Prabhat Research Report

8/2/2019 Prabhat Research Report

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RESEARCH PROJECT REPORT ON

SIGNIFICANCE OF MICROFINANCE

in RURAL DEVELOPMENT

DECLARATION

I PRABHAT MISHRA 4th

semester of MBA hereby declare that this research project

report entitled Significance of Microfinance as RURAL development has been

submitted by me in partial fulfillment of the requirements for the award of the degree of

Master of Business Administration by the LBSIMDS LUCKNOW. under GB Technical

University.

DATE PRABHAT MISHRA


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PREFACE

Micro-Finance is emerging as a powerful instrument for poverty alleviation in the new

economy. In India, 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'. Based on the philosophy of peer pressure and

group savings as collateral substitute, the SHG programme has been successful in not only

designing financial products meeting peculiar needs of the rural poor, but also in

strengthening collective self-help capacities of the poor at the local level, leading to their

empowerment.

IFAD and the National Bank for Agriculture and Rural Development, in association

with several other agencies, implemented the 'Maharashtra Rural Credit Project'

during 1995-2002, having micro-finance as a crucial component. The official statistics

and related MIS for savings and purpose-wise loans to 73,454 members of 4921 Self

Help Groups are now available. These data have some unique features. For example,

the compositional multivariate time series nature of the savings and loans data is a

valuable component of the knowledge base for future. Further, our analysis shows that

SHG is a useful instrument for savings mobilization and enhancing access to credit

for the rural, unreached poor. Besides consumption smoothening, SHG loaning had

supported working capital requirements and other productive investments as well.

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CONTENTS

i) CERTIFICATE. 2-3

ii) DECLARATION ................... 4

iii) PREFACE 5

iv) CONTENT 6

CHAPTER-I:INTRODUCTION PURPOSES AND OVERVIEW OF THE

STUDY.................................................................................................................9

i) Microfinance in India. .12

ii) Introduction of self help group.. .16

iii) Microfinance in the new economy. .20

CHAPTER-II:MFIs IMPACT ON RURAL & URBANPOVERTY.....................22

iv) Poverty endures.. .23

v) Institutional credit and poverty. .25

vi) Microfinance- instrument for poverty allevation . 26

CHAPTER-III: RESEARCH DESIGN, METHODS & SAMPLE 29

i) Sample survey....30

ii) Quantitative data analysis... .30

iii) Description of sample....30

iv) Survey findings: The impact of micro financial services

on households, individuals, and their economic activities. .34

CHAPTER-IV: MICROFINANCE EFFECT ON INDIA ECONOMY.... .42

i) Forms of MFIs.43

ii) Development process through microfinance .43

iii) Microfinance intervention through different organization .44

iv) Fact related to demand- supply of microfinance.. 44

v) Growth of microfinance sector at global level. .45

CHAPTER-V: MFIs STRATEGY TO REMOVE POVERTY IN

INDIA .47

i) A critical analysis of institutional initiatives of poverty allevation in India 48

ii) NGOs involvement in microfinance & strategies of peoples livelihood .53

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iii) SHG promotion strategy...................................................................... .54

iv) Microfinance institution strategy ..55

v) Social development strategy. .57

CHAPTER-VI: ROLE OF APEX FINANCIAL INSTITUTIONS IN

MICROFINANCE................................................................................................58

i) Sa-dhan. 59ii) SKS microfinance 62iii) Share microfin. .64iv) Bandhan 65v) Cashpor .67vi) Basix..69vii) Samasta microfiunance... 70viii) Nabard.. 71ix) Mix market.. .72

x) Accion international .73xi) Fwwb .74xii) Sidbi.75xiii) Nirmaan bharti.76

CHAPTER-VII: SUGGESTIONS AND CONCLUSION ...77

BIBLIOGRAPHY.79

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CHAPTER-I

INTRODUCTION: PURPOSES AND OVERVIEW

OF THE STUDY

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INTRODUCTION: PURPOSES AND OVERVIEW OF THE STUDY.

Micro-credit is something which is not going to disappear... because this is a need of

the people, whatever name you give it, you have to have those financial facilitiescoming to them because it is totally unfair... to deny half the population of the worldfinancial services.

- Dr. Muhammad Yunus, Founder - Bangladesh Grameen Bank, in March 2002

Home to the largest population of poor in the world, India has been a natural

candidate for experimenting with microfinance as a tool for poverty alleviation. With

a nationalized formal banking sector that has emphasized rural and developmental

banking for several decades now, Indias involvement with small credit targeted

primarily at the rural poor is hardly new. However, recent years have generated

unprecedented interest in microcredit and microfinance in the form of group-lending

without collateral; thanks in part to the remarkable success of institutions like the

Grameen Bank in neighboring Bangladesh and BRI, BancoSol and others in more

distant lands. The performance of organizations like SEWA in Western India and

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SHARE and BASIX in Southern India have convinced many a sceptic that

microfinance can indeed make a difference in India as well.

Over the past decade, NABARDs SHG-Bank Linkage Program aimed at

connecting self-help groups of poor people with banks, has, in fact, created the largest

microfinance network in the world . The self-help group approach has won

enthusiastic supporters among influential policymakers like the Andhra Pradesh CM,

Chandrababu Naidu. Even the central government has recognized the advantages of group

lending and has adopted the approach in its battle against poverty.

Within India the microfinance revolution in Western and Southern India have

received most attention, both in the media as well as in academic research 1. Theposter

boys of Indian microfinance - SHARE, BASIX, SEWA, MYRADA and PRADAN,

for instance - have deservingly received attention from academicians, media-persons as

well as the government. Andhra Pradesh, in particular, has witnessed a remarkable

growth in microfinance activities and its success stories have been widely reported as well.

In comparison Eastern India has not enjoyed the limelight in the stage of microfinance,

partly because of the absence of a single very large microfinance institution in the region.

However Self-Help Groups (SHGs), usually at the behest of certain developmental

non-government organizations (NGOs), have quietly mushroomed in most districts of

Eastern India - particularly in the state of West Bengal - over the last few years.

Millions of poor, predominantly women, are now members of thousands of SHGs.

Studies - academic or practitioner-oriented - documenting the extent and impact of

these Eastern Indian microfinance institutions (MFIs) have, so far, been conspicuous

in their absence. Given the lack of an easily accessible data source covering the

operation and performance of multiple MFIs and SHGs spread out over a region, it is

hardly surprising that much of the extant research on microfinance in India

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has focused on developing case studies, often covering the well-known success

stories. In this paper, we seek to follow a slightly different approach. In an effort to

understand the grassroots situation and appreciate the challenges faced by the not-yet-

superstar NGO MFIs, we put together glimpses of a couple of self-help groups

(SHGs) and take an in-depth look at an NGO MFI from Eastern India .

The paper is organized in the following manner. The next section provides a brief

background of microfinance