financial Systems Phase 3: Financial

Inclusion Approach1.Nationalization of private 1.Peer-pressure 1.NGO-

MFIs and SHGs gainingcommercial banks more legitimacy2.Expansion of

rural branch 2.Establishment of 2.MFIs emerging as strategicnetwork

MFIs,typically of non-profit partners to diverse entities origins interested in

thelow-income segments3.Extension of subsidized credit 3.Consumer

finance emerged 22

ashighgrowth area4.Establishment of Rural 4.Increased policy

regulationRegional Banks5.Establishment of apex 5.Increasing

commercializationinstitutionssuch as NationalBank for Agricultureand

RuralDevelopment and SmallIndu-stries Development Bank ofIndia Table

3.1Phase 1: In the 1960‟s, the credit delivery system in rural India was

largely dominated by thecooperative segment. The period between 1960

and 1990, referred to as the “social banking” phase.This phase includes

nationalization of private commercial banks, expansion of rural branch

networks,extension of subsidized credit, establishment of Regional Rural

Banks (RRBs) and the establishmentof apex institutions such as the

National Bank for Agriculture and Rural Development (NABARD) andthe

Small scale Industries Development Board of India (SIDBI).Phase 2: After

1990, India witnessed the second phase “financial system approach” of

credit delivery.In this phase NABARD initiated the Self Help Group (SHG) -

Bank Linkage Bank Linkage program,which links informal womens groups

to formal banks. This concept held great appeal for non-government

organizations (NGOs) working with the poor, prompting many of them to

collaborate withNABARD in the program. This period also witnessed the

entry of Microfinance Institutions (MFIs),largely of non-profit origins, with

existing development programs.Phase 3: In 2000, the third phase in the

development of Indian microfinance began, marked by furtherchanges in

policies, operating formats, and stakeholder orientations in the financial

services space.This phase emphasizes on “inclusive growth” and “financial

inclusion.” This period also saw manyNGO-MFIs transform into regulated

legal formats such as Non-Banking Finance Companies

(NBFCs).Commercial banks adopted innovative ways of partnering with

NGO-MFIs and other ruralorganizations to extend their reach into rural

markets. MFIs have emerged as strategic partners toindividuals and

entities interested in reaching out to Indias low income client segments. 23

Policy Attention to Microfinance After 20001999 --- Official definition of

microfinance by RBIAugust 2000 --- Micro Credit/Rural Credit included in

the list of permitted non-banking financialcompany (NBFC) activities

considered for Foreign Direct Investment (FDI)2005 --- MFIs acknowledged

for the first time in the Budget Speech by the Finance Minister“Government

intends to promote MFIs in a big way. The way forward, I believe, is to

identify MFIs,classify and rate such institutions, and empower them to

intermediate between the lending banks andthe beneficiaries.”January

2006 --- Announcement of the business correspondent modelFebruary

2006 --- Budget Speech by the Finance Minister promises a formal

statutory framework forthe promotion, development and regulation of the

microfinance sectorMarch 2006 --- Comprehensive guidelines by RBI on

loan securitizationJuly 2006 --- RBI master circular allows NGOs involved

in microfinance to access ExternalCommercial Borrowings (ECB) up to

USD 5 million (INR 20.25 crores) during a year.March 2007 --- Finance

Minister introduces the “Micro Finance Sector Development and

RegulationBill 2007” in LokSabhaEntities in Micro Finance:-Indian

Microfinance dominated by two operational approaches: SHG Initiated

by NABARD through SHG Bank Linkage Program. Largest outreach to

microfinance clients in the world. MFIs Emerged in the late 1990s to

harness social and commercial funds. Today the number of Indian MFIs

has increased and crossed 1000.SHGs and MFIs disbursement till 2007-

USD 3.7 billionsSHGs comprise twenty or fewer members, of whom the

majority are women from the poorest castesand tribes. Members save

small amounts of money, as little as a few rupees a month in a group

fund.Members may borrow from the group fund for a variety of purposes

ranging from household 24

emergencies to school fees. Banks typically lend up to four rupees for

every rupee in the group fund.Groups pay a reasonable 12-24% annual

rate of interest. Nearly 1.4 million SHGs comprisingapproximately 20

million women now borrow from banks, which makes the Indian SHG-

BankLinkage model the largest microfinance program in the world.MFI is

an organization that offers financial services to low income populations.

Almost all of theseoffer microcredit and only take back small amounts of

savings from their own borrowers, not from thegeneral public. Term refers

to a wide range of organizations - NGOs, credit unions,

cooperatives,private commercial banks and non-bank financial

institutions.Microfinance TodayIn the 1970s a paradigm shift started to take

place. The failure of subsidized government or donordriven institutions to

meet the demand for financial services in developing countries let to

several newapproaches. Some of the most prominent ones are presented

below.Bank Dagan Bali (BDB) was established in September 1970 to serve

low income people in Indonesiawithout any subsidies and is now “well-

known as the earliest bank to institute commercialmicrofinance”. While this

is not true with regard to the achievements made in Europe during the

19thcentury, it still can be seen as a turning point with an ever increasing

impact on the view of politiciansand development aid practitioners

throughout the world. In 1973 ACCION International, a UnitedStates of

America (USA) based non-governmental organization (NGO) disbursed its

first loan inBrazil and in 1974 Professor Muhammad Yunus started what

later became known as the GrameenBank by lending a total of $27 to 42

people in Bangladesh. One year later the Self-EmployedWomen‟s

Association started to provide loans of about $1.5 to poor women in India.

Although thelatter examples still were subsidized projects, they used a

more business oriented approach and showedthe world that poor people

can be good credit risks with repayment rates exceeding 95%, even if

theinterest rate charged is higher than that of traditional banks. Another

milestone was the transformationof BRI starting in 1984. Once a loss

making institution channeling government subsidized credits toinhabitants

of rural Indonesia it is now the largest MFI in the world, being profitable

even during theAsian financial crisis of 1997 – 1998.In February 1997 more

than 2,900 policymakers, microfinance practitioners and representatives

ofvarious educational institutions and donor agencies from 137 different

countries gathered inWashington D.C. for the first Micro Credit Summit.

This was the start of a nine yearlong campaign toreach 100 million of the

world poorest households with credit for self-employment by

2005.According to the Microcredit Summit Campaign Report 67,606,080

clients have been reached through2527 MFIs by the end of 2002, with

41,594,778 of them being amongst the poorest before they tooktheir first

loan. Since the campaign started the average annual growth rate in

reaching clients has beenalmost 40 percent. If it has continued at that

speed more than 100 million people will have access to 25

microcredit by now and by the end of 2005 the goal of the microcredit

summit campaign would bereached. As the president of the World Bank

James Wolfensohn has pointed out, providing financialservices to 100

million of the poorest households means helping as many as 500 – 600

million poorpeople.Need for Micro-Finance: The gap between Demand and

SupplySince independence, various governments in India have

experimented with a large number of grantand subsidy based poverty

alleviation programmes. These programmes were based on

grant/subsidyand the credit linkage was through commercial banks

only.Hence was adopted the concept of micro-credit in India. Success

stories in neighboring countries, likeGrameen Bank in Bangladesh, Bank

Rakiat in Indonesia, Commercial & Industrial Bank in Philippinesetc, gave

further boost to the concept in India in the 1980s. India thus adopted the

similar model ofextending credit to the poorest sector and took a no. of

steps to promote micro-financing in thecountry. Since the 1950s, various

governments in India have experimented with a large number ofgrant and

subsidy based poverty alleviation programmes. Studies show that these

mandatory anddedicated subsidized financial programmes, implemented

through banking institutions, have not beenfully successful in meeting their

social and economic objectives:The common features of these

programmes were:- Target orientation Based on grant/subsidy, and Credit

linkage through commercial banks.These programmes:- Were often not

sustainable Perpetuated the dependent status of the beneficiaries

Depended ultimately on government employees for delivery Led to misuse

of both credit and subsidy and Were treated at best as poverty alleviation

interventions.Who are the clients of micro finance?The typical micro

finance clients are low-income persons that do not have access to formal

financialinstitutions. Micro finance clients are typically self-employed, often

household-based entrepreneurs. Inrural areas, they are usually small

farmers and others who are engaged in small income-generatingactivities

such as food processing and petty trade. In urban areas, micro finance

activities are more 26

diverse and include shopkeepers, service providers, artisans, street

vendors, etc. Micro finance clientsare poor and vulnerable non-poor who

have a relatively unstable source of income.Access to conventional formal

financial institutions, for many reasons, is inversely related to income:the

poorer you are the less likely that you have access. On the other hand, the

chances are that, thepoorer you are, the more expensive or onerous

informal financial arrangements. Moreover, informalarrangements may not

suitably meet certain financial service needs or may exclude you

anyway.Individuals in this excluded and under-served market segment are

the clients of micro finance.As we broaden the notion of the types of

services micro finance encompasses, the potential market ofmicro finance

clients also expands. It depends on local conditions and political climate,

activeness ofcooperatives, SHG & NGOs and support mechanism. For

instance, micro credit might have a far morelimited market scope than say

a more diversified range of financial services, which includes varioustypes

of savings products, payment and remittance services, and various

insurance products. Forexample, many very poor farmers may not really

wish to borrow, but rather, would like a safer place tosave the proceeds

from their harvest as these are consumed over several months by the

requirements ofdaily living. Central government in India has established a

strong & extensive link between NABARD(National Bank for Agriculture &

Rural Development), State Cooperative Bank, District CooperativeBanks,

Primary Agriculture & Marketing Societies at national, state, district and

village level.The Need in India:- India is said to be the home of one third of

the world‟s poor; official estimates range from 26 to 50 percent of the more

than one billion population. About 87 percent of the poorest households do

not have access to credit. The demand for microcredit has been estimated

at up to $30 billion; the supply is less than $2.2 billion combined by all

involved in the sector.Due to the sheer size of the population living in

poverty, India is strategically significant in the globalefforts to alleviate

poverty and to achieve the Millennium Development Goal of halving the

world‟spoverty by 2015. Microfinance has been present in India in one

form or another since the 1970s and isnow widely accepted as an effective

poverty alleviation strategy. Over the last five years, themicrofinance

industry has achieved significant growth in part due to the participation of

commercialbanks. Despite this growth, the poverty situation in India

continues to be challenging.Some principles that summarize a century and

a half of development practice were encapsulated in2004 by Consultative

Group to Assist the Poor (CGAP) and endorsed by the Group of Eight

leaders atthe G8 Summit on June 10, 2004: Poor people need not just

loans but also savings, insurance and money transfer services. 27

Microfinance must be useful to poor households: helping them raise

income, build up assets and/or cushion themselves against external

shocks. “Microfinance can pay for itself.”Subsidies from donors and

government are scarce and uncertain, and so to reach large numbers of

poor people, microfinance must pay for itself. Microfinance means building

permanent local institutions. Microfinance also means integrating the

financial needs of poor people into a country‟s mainstream financial

system. “The job of government is to enable financial services, not to

provide them.” “Donor funds should complement private capital, not

compete with it.” “The key bottleneck is the shortage of strong institutions

and managers.” Donors should focus on capacity building. Interest rate

ceilings hurt poor people by preventing microfinance institutions from

covering their costs, which chokes off the supply of credit. Microfinance

institutions should measure and disclose their performance – both

financially and socially.Microfinance can also be distinguished from charity.

It is better to provide grants to families who aredestitute, or so poor they

are unlikely to be able to generate the cash flow required to repay a loan.

Thissituation can occur for example, in a war zone or after a natural

disaster.Financial needs and Financial services:-In developing economies

and particularly in the rural areas, many activities that would be classified

inthe developed world as financial are not monetized: that is, money is not

used to carry them out.Almost by definition, poor people have very little

money. But circumstances often arise in their livesin which they need

money or the things money can buy.In Stuart Rutherford‟s recent book The

Poor and Their Money, he cites several types of needs: Lifecycle Needs:

such as weddings, funerals, childbirth, education, homebuilding,

widowhood, old age. Personal Emergencies: such as sickness, injury,

unemployment, theft, harassment or death. Disasters: such as fires, floods,

cyclones and man-made events like war or bulldozing of dwellings.

Investment Opportunities: expanding a business, buying land or

equipment, improving housing, securing a job (which often requires paying

a large bribe), etc. 28

Poor people find creative and often collaborative ways to meet these

needs, primarily through creatingand exchanging different forms of non-

cash value. Common substitutes for cash vary from country tocountry but

typically include livestock, grains, jewellery and precious metals.As

Marguerite Robinson describes in The Microfinance Revolution, the 1980s

demonstrated that“microfinance could provide large-scale outreach

profitably,” and in the 1990s, “microfinance beganto develop as an

industry”. In the 2000s, the microfinance industry‟s objective is to satisfy

the unmetdemand on a much larger scale, and to play a role in reducing

poverty. While much progress has beenmade in developing a viable,

commercial microfinance sector in the last few decades, several

issuesremain that need to be addressed before the industry will be able to

satisfy massive worldwidedemand.The obstacles or challenges to building

a sound commercial microfinance industry include: Inappropriate donor

subsidies Poor regulation and supervision of deposit-taking MFIs Few MFIs

that mobilize savings Limited management capacity in MFIs Institutional

inefficiencies Need for more dissemination and adoption of rural,

agricultural microfinance methodologiesRole of Microfinance:-The micro

credit of microfinance progamme was first initiated in the year 1976 in

Bangladesh withpromise of providing credit to the poor without collateral ,

alleviating poverty and unleashing humancreativity 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.1.1 Strategic Policy

InitiativesSome of the most recent strategic policy initiatives in the area of

Microfinance taken by thegovernment and regulatory bodies in India are:

Working group on credit to the poor through SHGs, NGOs, NABARD, 1995

The National Microfinance Taskforce, 1999 Working Group on Financial

Flows to the Informal Sector (set up by PMO), 2002 29

Microfinance Development and Equity Fund, NABARD, 2005 Working

group on Financing NBFCs by Banks- RBI1.2 Activities in

MicrofinanceMicrocredit: It is a small amount of money loaned to a client by

a bank or other institution.Microcredit can be offered, often without

collateral, to an individual or through group lending.Micro savings: These

are deposit services that allow one to save small amounts of money for

futureuse. Often without minimum balance requirements, these savings

accounts allow households to save inorder to meet unexpected expenses

and plan for future expenses.Micro insurance: It is a system by which

people, businesses and other organizations make a paymentto share risk.

Access to insurance enables entrepreneurs to concentrate more on

developing theirbusinesses 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 acrossborders to family

and friends. Compared with other sources of capital that can fluctuate

depending onthe political or economic climate, remittances are a relatively

steady source of funds.1.3 Legal RegulationsBanks in India are regulated

and supervised by the Reserve Bank of India (RBI) under the RBI Act

of1934, Banking Regulation Act, Regional Rural Banks Act, and the

Cooperative Societies Acts of therespective state governments for

cooperative banks.NBFCs are registered under the Companies Act, 1956

and are governed under the RBI Act. There isno specific law catering to

NGOs although they can be registered under the Societies Registration

Act,1860, the Indian Trust Act, 1882, or the relevant state acts. There has

been a strong reliance on self-regulation for NGO MFIs and as this applies

to NGO MFIs mobilizing deposits from clients who alsoborrow. This

tendency is a concern due to enforcement problems that tend to arise with

self-regulatoryorganizations. In January 2000, the RBI essentially created a

new legal form for providingmicrofinance services for NBFCs registered

under the Companies Act so that they are not subject toany capital or

liquidity requirements if they do not go into the deposit taking business.

Absence ofliquidity requirements is concern to the safety of the sector. 30

Development Process through Micro FinanceDonors and Banks Micro-

Finance Governmentand Banks Implementing Organisations Individual

Awareness/Promotional Work Individual Promotion and Formation of SHGs

Micro Enterprise Consolidation of SHGs Micro Enterprise

SavingsConsumption Needs Credit Delivery Production Needs Recovery

Follow-up Monitoring Income Generation Farm Related (Sustainable &

Growth Non-Farm Related Oriented) Self-Sustainability of SHGs Economic

Empowerment through use of Micro-Credit as an entry point for overall

Empowerment Figure 3.1 31

Micro-finance interventions through different organisations National

Government Funded Donors/Bilateral Financial Banks Programmes

Projects Institutions Implementing OrganisationsResource/Support

Indirectly Organisations engaged in Directly engaged in Micro-Finance

Micro-Finance Individuals SHGs Members Figure 3.2 32

Microfinance in IndiaAt present lending to the economically active poor

both rural and urban is pegged at around Rs.7000crores in the Indian

banks‟ credit outstanding. As against this, according to even the most

conservativeestimates, the total demand for credit requirements for this

part of Indian society is somewhere aroundRs.2,00,000

crores.Microfinance changing the face of poor IndiaMicro-Finance is

emerging as a powerful instrument for poverty alleviation in the new

economy. InIndia, micro-Finance scene is dominated by Self Help Groups

(SHGs) - Banks linkage Programme,aimed at providing a cost effective

mechanism for providing financial services to the unreached poor.In the

Indian context terms like "small and marginal farmers", " rural artisans" and

"economicallyweaker sections" have been used to broadly define micro-

finance customers. Research across the globehas shown that, over time,

microfinance clients increase their income and assets, increase the

numberof years of schooling their children receive, and improve the health

and nutrition of their families.A more refined model of micro-credit delivery

has evolved lately, which emphasizes the combineddelivery of financial

services along with technical assistance, and agricultural business

developmentservices. When compared to the wider SHG bank linkage

movement in India, private MFIs have hadlimited outreach. However, we

have seen a recent trend of larger microfinance institutionstransforming

into Non-Bank Financial Institutions (NBFCs). This changing face of

microfinance inIndia appears to be positive in terms of the ability of

microfinance to attract more funds and thereforeincrease outreach. In

terms of demand for micro-credit or micro-finance, there are three

segments, which demandfunds. They are: At the very bottom in terms of

income and assets, are those who are landless and engaged in agricultural

work on a seasonal basis, and manual labourers in forestry, mining,

household industries, construction and transport. This segment requires,

first and foremost, consumption credit during those months when they do

not get labour work, and for contingencies such as illness. They also need

credit for acquiring small productive assets, such as livestock, using which

they can generate additional income. The next market segment is small

and marginal farmers and rural artisans, weavers and those self-employed

in the urban informal sector as hawkers, vendors, and workers in

household micro-enterprises. This segment mainly needs credit for working

capital, a small part of which also serves consumption needs. This

segment also needs term credit for acquiring additional productive assets,

such as irrigation pumpsets, borewells and livestock in case of farmers,

and equipment (looms, machinery) and worksheds in case of non-farm

workers. 33

The third market segment is of small and medium farmers who have gone

in for commercial crops such as surplus paddy and wheat, cotton,

groundnut, and others engaged in dairying, poultry, fishery, etc. Among

non-farm activities, this segment includes those in villages and slums,

engaged in processing or manufacturing activity, running provision stores,

repair workshops, tea shops, and various service enterprises. These

persons are not always poor, though they live barely above the poverty line

and also suffer from inadequate access to formal credit.Well these are the

people who require money and with Microfinance it is possible. Right now

theproblem is that, it is SHGs which are doing this and efforts should be

made so that the big financialinstitutions also turn up and start supplying

funds to these people. This will lead to a better India andwill definitely fulfill

the dream of our late Prime Minister, Mrs. Indira Gandhi, i.e. Poverty.One

of the statements is really appropriate here, which is as:“Money, says the

proverb makes money. When you have got a little, it is often easy to get

more. Thegreat difficulty is to get that little.”Adams Smith.Today India is

facing major problem in reducing poverty. About 25 million people in India

are underbelow poverty line. With low per capita income, heavy population

pressure, prevalence of massiveunemployment and underemployment, low

rate of capital formation, misdistribution of wealth andassets , prevalence

of low technology and poor economics organization and instability of output

ofagriculture production and related sectors have made India one of the

poor countries of the world.Present Scenario of India:India falls under low

income class according to World Bank. It is second populated country in

theworld and around 70 % of its population lives in rural area. 60% of

people depend on agriculture, as aresult there is chronic underemployment

and per capita income is only $ 3262. This is not enough toprovide food to

more than one individual. The obvious result is abject poverty, low rate of

education,low sex ratio, exploitation. The major factor account for high

incidence of rural poverty is the lowasset base. According to Reserve Bank

of India, about 51 % of people house possess only 10% of thetotal asset of

India .This has resulted low production capacity both in agriculture (which

contributearound 22-25% of GDP) and Manufacturing sector. Rural people

have very low access toinstitutionalized credit (from commercial

bank).Poverty alleviation programmes and conceptualization of

Microfinance:There has been a continuous effort of planners of India in

addressing the poverty. They have come upwith development programmes

like Integrated Rural Development progamme (IRDP), National

RuralEmployment Programme (NREP), Rural Labour Employment

Guarantee Programme (RLEGP) etc. 34

But these progamme have not been able to create massive impact in

poverty alleviation. Theproduction oriented approach of planning without

altering the mode of production could not but resultof the gains of

development by owners of instrument of production. The mode of

production doesremain same as the owners of the instrument have low

access to credit which is the major factor ofproduction. Thus in Nineties

National bank for agriculture and rural development(NABARD)

launchespilot projects of Microfinance to bridge the gap between demand

and supply of funds in the lowerrungs of rural economy. Microfinance the

buzzing word of this decade was meant to cure the illness ofrural economy.

With this concept of Self Reliance, Self Sufficiency and Self Help gained

momentum.The Indian microfinance is dominated by Self Help Groups

(SHGs) and their linkage to Banks.Deprived of the basic banking facilities,

the rural and semi urban Indian masses are still relying oninformal

financing intermediaries like money lenders, family members, friends

etc.Distribution of Indebted Rural Households: Agency wiseCredit Agency

Percentage of Rural HouseholdsGovernment 6.1Cooperative Societies

21.6Commercial banks and RRBs 33.7Insurance 0.3Provident Fund

0.7Other Institutional Sources 1.6All Institutional Agencies 64.0Landlord

4.0Agricultural Moneylenders 7.0Professional Moneylenders 10.5Relatives

and Friends 5.5Others 9.0All Non Institutional Agencies 36.0All Agencies

100.0 Table 3.2Self Help Groups (SHGs)Self- help groups (SHGs) play

today a major role in poverty alleviation in rural India. A growingnumber of

poor people (mostly women) in various parts of India are members of

SHGs and activelyengage in savings and credit (S/C), as well as in other

activities (income generation, natural resourcesmanagement, literacy, child

care and nutrition, etc.). The S/C focus in the SHG is the most prominent

35

element and offers a chance to create some control over capital, albeit in

very small amounts. TheSHG system has proven to be very relevant and

effective in offering women the possibility to breakgradually away from

exploitation and isolation.How self-help groups workNABARD (1997)

defines SHGs as "small, economically homogenous affinity groups of rural

poor,voluntarily formed to save and mutually contribute to a common fund

to be lent to its members as perthe group members decision".Most SHGs

in India have 10 to 25 members, who can be either only men, or only

women, or onlyyouth, or a mix of these. As womens SHGs or sangha have

been promoted by a wide range ofgovernment and non- governmental

agencies, they now make up 90% of all SHGs.The rules and regulations of

SHGs vary according to the preferences of the members and

thosefacilitating their formation. A common characteristic of the groups is

that they meet regularly(typically once per week or once per fortnight) to

collect the savings from members, decide to whichmember to give a loan,

discuss joint activities (such as training, running of a communal business,

etc.),and to mitigate any conflicts that might arise. Most SHGs have an

elected chairperson, a deputy, atreasurer, and sometimes other office

holders.Most SHGs start without any external financial capital by saving

regular contributions by themembers. These contributions can be very

small (e.g. Rs.10 per week). After a period of consistentsavings (e.g. 6

months to one year) the SHGs start to give loans from savings in the form

of smallinternal loans for micro enterprise activities and consumption. Only

those SHGs that have utilized theirown funds well are assisted with

external funds through linkages with banks and other

financialintermediaries.Micro Finance Models 1. Micro Finance Institutions

(MFIs): MFIs are an extremely heterogeneous group comprising NBFCs,

societies, trusts and cooperatives. They are provided financial support from

external donors and apex institutions including the RashtriyaMahilaKosh

(RMK), SIDBI Foundation for micro-credit and NABARD and employ a

variety of ways for credit delivery. Since 2000, commercial banks including

Regional Rural Banks have been providing funds to MFIs for on lending to

poor clients. Though initially, only a handful of NGOs were “into” financial

intermediation using a variety of delivery methods, their numbers have

increased considerably today. While there is no published data on private

MFIs operating in the country, the number of MFIs is estimated to be

around 800. 36

Legal Forms of MFIs in India Types of MFIs Estimated Legal Acts under

which Registered Number* 1. Not for Profit MFIs 400 to 500 Societies

Registration Act, 1860 or similar Provincial Acts a.) NGO - MFIs Indian

Trust Act, 1882 b.) Non-profit Companies 10 Section 25 of the Companies

Act, 1956 2. Mutual Benefit MFIs 200 to 250 Mutually Aided Cooperative

Societies a.) Mutually Aided Cooperative Act enacted by State Government

Societies (MACS) and similarly set up institutions 3. For Profit MFIs 6

Indian Companies Act, 1956 a.) Non-Banking Financial Reserve Bank of

India Act, 1934 Companies (NBFCs) Total 700 – 800 Table 3.32. Bank

Partnership Model This model is an innovative way of financing MFIs. The

bank is the lender and the MFI acts as an agent for handling items of work

relating to credit monitoring, supervision and recovery. In other words, the

MFI acts as an agent and takes care of all relationships with the client,

from first contact to final repayment. The model has the potential to

significantly increase the amount of funding that MFIs can leverage on a

relatively small equity base. A sub - variation of this model is where the

MFI, as an NBFC, holds the individual loans on its books for a while before

securitizing them and selling them to the bank. Such refinancing through

securitization enables the MFI enlarged funding access. If the MFI fulfills

the “true sale” criteria, the exposure of the bank is treated as being to the

individual borrower and the prudential exposure norms do not then inhibit

such funding of MFIs by commercial banks through the securitization

structure.3. Banking Correspondents The proposal of “banking

correspondents” could take this model a step further extending it to

savings. It would allow MFIs to collect savings deposits from the poor on

behalf of the bank. It would use the ability of the MFI to get close to poor

clients while relying on the financial strength of the bank to safeguard the

deposits. This regulation evolved at a time when there were 37

genuine fears that fly-by-night agents purporting to act on behalf of banks

in which the people have confidence could mobilize savings of gullible

public and then vanish with them. It remains to be seen whether the

mechanics of such relationships can be worked out in a way that minimizes

the risk of misuse. 4. Service Company Model Under this model, the bank

forms its own MFI, perhaps as an NBFC, and then works hand in hand with

that MFI to extend loans and other services. On paper, the model is similar

to the partnership model: the MFI originates the loans and the bank books

them. But in fact, this model has two very different and interesting

operational features: The MFI uses the branch network of the bank as its

outlets to reach clients. This allows the client to be reached at lower cost

than in the case of a stand–alone MFI. In case of banks which have large

branch networks, it also allows rapid scale up. In the partnership model,

MFIs may contract with many banks in an arm‟s length relationship. In the

service company model, the MFI works specifically for the bank and

develops an intensive operational cooperation between them to their

mutual advantage. The Partnership model uses both the financial and

infrastructure strength of the bank to create lower cost and faster growth.

The Service Company Model has the potential to take the burden of

overseeing microfinance operations off the management of the bank and

put it in the hands of MFI managers who are focused on microfinance to

introduce additional products, such as individual loans for SHG graduates,

remittances and so on without disrupting bank operations and provide a

more advantageous cost structure for microfinance.Bank Led ModelThe

bank led model was derived from the SHG-Bank linkage program of

NABARD. Through thisprogram, banks financed Self Help Groups (SHGs)

which had been promoted by NGOs andgovernment agencies.ICICI Bank

drew up aggressive plans to penetrate rural areas through its SHG

program. However,rather than spending time in developing rural

infrastructure of its own, in 2000, ICICI Bank announcedmerger of Bank of

Madura (BoM), which had significant presence in the rural areas of South

India,especially Tamil Nadu, with a customer base of 1.9 million and 87

branches. Bank of Maduras SHGdevelopment program was initiated in

1995. Through this program, it had formed, trained and initiatedsmall

groups of women to undertake financial activities like banking, saving and

lending. By 2000, ithad created around 1200 SHGs across Tamil Nadu and

provided credit to them. 38

Partnership ModelsA model of microfinance has emerged in recent years

in which a microfinance institution (MFI)borrows from banks and on-lends

to clients; few MFIs have been able to grow beyond a certain point.Under

this model, MFIs are unable to provide risk capital in large quantities, which

limits the advancesfrom banks. In addition, the risk is being entirely borne

by the MFI, which limits its risk-taking.This model aimed at synergizing the

comparative advantages and financial strength of the bank withsocial

intermediation, mobilization power and infrastructure of MFIs and NGOs.

Through this model,ICICI Bank could save on the initial costs of developing

rural infrastructure and micro creditdistribution channels and could take

advantage of the expertise of these institutions in rural areas.Initially, ICICI

Bank started off by lending to MFIs and NGOs in order to provide the

necessaryfinancial support to their activities. Later, ICICI Bank came up

with a plan where the NGO/MFIcontinued to promote their microfinance

schemes, while the bank met the financial requirements of

theborrowers.TYPES OF ORGANIZATIONThese organizations are

classified in the following categories to indicate the functional aspects

coveredby them within the micro finance framework. The aim, however, is

not to "typecast" an organization,as these have many other activities within

their scope:Microfinance providers in India can be classified under three

broad categories: formal, semiformal,and informal. Formal Sector The

formal sector comprises of the bankssuch as NABARD, SIDBI and other

regional rural banks (RRBs). They primarily provide credit for assistance in

agriculture and micro-enterprise development and primarily target the poor.

Their deposit at around Rs.350 billion and of that, around Rs.250 billion

has been given as advances. They charge an interest of 12-13.5% but if

we include the transaction costs (number of visits to banks, compulsory

savings and costs incurred for payments to animators/staff/local leaders

etc.) they come out to be as high as 21- 24%. Semi - formal Sector The

majority of institutional microfinance providers in India are semi-formal

organizations broadly referred to as MFIs. Registered under a variety of

legal acts, these organizations greatly differ in philosophy, size, and

capacity. There are over 500 non-government organizations 39

(NGOs) registered as societies, public trusts, or non-profit companies.

Organizations implementing micro-finance activities can be categorized

into three basic groups. I. Organizations which directly lend to specific

target groups and are carrying out all related activities like recovery,

monitoring, follow-up etc. II. Organizations who only promote and provide

linkages to SHGs and are not directly involved in micro lending operations.

III. Organizations which are dealing with SHGs and plan to start micro-

finance related activities. Informal Sector In addition to friends and family,

moneylenders, landlords, and traders constitute the informal sector. While

estimates of their importance vary significantly, it is undeniable that they

continue to play a significant role in the financial lives of the poor. These

are the organizations that provide support to implementing organizations.

The support may be in terms of resources or training for capacity building,

counseling, networking, etc. They operate at state/regional or national

level. They may or may not be directly involved in micro-finance activities

adopted by the associations/collectives to support implementing

Organizations.Grameen BankThe Grameen Model which was pioneered by

Prof MuhammedYunus of Grameen Bank is perhaps themost well-known,

admired and practiced model in the world. The model involves the

followingelements. Homogeneous affinity group of five Eight groups form a

Centre Centre meets every week Regular savings by all members Loan

proposals approved at Centre meeting Loan disbursed directly to

individuals All loans repaid in 50 installmentsThe Grameen model follows a

fairly regimented routine. It is very cost intensive as it involves

buildingcapacity of the groups and the customers passing a test before the

lending could start. The groupmembers tend to be selected or at least

strongly vetted by the bank. One of the reasons for the highcost is that staff

members can conduct only two meetings a day and thus are occupied for

only a few 40

hours, usually early morning or late in the evening. They were used

additionally for accounting work,but that can now be done more cost

effectively using computers. The model is also rather meetingintensive

which is fine as long as the members have no alternative use for their time

but can be aproblem as members go up the income ladder.The greatness

of the Grameen model is in the simplicity of design of products and

delivery. Theprocess of delivery is scalable and the model could be

replicated widely. The focus on the poorest,which is a value attribute of

Grameen, has also made the model a favourite among the

donorcommunity.However, the Grameen model works only under certain

assumptions. As all the loans are only forenterprise promotion, it assumes

that all the poor want to be self-employed. The repayment of loansstarts

the week after the loan is disbursed – the inherent assumption being that

the borrowers canservice their loan from the ex-ante income.SKS

Microfinance(CEO-VikramAkula)Many companies say they protect the

interests of their customers. Very few actually sit in dirt withthem, using

stones, flowers, sticks, and chalk powder to figure out if they will be able to

repay a $20loan at $1 a month. With this approach, this company has

created its own loyal gang of over 2 millioncustomers.Its borrowers include

agricultural laborers, mom-and-pop entrepreneurs, street vendors, home

basedartisans, and small scale producers, each living on less than $2 a

day. It works on a model that wouldallow micro-finance institutions to scale

up quickly so that they would never have to turn poor personaway.Its

model is based on 3 principles- 1. Adopt a profit-oriented approach in order

to access commercial capital- Starting with the pitch that there is a high

entrepreneurial spirit amongst the poor to raise the funds, SKS converted

itself to for-profit status as soon as it got break even and got philanthropist

Ravi Reddy to be a founding investor. Then it secured money from parties

such as Unitus, a Seattle based NGO that helps promote micro-finance;

SIDBI; and technology entrepreneur VinodKhosla. Later, it was able to

attract multimillion dollar lines of credit from Citibank, ABN Amro, and

others. 2. Standardize products, training, and other processes in order to

boost capacity- They collect standard repayments in round numbers of 25

or 30 rupees. Internally, they have factory style training models. They enroll

about 500 loan officers every month. They participate in theory classes on

Saturdays and practice what they have learned in the field during the week.

They 41

have shortened the training time for a loan officer to 2 months though the

average time taken by other industry players is 4-6 months. 3. Use

Technology to reduce costs and limit errors- It could not find the software

that suited its requirements, so it they built their own simple and user

friendly applications that a computer- illiterate loan officer with a 12th grade

education can easily understand. The system is also internet enabled.

Given that electricity is unreliable in many areas they have installed car

batteries or gas powered generators as back-ups in many areas.Scaling up

Customer LoyaltyInstead of asking illiterate villagers to describe their

seasonal pattern of cash flows, they encouragethem to use colored chalk

powder and flowers to map out the village on the ground and tell where

thepoorest people lived, what kind of financial products they needed, which

areas were lorded over bywhich loan sharks, etc. They set people‟s tiny

weekly repayments as low as $1 per week and healthand whole life

insurance premiums to be $10 a year and 25 cents per week respectively.

They alsooffer interest free emergency loans. The salaries of loan officers

are not tied to repayment rates andthey journey on mopeds to borrowers‟

villages and schedule loan meetings as early as 7.00 A.M. Deepcustomer

loyalty ultimately results in a repayment rate of 99.5%.Leveraging the SKS

brandIts payoff comes from high volumes. They are growing at 200%

annually, adding 50 branches and1,60,000 new customers a month. They

are also using their deep distribution channels for selling soap,clothes,

consumer electronics and other packaged goods.Marketing of Microfinance

Products:- 1. Contract Farming and Credit Bundling Banks and financial

institutions have been partners in contract farming schemes, set up to

enhance credit. Basically, this is a doable model. Under such an

arrangement, crop loans can be extended under tie-up arrangements with

corporate for production of high quality produce with stable marketing

arrangements provided – and only, provided – the price setting mechanism

for the farmer is appropriate and fair. 2. Agri Service Centre – Rabo India

Rabo India Finance Pvt. Ltd. has established agri-service centres in rural

areas in cooperation with a number of agri-input and farm services

companies. The services provided are similar to those in contract farming,

but with additional flexibility and a wider range of products including

inventory finance. Besides providing storage facilities, each centre rents

out farm 42

machinery, provides agricultural inputs and information to farmers,

arranges credit, sells other services and provides a forum for farmers to

market their products. 3. Non Traditional Markets Similarly, Mother Dairy

Foods Processing, a wholly owned subsidiary of National Dairy

Development Board (NDDB) has established auction markets for

horticulture producers in Bangalore. The operations and maintenance of

the market is done by NDDB. The project, with an outlay of Rs.15 lakh,

covers 200 horticultural farmers associations with 50,000 grower members

for wholesale marketing. Their produce is planned with production and

supply assurance and provides both growers and buyers a common

platform to negotiate better rates. 4. ApniMandi Another innovation is that

of The Punjab Mandi Board, which has experimented with a „farmers‟

market‟ to provide small farmers located in proximity to urban areas, direct

access to consumers by elimination of middlemen. This experiment known

as "ApniMandi" belongs to both farmers and consumers, who mutually help

each other. Under this arrangement a sum of Rs.5.2 lakh is spent for

providing plastic crates to 1000 farmers. Each farmer gets 5 crates at a

subsidized rate. At the mandi site, the Board provides basic infrastructure

facilities. At the farm level, extension services of different agencies are

pooled in. These include inputs subsidies, better quality seeds and loans

from Banks. ApniMandi scheme provides self-employment to producers

and has eliminated social inhibitions among them regarding the retail sale

of their produce.Commercial banksas Microfinance VehiclesCommercial

banks recently have stepped into the realm of microfinance. They have

taken tentative butvery important steps toward distributing Microfinance

loans to the poor. One advantage of theseinstitutions is that they bring in

the risks management practices that they regularly use in theircommercial

operations risk management practices that they regularly use in their

commercialoperations. The other important aspect they bring in is the

professional credit appraisal practices thatare used in their normal

operations. These important features combined with a mission to provide

thepoor entrepreneurs will enhance the social lives and they can run their

business effectively with properaccess to credit. In some cases, successful

microfinance NGOs have transformed themselves into forprofit commercial

banks (BancoSol of Bolivia is a prime example of a microfinance NGO that

hassuccessfully transformed itself into a for-profit commercial bank). This

transformation from a not-for-profit institution into for-profit organization has

increased the focus of these organizations on financialself-sufficiency. This

transformation has been possible because commercial banks have entered

thisarena bringing in key concepts like self-sufficiency, proper credit

appraisal and risk managementpractices. But there are some issues that

have to be dealt with by the banks before embarking on theMicrofinance

journey. 43

They are: 1. Banks Outreach 2. Clarity in objectivesBanks outreach is one

of the most crucial aspects that must be critically examined by them

beforeentering into microfinance sector. One reason for it is that most of

the commercial banks have little orno rural presence with rate exceptions

such as India, where rural banking was a priority and there is asignificant

presence of commercial banks in the rural areas. They have to decide

whether to start theirown branches in rural areas if they do not have any or

partner with other banks or other microfinanceinstitutions in order to get a

foothold in the rural finance sector. The other issue that has to be

resolvedis the clarity in the bank in dealing with its microfinance operations.

They have to decide whether itwill be completely independent operation or

it will be part of their existing rural banking framework.For example, ICICI

bank‟s microfinance operation is a completely independent operation and it

doesnot have any link with its commercial banking operation. Once these

major issues are sorted outcommercial banks will have enough leverage to

approach the microfinance sector with confidence.MICROFINANCE

INSTITUTIONSMicrofinance institutions are perhaps one of the most

important vehicles to reach the rural poor. Theseinstitutions can act as very

important tool to provide the rural entrepreneurs with micro-loans, whichwill

help them to start their own businesses and sustain them. One advantage

that these institutionshave over other financial services delivery vehicles is

the focus. While NGOs have to straddle withvarious non-financial and

financial services activities and commercial bank with other

operations.MFIs can solely focus on providing the financial service to the

poor since the very objective of startingthis kind of institution is to provide

financial services in the rural areas. There are many examples ofMFIs that

has done some stellar work in this area such as ACCION International,

BancoSol andGrameen Bank. These institutions have helped many people

in enhancing their lives and achieving adecent social status in the societies

that they are living in. The key advantages that they have over theother

forms of microfinance are: Focus is solely on providing financial services. It

can provide whole gamut of services from loans to insurance.However, it

has also some advantages like sustainability of these institutions. Most of

the MFIsincluding Grameen bank are still donor supported organization

and many of them still depend onoutside funds for their survival. Only

some have like BancoSol have made successful transition fromdonor

supported financially self-sustained organization. 44

Apart from these there are several other important mechanisms through

while microfinance is providedlike mutual community groups, regional

woman group like Development of Women and Child inRural Area

(DWCRA) and other local organizations. However, they have not played a

significant rolein the microfinance movement till now and they can play a

major role in providing rural financialservices in the long run.ICICI Bank

launches new initiative in micro-finance ICICI Bank has taken a stake of

under 20 per cent in Financial Information Network and Operations Private

Ltd (FINO), which was launched on Thursday, July 13, 2001. FINO

would provide technological solutions as well as services to finance

providers to reach the underserved in the country. ICICI Bank is the lead

facilitator. According to Mr. NachiketMor, Deputy Managing Director,

ICICI Bank, FINO is an independent entity. "We would reduce our stake in

the company when required," he said. ICICI Bank expects to target 200

micro-finance institutions (MFIs) by March 2007, he said, speaking on the

sidelines of the press conference to launch FINO. At present, the bank has

tie- ups with 100 MFIs. FINO is an initiative in the micro-finance sector. It

would target 300-400 million people who do not have access to basic

financial services, said Mr. Manish Khera, CEO, FINO. The company has

an authorized capital of Rs.50 crore. MFIs, NBFCs, RRBs, co-operative

banks, etc. would directly or indirectly tie up with FINO to use its services,

he said. FINO would charge Rs.25-30 per account every year.Core

banking productsFINO has partnered with IBM and i-flex to offer core

banking products. It would also provide creditbureau services, which

includes individual customer credit rating and analytics based on

transactionhistory. It also launched biometric cards for customers, which

would be a proof of identity and givecollateral to them. The card would also

offer multiple products including savings, loans, insurance,recurring

deposits, fixed deposits and remittances. The company would also build-up

customerdatabase, thus bringing them into mainstream banking."There

was a need for automated structured data system like FINO," said Mr. Mor.

"Essential pieces ofinfrastructure are missing in India. We lack credit-

tracking mechanism; therefore there was a need foran intervention like

FINO."The company expects to reach 25 million customers in five years

and two million customers by theend of 2007. 45

FINO aims bringing scale to "micro" business leading to lowering of costs

for the local financialinstitutions (LFIs) and act as an internal technology

department for the LFIs, said Mr. Khera.The company is working on

providing technological solutions in insurance, especially the

healthinsurance sector to the under-privileged," he said. It is interacting

with Nabard, SIDBI and other banksto give shape to what FINO does, said

Mr. Khera.ICICI Banks thrust on micro-financeCHENNAI, MARCH 9. ICICI

Bank has entered into partnerships with various microfinanceinstitutions

(MFI) and non-Government organizations (NGOs) to scale up its micro

lending business.Addressing presspersons here, today, NachiketMor,

Executive Director, ICICI Bank, said, thepartnership model would provide

assured source of funding to NGOs and MFIs. The bank hadextended

advances to the tune of Rs.150 crores as on February 29, this year, under

this scheme, Mr.Mor said.The bank had acquired a network of self-help

groups (SHGs) developed by the erstwhile Bank ofMadura after its merger

with ICICI Bank. Since then the SHG programme had grown substantially

and10,175 groups had been promoted reaching out to 2.03 lakh women

spread across 2,398 villages, theExecutive Director said.One of the micro

finance institutions, `Microcredit Foundation of India, established by K.

M.Thiagarajan, former Chairman of Bank of Madura in 2002, had initiated a

programme for microcreditthrough self-help groups.ICICI Bank has entered

into a memorandum of understanding with Microcredit Foundation

tooutsource SHG development, maintenance of groups, credit linkage and

recovery of loans.Financial Institutions and banksMicrofinance has been

attractive to the lending agencies because of demonstrated sustainability

and oflow costs of operation. Institutions like SIDBI and NABARD are hard-

nosed bankers and would notwork with the idea if they did not see a long

term engagement – which only comes out of sustainability(that is economic

attractiveness).On the supply side, it is also true that it has all the trappings

of a business enterprise, its output istangible and it is easily understood by

the mainstream. This also seems to sound nice to thegovernment, which in

the post liberalization era is trying to explain the logic of every rupee

spent.That is the reason why microfinance has attracted mainstream

institutions like no other developmentalproject. 46

Perhaps the most important factor that got banks involved is what one

might call the policy push.Giventhat most of our banks are in the public

sector, public policy does have some influence on what theywill or will not

do. In this case, policy was followed by diligent, if meandering, promotional

work byNABARD. The policy change about a decade ago by RBI to allow

banks to lend to SHGs was initiallyfollowed by a seven-page memo by

NABARD to all bank chairmen, and later by sensitization andtraining

programmes for bank staff across the country. Several hundred such

programmes wereconducted by NGOs alone, each involving 15 to 20 bank

staff, all paid for by NABARD. The policypush was sweetened by the

NABARD refinance scheme that offers much more favorable terms

(100%refinance, wider spread) than for other rural lending by banks.

NABARD also did some system settingwork and banks lately have been

given targets. The canvassing, training, refinance and close follow upby

NABARD has resulted in widespread bank involvement.Moreover, for

banks the operating cost of microfinance is perhaps much less than for

pure MFIs. Thebanks already have a vast network of branches. To the

extent that an NGO has already promoted SHGsand the SHG portfolio is

performing better than the rest of the rural (if not the entire)

portfolio,microfinance via SHGs in the worst case would represent marginal

addition to cost and would oftenreduce marginal cost through better

capacity utilization. In the process the bank also earns browniepoints with

policy makers and meets its priority sector targets.It does not take much

analysis to figure out that the market for financial services for the 50-60

millionpoor households of India, coupled with about the same number who

are technically above the povertyline but are severely under-served by the

financial sector, is a very large one. Moreover, as in anyemerging market,

though the perceived risks are higher, the spreads are much greater. The

traditionalcommercial markets of corporates, business, trade, and now

even housing and consumer finance arebeing sought by all the banks,

leading to price competition and wafer thin spreads.Further, bank-groups

are motivated by a number of cross-selling opportunities in the market,

fordeposits, insurance, remittances and eventually mutual funds. Since the

larger banks are offering allthese services now through their group

companies, it becomes imperative for them to expand theirdistribution

channels as far and deep as possible, in the hope of capturing the entire

financial servicesbusiness of a household.Finally, both agri-input and

processing companies such as EID Parry, fast-moving consumer

goods(FMCG) companies such as Hindustan Levers, and consumer

durable companies such as Philips haverealized the potential of this big

market and are actively using SHGs as entry points. Some amount offree-

riding is taking place here by companies, for they are using channels which

were built at asignificant cost to NGOs, funding agencies and/or the

government.On the whole, the economic attractiveness of microfinance as

a business is getting established and thisis a sure step towards

mainstreaming. We know that mainstreaming is a mixed blessing, and one

tendsto exchange scale at the cost of objectives. So it needs to be watched

carefully. 47

The RBI will now directly regulate microfinance sectorThe Reserve Bank of

India has now decided to bunch together the beleaguered microfinance

sector asa niche segment within the category of non-banking financial

companies (NBFC).This means it will now be the direct regulator of this

sector – in line with the recommendations of theMalegam Committee which

made recommendations in this regard after the Andhra

microfinancefiasco.Under guidelines issued on Friday, the RBI has directed

all existing microfinance institutions (MFIs)who can meet its new regulatory

norms to register as NBFC-MFIs by April 2012. Those who do notmeet the

norms cannot, henceforth, lend more than 10 percent of their total assets

to the sector.The conditions set for NBFC-MFIs include the following: They

must have minimum net owned funds of Rs.5 crore (Rs.2 crore if they

operate in the North-East). Their capital adequacy ratio (CAR) has to be 15

percent. This ratio is the measure of a bank‟s capital weighed against its

risk assets (loans). Since MFIs in Andhra are stuck up to their necks in bad

debts, the RBI has given them a one-year concession in capital adequacy.

MFIs with more than 25 percent exposure to Andhra Pradesh need to

maintain only 12 percent CAR in the first year. MFIs cannot lend at more

than 26 percent interest, and margins on borrowed funds cannot exceed 12

percent. This means if MFIs can borrow cheap – say at 10 percent – the

interest rate cap on lending is 22 percent, and not 26 percent. As far as

lending is concerned, not more than two MFIs can lend to the same

borrower while one borrower cannot be a member of two groups

simultaneously. The frequency of repayment installments can be decided

by the borrower. MFIs should have higher cutoffs for lending in urban and

semi-urban areas. MFIs have to start provisioning for defaults, and loans

that are not serviced for more than 90 days should be classified as non-

performing.The Reserve Bank has had to step in because states were

beginning to impose their own regulations.This is what happened in Andhra

Pradesh, where the state issued an ordinance last October whenreports of

borrower suicides and unfair debt collection methods were reported. The

MFI boomcollapsed immediately after the Andhra law was imposed.In its

recent report on “Trend and Progress of the Banking in India, 2011-12″, the

RBI had expressedconcern over states bringing in their own regulations.

This was queering the pitch for big MFIs withbusiness across several

states since they would have to follow different laws in different states. 48

The collapse of MFIs in Andhra Pradesh also sent a clear warning signal

those MFIs needed a singleregulatory environment – especially since

micro financing is seen as one way of improving financialinclusion.The

National Bank for Agriculture and Rural Development (Nabard) was one of

the choices forregulating MFIs, but since it has its own lending exposures

to rural areas, the mantle finally fell on theRBI itself.The MFI industry is

likely to welcome the new norms, barring the one capping interest rates. In

thecurrent high interest rate scenario and high default rates, the 26 percent

limit will squeeze theirmargins.MICROFINANCE AND WOMEN

EMPOWERMENTWomen as micro and small entrepreneurs have

increasingly become the key target group for microfinance programs.

Consequently, providing access to micro finance facilities is not only

considered apre-condition for poverty alleviation, but also considered as a

strategy for empowering women. Indeveloping countries like INDIA micro

finance is playing an important role, promoting genderequality and is

helping in empowering women so that they can live quality life with

dignity.The study conducted by FINCA Client Poverty Assessment

conducted in 2003 revealed that of theinterviewed clients 81 percent were

women, and it was found that food security was 15 percent higheramong

their village banking clients than non-clients. The report also showed

clients to have 11 percentmore of their children enrolled in school with an

18 percent increase in healthcare benefits. Clients‟housing security was

reported as 18 percent higher than non-clients. The assessment concluded

thatmicrofinance improved the wellbeing of women clients and their

families.Microfinance has a positive effect on the empowerment of women

by creating an “empowermentindicator”.These indicators can be based on

the following factors: Mobility. Economic security- enables poor women in

making them economic agents of change by increasing their income and

productivity. Ability to make small purchases. Ability to make larger

purchases. Involvement in major household decisions. Relative freedom

from domination within the family. Political and legal awareness.

Involvement in political campaigning and protests. 49

To access to markets and information. They become more confident. They

get a better control of the resources. They can confront systemic gender

inequalitiesBEIJING CONFERENCE 1995 HAD IDENTIFIED CERTAIN

INDICATORS OF WOMENEMPOWERMENTImportant among them are as

follows: Increase in self-esteem, individual and collective confidence

Increase in articulation, knowledge and awareness on health, nutrition

reproductive rights, law and literacy Increase an decrease in personal

leisure time and time for child care; Increase on decrease of workloads in

new programmes Change in roles and responsibility in family & community.

Visible increase on decrease in violence on women and girls; Responses

to, changes in social customs like child marriage, dowry, discrimination

against widows Visible changes in womens participation level attending

meeting, participating and demanding participation Increase in bargaining

and negotiating power at home, in community and the collective Increase

access to and ability to gather information Formation of women collectives

Positive changes in social attitudes Awareness and recognition of womens

economic contribution within and outside the household; Women‟s

decision-making over her work and incomeWOMEN’S EMPOWERMENT

AND MICRO FINANCE: DIFFERENT PARADIGMSConcern with women‟s

access to credit and assumptions about contributions to

women‟sempowerment are not new. From the early 1970s women‟s

movements in a number of countriesbecame increasingly interested in the

degree to which women were able to access poverty-focusedcredit

programmes and credit cooperatives. In India organizations like Self-

Employed Women‟sAssociation (SEWA) among others with origins and

affiliations in the Indian labour and women‟smovements identified credit as

a major constraint in their work with informal sector women workers. 50

a) Feminist Empowerment ParadigmThe feminist empowerment paradigm

did not originate as a Northern imposition, but is firmly rootedin the

development of some of the earliest micro-finance programmes in the

South, including SEWAin India. It currently underlies the gender policies of

many NGOs and the perspectives of some of theconsultants and

researchers looking at gender impact of micro-finance programmes (e.g.

Chen 1996,Johnson, 1997).Here the underlying concerns are gender

equality6 and women‟s human rights. Women‟sempowerment is seen as

an integral and inseparable part of a wider process of social

transformation.The main target group is poor women and women capable

of providing alternative female role modelsfor change. Increasing attention

has also been paid to mens role in challenging gender inequality.Micro-

finance is promoted as an entry point in the context of a wider strategy for

women‟s economicand socio-political empowerment which focuses on

gender awareness and feminist organization. Asdeveloped by Chen in her

proposals for a sub sector approach to micro credit, based partly on

SEWAsstrategy and promoted by UNIFEM, microfinance must be:Part of a

sectorial strategy for change which identifies opportunities, constraints and

bottlenecks withinindustries which if addressed can raise returns and

prospects for large numbers of women. Possiblestrategies include linking

women to existing services and infrastructure, developing new

technologysuch as labour-saving food processing, building information

networks, and shifting to new markets,policy level changes to overcome

legislative barriers and unionization.Based on participatory principles to

build up incremental knowledge of industries and enable womento develop

their strategies for change (Chen, 1996). Economic empowerment is

however defined inmore than individualist terms to include issues such as

property rights, changes intra-householdrelations and transformation of the

macro-economic context. Many organizations go further thaninterventions

at the industry level to include gender-specific strategies for social and

politicalempowerment. Some programmes have developed very effective

means for integrating genderawareness into programmes and for

organizing women and men to challenge and change genderdiscrimination.

Some also have legal rights support for women and engage in gender

advocacy. Theseinterventions to increase social and political

empowerment are seen as essential prerequisites foreconomic

empowerment.b) Poverty Reduction ParadigmThe poverty alleviation

paradigm underlies many NGO integrated poverty-targeted

communitydevelopment programmes. Poverty alleviation here is defined in

broader terms than market incomes toencompass increasing capacities

and choices and decreasing the vulnerability of poor people.The main

focus of programmes as a whole is on developing sustainable livelihoods,

communitydevelopment and social service provision like literacy,

healthcare and infrastructure development. 51

There is not only a concern with reaching the poor, but also the poorest.

Although term empowermentis frequently used in general terms, often

synonymous with a multi-dimensional definition of povertyalleviation, the

term womens empowerment is often considered best avoided as being

toocontroversial and political.c) Financial Sustainability ParadigmThe

financial self-sustainability paradigm (also referred to as the financial

systems approach orsustainability approach) underlies the models of

microfinance promoted since the mid-1990s by mostdonor agencies and

the Best Practice guidelines promoted in publications by USAID, World

Bank,UNDP and CGAP.The ultimate aim is large programmes which are

profitable and fully self-supporting in competitionwith other private sector

banking institutions and able to raise funds from international

financialmarkets rather than relying on funds from development agencies.

The main target group, despiteclaims to reach the poorest, is the „bankable

poor: small entrepreneurs and farmers. This emphasis onfinancial

sustainability is seen as necessary to create institutions which reach

significant numbers ofpoor people in the context of declining aid budgets

and opposition to welfare and redistribution inmacro-economic

policy.These paradigms do not correspond systematically to any one

organizational model of micro-finance.Micro-finance providers with the

same organizational form e.g. village bank, Grameen model orcooperative

model may have very different gender policies and/or emphases and

strategies for povertyalleviation. The three paradigms represent different

„discourses‟ each with its own relatively consistentinternal logic in relating

aims to policies, based on different underlying understandings

ofdevelopment. They are not only different, but often seen as „incompatible

discourses‟ in uneasytension and with continually contested degrees of

dominance. In many programmes and donoragencies there is considerable

disagreement, lack of communication and/or personal animosity

andpromoted by different stakeholders within organizations between staff

involved in micro-finance(generally firm followers of financial self-

sustainability), staff concerned with human development(generally with

more sympathy for the poverty alleviation paradigm and emphasizing

participation andintegrated development) gender lobbies (generally

incorporating at least some elements of the feministempowerment

paradigm). What is of concern in current debates is the way in which the

use ofapparently similar terminology of empowerment, participation and

sustainability conceals radicaldifferences in policy priorities. Although

women‟s empowerment may be a stated aim in the rhetoricof official

gender policy and program promotion, in practice it becomes subsumed in

and marginalizedby concerns of financial sustainability and/or poverty

alleviation. 52

Micro Credit and Womens EmpowermentBefore 1990s, credit schemes for

rural women were almost negligible. The concept of womens creditwas

born on the insistence by women oriented studies that highlighted the

discrimination and struggleof women in having access to credit. However,

there is a perceptible gap in financing genuine creditneeds of the poor

especially women in the rural sector.There are certain misconceptions

about the poor people that they need loan at subsidized rates ofinterest on

soft terms, they lack education, skills, capacity to save, credit-worthiness

and therefore arenot bankable. Nevertheless, the experiences of several

SHGs(self-help groups) reveal that rural poorare actually efficient

managers of credit and finance. Availability of timely and adequate credit

isessential for them to undertake any economic activity rather than credit

subsidy.The Government measures have attempted to help the poor by

implementing different povertyalleviation programmes but with little

success. Since most of them are target-based involving lengthyprocedures

for loan disbursements, high transaction costs, and lack of supervision and

monitoring.Banks often suffer from poor repayment leading to a high level

of non-performing assets NPAs (non-performing assets).Since the credit

requirements of the rural poor cannot be adopted on project lending

approach as it is inthe case of organized sector, there emerged the need

for an informal credit supply through SHGS. Therural poor with the

assistance from NGOs have demonstrated their potential for self-help to

secureeconomic and financial strength. Various case studies show that

there is a positive correlation betweencredit availability and womens

empowerment.Microfinance refers to the provision of financial services to

low-income clients, including consumersand the self-employed.

Microfinance programmes are currently being promoted as a key strategy

forsimultaneously addressing both poverty alleviation and womens

empowerment. Where financialservice provision leads to the setting up or

expansion of microenterprises there are a range of potentialimpacts

including: Increasing womens income levels and control over income

leading to greater levels of economic independence Access to networks

and markets giving wider experience of the world outside the home, access

to information and possibilities for development of other social and political

roles. Enhancing perceptions of womens contribution to household income

and family welfare, increasing womens participation in household decisions

about expenditure and other issues and leading to greater expenditure on

womens welfare.The term micro finance is of recent origin and is

commonly used in addressing issues related topoverty alleviation, financial

support to micro entrepreneurs, gender development etc. There is, 53

however, no statutory definition of micro finance. The taskforce on

supportative policy and RegulatoryFramework for Microfinance has defined

microfinance as “Provision of thrift, credit and otherfinancial services and

products of very small amounts to the poor in rural, semi-urban or urban

areasfor enabling them to raise their income levels and improve living

standards”. The term “Micro”literally means “small”. But the task force has

not defined any amount. However as per Micro CreditSpecial Cell of the

Reserve Bank Of India , the borrowal amounts up to the limit of Rs.25000/-

couldbe considered as micro credit products and this amount could be

gradually increased up to Rs.40000/-over a period of time which roughly

equals to $500 – a standard for South Asia as per internationalperceptions.

The term micro finance sometimes is used interchangeably with the term

micro credit.However while micro credit refers to purveyance of loans in

small quantities, the term microfinancehas a broader meaning covering in

its ambit other financial services like saving, insurance etc. as well.The

mantra “Microfinance” is banking through groups. The essential features of

the approach are toprovide financial services through the groups of

individuals, formed either in joint liability or co-obligation mode.The other

dimensions of the microfinance approach are:- Savings/Thrift precedes

credit Credit is linked with savings/thrift Absence of subsidies Group plays

an important role in credit appraisal, monitoring and

recovery.EMPOWERMENT: FOCUS ON POOR WOMENWomen have

been the vulnerable section of society and constitute a sizeable segment of

the poverty-struck population. Women face gender specific barriers to

access education health, employment etc.Micro finance deals with women

below the poverty line. Micro loans are available solely and entirelyto this

target group of women. There are several reason for this: Among the poor ,

the poor women aremost disadvantaged –they are characterized by lack of

education and access of resources, both ofwhich is required to help them

work their way out of poverty and for upward economic and socialmobility.

The problem is more acute for women in countries like India, despite the

fact that women‟slabor makes a critical contribution to the economy. This is

due to the low social status and lack ofaccess to key resources. Evidence

shows that groups of women are better customers than men, thebetter

managers of resources. If loans are routed through women benefits of

loans are spread wideramong the household. Since women‟s

empowerment is the key to socio economic development of thecommunity;

bringing women into the mainstream of national development has been a

major concern ofgovernment. The ministry of rural development has

special components for women in its programmes.Funds are earmarked as

“Women‟s component” to ensure flow of adequate resources for the same.

54

Besides SwarnagayantiGrameenSwarazgarYojona (SGSY), Ministry of

Rural Development isimplementing other scheme having women‟s

component .They are the Indira AwasYojona (IAJ),National Social

Assistance Programme (NSAP), Restructured Rural Sanitation

Programme,Accelerated Rural Water Supply programme (ARWSP) the

(erstwhile) Integrated Rural DevelopmentProgramme (IRDP), the

(erstwhile) Development of Women and Children in Rural Areas

(DWCRA)and the JowaharRozgarYojana (JRY).MICRO FINANCE

INSTRUMENT FOR WOMEN’S EMPOWERMENTMicro Finance is

emerging as a powerful instrument for poverty alleviation in the new

economy. InIndia, micro finance scene is dominated by Self Help Groups

(SHGs) – Bank Linkage Programme,aimed at providing a cost effective

mechanism for providing financial services to the “unreachedpoor”. Based

on the philosophy of peer pressure and group savings as collateral

substitute , the SHGprogramme has been successful in not only in meeting

peculiar needs of the rural poor, but also instrengthening collective self-

help capacities of the poor at the local level, leading to theirempowerment.

Micro Finance for the poor and women has received extensive recognition

as a strategyfor poverty reduction and for economic empowerment.

Increasingly in the last five years , there isquestioning of whether micro

credit is most effective approach to economic empowerment of poorestand,

among them, women in particular. Development practitioners in India and

developing countriesoften argue that the exaggerated focus on micro

finance as a solution for the poor has led to neglect bythe state and public

institutions in addressing employment and livelihood needs of the poor.

Credit forempowerment is about organizing people, particularly around

credit and building capacities to managemoney. The focus is on getting the

poor to mobilize their own funds, building their capacities andempowering

them to leverage external credit. Perception women is that learning to

manage money androtate funds builds women‟s capacities and confidence

to intervene in local governance beyond thelimited goals of ensuring

access to credit. Further, it combines the goals of financial sustainability

withthat of creating community owned institutions.Before 1990‟s, credit

schemes for rural women were almost negligible. The concept of women‟s

creditwas born on the insistence by women oriented studies that

highlighted the discrimination and struggleof women in having the access

of credit. However, there is a perceptible gap in financing genuinecredit

needs of the poor especially women in the rural sector. There are certain

misconception aboutthe poor people that they need loan at subsidized rate

of interest on soft terms, they lack education,skill, capacity to save, credit

worthiness and therefore are not bankable. Nevertheless, the experienceof

several SHGs reveals that rural poor are actually efficient managers of

credit and finance.Availability of timely and adequate credit is essential for

them to undertake any economic activityrather than credit subsidy. The

Government measures have attempted to help the poor by 55

implementing different poverty alleviation programmes but with little

success. Since most of them aretarget based involving lengthy procedures

for loan disbursement, high transaction costs, and lack ofsupervision and

monitoring. Since the credit requirements of the rural poor cannot be

adopted onproject lending app roach as it is in the case of organized

sector, there emerged the need for aninformal credit supply through SHGs.

The rural poor with the assistance from NGOs havedemonstrated their

potential for self-help to secure economic and financial strength. Various

casestudies show that there is a positive correlation between credit

availability and women‟s empowermentA real life Examples:-Lakshmi, a

22-year-old school dropout, lived in a remote village of Tamil Nadu. Instead

of gettingmarried and starting a family like any other village girl of her age

in India, she wanted to set up on herown business. Lakshmi started an

Internet kiosk in her village, offering services like e-mail, Internetchat and

tips on health and education. The kiosk was partially financed by ICICI

Bank and was set upin association with n-Logue Communications. Latha, a

29-year-old married woman with three childrenborrowed Rs.18000 to set

up a small provision store in Kothaipalli, a small village, in the north

ofAndhra Pradesh. Within a year, she started earning Rs.3500 a month

from the store. With this money,she was able to provide her children a

good education at a local private school. She was a part of a selfhelp group

in Andhra Pradesh which received financial assistance from ICICI Bank.

These are real-lifeexamples to illustrate how the micro-lending initiatives of

ICICI Bank affected the lives of poorwomen in India. 56

CHAPTER 4OBJECTIVES AND RESEARCH METHODOLOGY 57

INTRODUCTIONThis chapter focuses on the methodology & the

techniques used for the collection, classification &tabulation of data. It light

on the research problem, the objective of study & its

limitaions.OBJECTIVES OF THE STUDY: To study the impact of micro

finance in empowering the social economic status of women and

developing of social entrepreneurship. To know about relationship between

SHG‟s members, micro finance banks and entrepreneur‟s women. To

clarify the limitation of microfinance programmes as the tool for women‟s

empowerment and the type of support service necessary to maximize the

contribution of microfinance service. To study potential hurdles in the

development of women entrepreneurship.RESEARCH

METHODOLOGYResearch methodology is a way to systematically solve

the problem. It is a game plan for conductingresearch. In this we describe

various steps that are taken by the researcher.“All progress is born of

inquiry. Doubt is often better than overconfidence, for it leads to inquiry

andinquiry leads to invention.”Research in a common parlance is a search

for knowledge. Research is an art of scientific andsystematic investigation.

Thus research comprises defining and redefining problems,

formulatinghypothesis or suggested solutions; collecting, organizing and

evaluating data, making deductions andreaching conclusions. Research

methodology is the arrangement of condition for collection andanalysis of

data in a manner that aims to combine relevance to the research purpose

with economy inprocedure. Research Methodology is the conceptual

structure within which research is conducted. Itconstitutes the blueprint for

the collection measurement and analysis of the data.Research

methodology is a framework for the study and is used as a guide in

collecting and analyzingthe data. It is a strategy specifying which approach

will be used for gathering and analyzing the data. italso includes time and

cost budget since most studies are done under these two constraints.

Theresearch methodology includes overall research design, the sampling

procedure, the data collectionmethod and analysis procedure. 58

TYPE OF RESEARCH USED:-Descriptive ResearchIn the study

descriptive research design has been used. As descriptive research design

is thedescription of state of affairs, as it exists at present. In this type of

research the researcher has nocontrol over the variables; he can only

report what has happened or what is happeningDescriptive research

designs are those design which are concerned with describing the

characteristicsof particular individual or of the group. In descriptive and

diagnostic study the researcher must be ableto define clearly what he

wants to measure and must find adequate method for measuring

it.METHOD OF DATA COLLECTIONAfter the research problem has been

identified and selected the next step is to gather the requisite data.While

deciding about the method of data collection to be used for the researcher

should keep in mindtwo types of data i.e. primary and secondary. TYPES

OF DATA PRIMARY SECONDRY DATA DATA Figure 4.1Primary

DataThe primary data are those, which are collected afresh and for the first

time, and thus happened to beoriginal in character. We can obtain primary

data either through observation or through directcommunication with

respondent in one form or another or through personal interview. 59

PRIMARY DATA OBSERVATION INTERVIEW QUETIONAIRE

SCHEDULE METHOD METHIOD METHOD METHOD Figure

4.2Secondary DataThe secondary data on the other hand, are those which

have already been collected by someone elseand which have already been

passed through the statistical processes. When the researcher

utilizessecondary data then he has to look into various sources from where

he can obtain them. For e.g. books,magazine, newspaper, internet,

publications and reports.In this study data have been taken fromvarious

secondary sources like: Internet Books Magazines Newspapers Journals

60

CHAPTER 5 ANALYSIS ANDINTERPRETATION OF DATA 61

Objective 1:-To study the impact of micro finance in empowering the social

economic status ofwomen and developing of social

entrepreneurship.AmountInCrore/No. in Lakhs Particular Year Total SHGs

All Women SHGs % ofWomanGroups No. Amount No. Amount No.

Amount SHG Savingswith 2009-10 69.53 6198.71 53.10 4498.66 76.4 72.6

banks as on 31st March 2010-11 74.62 7016.30 60.98 5298.65 81.7 75.5

Loan disbursed to 2009-10 15.87 14453.3 12.94 12429.37 81.6 86 SHGs

during the 2010-11 11.96 14547.73 10.17 12622.33 85 86.8 year Loan

outstanding 2009-10 48.51 28038.28 38.98 23030.36 80.30 82.1 against

SHGs as on 2010-11 47.87 31221.17 39.84 26123.75 83.2 83.7 31st

March Table 5.1Total No. of Loan disbursed:- Particular 2009-10 2010-11

Total SHGs 15.87 11.96 All Women SHGs 12.94 10.17 Table 5.2 18 16 14

12 10 2009-10 8 2010-11 6 4 2 0 Total SHGs All Women SHGs Figure

5.1Total Amount of loan disbursed:- 62

Particular 2009-10 2010-11 Total SHGs 6198.71 7016.30 All Women

SHGs 4498.66 5298.65 Table 5.3 8000 7000 6000 5000 4000 2009-10

2010-11 3000 2000 1000 0 Total SHGs All Women SHGs Figure

5.2INTERPRETATION: - According to main objective to know the

economic and social developmentof women entrepreneurship. Above table

show the economic development of women. In 2009-10loansdisbursed

amount to women is 12429.37crore and 2010-11 is 12622.33crore. In

2009-10 SHG Savingsamount to women is 4498.66crore and 2010-11 is

5298.65crore and in 2009-10 loan outstandingamounts to women is

23030.36crore and 2010-11 is 26123.75crore. That shows the

economicdevelopment of women.Objective 2:-To know about relationship

between SHG‟s members, micro finance banks andentrepreneur‟s women.

63

Savings of SHGs with public sector commercial banks as on 31st March

2011 Amount Rs. Lakh Details of SHGs Saving linked Out Of Total SHGs-

ExclusiveSr. with Banks Women SHGs Name of The BankNo. No. Of No.

of Saving No. Of No. of Saving SHGs Members Amount SHGs Members

AmountDelhi 1 Allahabad Bank 30 320 14.00 30 320 14.00 2 Bank of

Baroda 383 3775 62.83 377 3685 60.96 3 Bank of India 35 552 6.73 35

552 6.73 4 Indian Bank 815 8956 43.59 789 8675 38.39 5 Central Bank of

India 8 80 0.30 8 80 0.30 6 Syndicate Bank 19 173 2.58 16 165 2.54 7

Punjab National Bank 760 7600 108.42 705 7050 103.99 8 State Bank of

India 751 9012 31.00 751 9012 31.00 Table 5.4 Amount Rs. Lakh 64

Details of SHGs Saving linked Out Of Total SHGs- ExclusiveSr. Name of

The Bank with Banks Women SHGsNo. No. Of No. of Saving No. Of No. of

Saving SHGs Members Amount SHGs Members AmountPunjab 1

Allahabad Bank 304 3040 9.40 95 950 2.94 2 Bank of Baroda 150 1200

50.30 142 710 24.50 3 Bank of India 374 4452 25.43 271 3253 18.76 4

Canara Bank 159 1936 9.53 137 1502 7.28 5 Central Bank of India 540

6022 64.42 354 4106 42.06 6 Punjab & Sind Bank 1113 11744 50.89 745

7911 31.08 7 Punjab National Bank 4315 46575 2041.77 2105 22073

183.38 8 State Bank of India 3944 47328 89.00 3156 37872 71.00 Table

5.5 Amount Rs. Lakh 65

Details of SHGs Saving linked Out Of Total SHGs- ExclusiveSr. with Banks

Women SHGs Name of The BankNo. No. Of No. of Saving No. Of No. of

SavingAmount SHGs Members Amount SHGs MembersHaryana1 Bank of

Baroda 152 725 16.00 129 350 2.602 Bank of India 139 1398 42.15 31 290

2.203 Canara Bank 453 4925 52.25 390 4052 37.59 Central Bank of4 482

5296 28.72 350 3844 19.14 India5 Indian Bank 114 1710 3.63 114 1710

3.63 Punjab & Sind6 704 7040 49.76 411 4110 28.57 Bank Punjab

National7 10703 109260 7002.82 8037 84148 4264.17 Bank8 State Bank

of India 4984 59808 207.00 4190 50280 170.00 Table 5.6 66

Amount Rs. Lakh Details of SHGs Saving linked Out of Total SHGs-

ExclusiveSr. with Banks Women SHGs Name of The BankNo. No. of No.

of Saving No. Of No. of Saving SHGs Members Amount SHGs Members

AmountHimachal Pradesh 1 Bank of India 46 465 11.50 0 0 0.00 2 Canara

Bank 118 1440 4.65 118 1440 4.65 3 Central Bank of India 412 4244 48.21

324 3382 33.68 4 Indian Bank 39 585 2.37 39 585 2.37 5 Punjab & Sind

Bank 92 920 11.62 53 530 6.73 6 Punjab National Bank 18049 182407

1127.80 12301 123010 946.24 7 State Bank of India 6794 81528 126.00

5436 65232 100.00 8 UCO Bank 993 11432 333.19 760 8680 259.91

Table 5.7INTERPRETATION:-There are four states which show the

relationship between Banks SHGs andwomen SHGs. According to above

table it show the total saving of women SHGs with total SHGs andtotal

saving of SHGs with banks. There are more % of women SHGs saving out

of total SHGs saving.In Delhi region 2010-11 highest SHG Savings amount

to women in Punjab national bank is 103.99lakh and lowest in Central

Bank of India is 0.30 lakh. In Punjab region 2010-11 highest SHG

Savingsamount to women in Punjab National Bank is 183.38 lakh and

Lowest in Allahabad Bank is 2.94lakh.In Haryana region 2010-11 highest

SHG Savings amount to women in Punjab National Bank is4264.17 lakh

and Lowest in Bank of India is 2.20 lakh. In Himachal Pradesh region

2010-11 highestSHG Savings amount to women in Punjab National Bank

is 946.24 lakh and Lowest in Bank of Indiais 0.00 Lakh. It shows the good

relationship of women SHGs with SHGs group and banks. 67

Objective 3:- To clarify the limitation of microfinance programmes as the

tool for women‟sempowerment and the type of support service necessary

to maximize the contribution of microfinanceservice. Figure

5.3CHALLENGES FACED BY THE WOMEN

ENTREPRENEURSChallenges are faced by the women entrepreneurs

due to many reasons. Some of the challenges facedby the women

entrepreneurs include- Intense competition from similar products, limited

knowledge, production and quality standards as well as low confidence and

morale. Many women started their own business due to the adverse

circumstances, such as loss of spouses, divorce or financial hardship. Lack

of follow up and holding support (i.e. Capital, market linkages, technical

information and marketing techniques) after receiving Entrepreneurship

development training. A risk averse mindset. Inadequate capital.

Networking problem (i.e. with raw supplier to buyer of products) Insufficient

management and marketing skills. Low level of motivation and courage.

Lack of support from male members (of the families) as well as banks 68

Large magnitude of the target group of poor people. Attitudinal rigidities.

Difficulty in creating awareness among people. Limited resources with the

NGOs. Large requirements of training and sensitization of issues. Limited

number of experienced intervention agencies. Diversities of situations due

to wide coverage.OVERCOMING THE CHALLENGESThe challenges

faced by the women entrepreneurs can be overcome with the help of the

followingmeasures- Creating the Importance of Entrepreneurship program

and skills training, and MF and support under single roof. Training

programme operating in several states helped NGOS-MFIs provide their

microfinance clients different set of skills for successfully running

enterprises. Provide micro credit for livelihood support and to micro

enterprises development. Encouraging women entrepreneur to utilize the

loans for productive purposes and have the potential to become

entrepreneur. Establishing a network of SHG to serve as a “self-help

community” for micro enterprises development activities. Social recognition

of women leading an enterprise. Developing female mentors, trainers and

advisors. Establishing sources of credit.Objective 4:-To study potential

hurdles in the developing of women entrepreneurship.Role of Microfinance

Services:-1. Do not restrict loan use: - Access to financial services provides

the poor with the opportunity toaccumulate assets, to reduce their

vulnerability to shocks (such as illness or death in the household,crop

failure, theft, dramatic price fluctuations, the payment of dowries) and to

invest in income-generation activities. It also enables them to improve the

quality of their lives through better education,health and housing. One of

the most important roles of access to credit is that it enables the poor

todiversify their incomes. Most poor households do not have one source of

income or livelihood. Insteadthey pursue a mix of activities, depending on

the season, prices, their health and other contingencies.This may include

growing their own food, working for others, running small production or

tradingbusinesses, hunting and gathering, and accessing loans. 69

What to do?Microfinance organizations should allow for the fact that

microentrepreneurs have a variety of uses forfunds, not only for the activity

for which a loan is formally given but also for household operations

andother family enterprises. It would be too risky for the poor, particularly

the poorest of the poor, toinvest all their income in a single activity. If the

single activity or enterprise failed, the consequencesof this would be much

greater than if they had several sources of income. Providers of quality

financialservices recognize this and place relatively few restrictions on loan

use. Most microfinanceorganizations do not monitor client loans to ensure

that the loan is being used for its stated purposebecause they recognize

that it is part of the survival strategy of poor clients to make an on-

goingstream of economic choices and decisions. The clients themselves

know how best to manage theirfunds.Example: Kamala Ranis diversified

activities (Bangladesh). Kamala Rani is an experienced borrower.She has

taken loans three times. She invested her small, first loan (1,000 taka) in

her husbandsbusiness. He trades in bamboo and sells bamboo products in

his shop. Kamala also provides labour tomake bamboo mats. When she

obtained her second loan (2,000 taka), she used it to make largecontainers

for storing crops and other products, which she sells fromhome to

wholesalers and villagers.Next she borrowed another 4,000 taka, primarily

to buy a cow. She can repay her loan from her profitsfrom selling milk and

from her investment in her husbands business. She still makes mats and

otherbamboo products, which she plans to sell at the end of the year, when

the price of the mats will go up.She can take advantage of this increase in

the price of the mats because she has other sources ofincome to make her

weekly loan instalment payments. Like other low- income clients, Kamala

Rani‟sdiversified activities enable her to maximize returns from

investment.2. Provide access to financial services, not subsidies:-For

microenterprises, the most common constraint is the lack of access to

working capital to grow theirbusiness. Low-income entrepreneurs want

rapid and continued access to financial services rather thansubsidies, and

they are able – and willing – to pay for these services from their profits.

Most microentrepreneurs borrow small amounts for short-term working

capital needs. The returns from theireconomic activities are normally

sufficient to pay high interest rates for loans and still make a profit.Micro

entrepreneurs value the opportunity to borrow and save with MFIs since

they provide servicesthat are cheaper than those that would normally be

available to poor clients or that would be entirelyunavailable to them.

Moneylenders charge very high interest rates, often many times the rate

chargedby MFIs, and the moneylenders terms may not be suited to the

borrower. Micro entrepreneurs haveconsistently demonstrated that they will

pay the full interest cost to have continued access to financialservices from

MFIs.What to do? 70

MFIs cannot afford to subsidize loans. If the organization is to provide

loans on an on-going basis, itmust charge interest rates that allow it to

cover its costs. These costs tend to be high because providingunsecured,

small loans costs significantly more than loans in traditional banking. The

costs to theinstitution include operating costs, the cost of obtaining the

funds for loans, and the cost of inflation.MFIs cannot rely on governments

and donors as long-term sources of funding. They must be able togenerate

their own income from revenues, including interest and other fees. Since

the poor seekcontinued and reliable access to financial services and are

able and willing to pay for it, it isadvantageous to both the institution and

the clients to charge interest rates that cover the cost of

theservicesExamples: Client demand as an indicator. If clients repay their

loans, pay full-cost interest rates andremain in a programme as borrowers

or savers, it is a very good indication that they value theseservices. A

detailed, independent review of the microfinance activities of the United

Nations CapitalDevelopment Fund (UNCDF) in Africa, Asia and Latin

America found evidence that poor clients werewilling to pay the interest

rates necessary to provide these services. “Even when they have to pay

thefull cost of those services, they use them and come back to use them

again and again.” Continued andreliable access to credit and savings

services is what is most needed. “Subsidized lending programsprovide a

limited volume of cheap loans. When these are scarce and desirable, the

loans tend to beallocated predominantly to a local elite with the influence to

obtain them, bypassing those who needsmaller loans.In addition, there is

substantial evidence from developing countries worldwide thatsubsidized

rural credit programs result in high arrears, generate losses both for the

financial institutionadministering the programs and for the government or

donor agencies, and depress institutional savingand, consequently, the

development of profitable, viable rural financial institutions."3. Financial

services contribute to women’s empowerment:-Women entrepreneurs have

attracted special interest from MFIs because they almost always make

upthe poorest segments of society, they have fewer economic

opportunities, and they are generallyresponsible for child-rearing, including

education, health and nutrition. Given their particularlyvulnerable position,

many MFIs seek to empower women by increasing their economic position

insociety. Experience shows that providing financial services directly to

women aids in this process.Women clients are also seen as beneficial to

the institution because they are seen as creditworthy.Women have

generally demonstrated high repayment and savings rates.What to do?

MFIs interested in serving women should understand the specific needs of

women clients and attractwomen as customers. Women often have fewer

economic opportunities than men. Women also facecultural barriers that

often restrict them to the home (for example, the institution of the veil, or

purdah),making it difficult for them to access finance services.Women have

more traditional roles in theeconomy and may be less able to operate a

business outside of their homes. Women also tend to have 71

disproportionally large household obligations. Loan sizes may need to be

smaller, given that women‟sbusinesses tend to be smaller than mens.

They tend to focus on trade, services and lightmanufacturing. Womens

businesses are often based in the home and frequently use family

labour.Loans to women should allow women to balance their household

and business activities, for example,by not requiring that too much time be

spent in meetings and holding meetings in convenient locations.The

gender of loan officers may also affect the level of female participation in

financial services,depending on the social context.Examples:Women and

empowerment. Regardless of culture or national context, impact

assessments have foundpositive results for women with access to financial

services. For instance, a study on the impact ofmicrofinance on poverty

alleviation in East Africa, conducted by the UNDP MicroSave-

Africaprogramme, found that participation in a microfinance institution

"typically strengthens the position ofthe woman in her family. Not only does

access to credit give the woman the opportunity to make alarger

contribution to the family business, but she can also deploy it to assist the

husbands businessand act as the familys banker - all of which increase her

prestige and influence within the household."Access to networks and

markets giving wider experience of the world outside the home, access

toinformation and possibilities for development of other social and political

roles Enhancing perceptions of womens contribution to household income

and family welfare, increasing womens participation in household decisions

about expenditure and other issues and leading to greater expenditure on

womens welfare More general improvements in attitudes to womens role in

the household and community Many programmes have had negative as

well as positive impacts on women. Where women have set up enterprises

this has often led to small increases in access to income at the cost of

heavier workloads and repayment pressures. Within schemes, impacts

often vary significantly between women. There are differences between

women in different productive activities and between women from different

backgrounds. Positive impact on non-participants cannot be assumed,

even where women participants are able to benefit. Women micro-

entrepreneurs are frequently in competition with each other and the

poorest micro-entrepreneurs may be disadvantaged if programmes do not

include them. 72

CHAPTER 6FINDINGS AND LIMITAIONS 73

FINDINGS Micro financial institutions play a very important role today to

provide the micro finance to the women entrepreneure. Mostly MFI provide

the assistance to the women entrepreneur through MFI- bank linkage

programme. SKS is the largest micro financial institute which providing the

micro finance through different ways. It also coming up with their IPO to get

the more capital to increase their functioning From the current situation we

can understand that today the main focus of micro finance industry is to

empower the woman that‟s why more loans are provided to woman and on

easy terms. From the total SHG more SHG are coming in which only

women are member because women can better run a business and his

family. Narega and SGSY Swaranjyanti Gram SwarojgarYojna are one of

the schemes which are introduced by the government to help the poor

people Schemes are provided by the government to poor people but there

is less people who avail the benefit from these schemes. There are many

challenges face by women to doing the business as entrepreneur like lack

of capital, networking problems etc. But these challenges can be

overcoming with the help of Provide micro credit for livelihood support and

to micro enterprises development, establishing sources of credit. With the

help of relationship data we can see that there are more percentage of

women SHGs out of total SHGs. So that is good indicator for women

entrepreneur. The loan distributed data show increase the % of loan

amount to women as compare to last year. This show the economic

development of women entrepreneur.LIMITATIONS TIME CONSTRAINT

Shortage of time was a very big constraint due to which some area of

micro finance has been included in the study. RESOURCE CONSTRAINT

Availability of data was a constraint due to which only secondary data is

considered, which is available, and also there are some MFIs whose data

was not available SECONDARY DATA 74

All the information available was from secondary sources and data was

very vastto analyze properly & accuratelyWIDE AREA TO STUDY Study

being conducted was very wide & analysis require expertise knowledge &

skills which was lackingNO DIRECT SOURCE OF INFORMATION

AVAILABLEThe information is collected from indirect sources so in some

information data is not availableFUTURE ANALYSISThe whole study was

based on historical data which was not much useful in analysis of

presentand prediction of future. 75

CHAPTER 7 CONCLUSION, IMPLICATIONS ANDRECOMMENDATIONS

76

ConclusionTraditionally women have been marginalized. A high

percentage of women are among the poorest ofthe poor. Microfinance

activities can give them a means to climb out of poverty. Microfinance

couldbe a solution to help them to extend their horizon and offer them

social recognition and empowerment.Numerous traditional and informal

system of credit that was already in existence before micro financecame

into vogue. Viability of micro finance needs to be understood from a

dimension that is farbroader- in looking at its long-term aspects too.A

conclusion that emerges from this account is that micro finance can

contribute to solving theproblems of inadequate housing and urban

services as an integral part of poverty alleviationprogrammes. The

challenge lies in finding the level of flexibility in the credit instrument that

couldmake it match the multiple credit requirements of the low income

borrower without imposingunbearably high cost of monitoring its end use

upon the lenders. A promising solution is to providemultipurpose lone or

composite credit for income generation, housing improvement and

consumptionsupport. Consumption loan is found to be especially important

during the gestation period betweencommencing a new economic activity

and deriving positive income.India is the country where a collaborative

model between banks, NGOs, MFIs and Women‟sorganizations is furthest

advanced. It therefore serves as a good starting point to look at what we

knowso far about „Best Practice‟ in relation to micro-finance for women‟s

empowerment and how differentinstitutions can work together.It is clear

that gender strategies in micro finance need to look beyond just increasing

women‟s accessto savings and credit and organizing self-help groups to

look strategically at how programmes canactively promote gender equality

and women‟s empowerment. On the other hand, thank to

womenscapabilities to combine productive and reproductive roles in

microfinance activities and society hasenabled them to produce a greater

impact as they will increase at the same time the quality of life ofthe

women micro-entrepreneur and also of her family.SUGGESTION Credit is

important for development but cannot by itself enable very poor women to

overcome their poverty. 77

Making credit available to women does not automatically mean they have

control over its use and over any income they might generate from micro

enterprises. In situations of chronic poverty it is more important to provide

saving services than to offer credit. A useful indicator of the tangible impact

of micro credit schemes is the number of additional proposals and

demands presented by local villagers to public authorities. Globalization

will not be allowed to expand the gap between the rich and the poor.

Affluent countries cannot continue to dump aid on needy nations;

developing countries must not be permitted to ignore the needs of their

impoverished population. As the poor are vulnerable it is not sufficient for

us just to provide micro credit, but to have a series of support systems

provided at the appropriate time.Government can contribute most

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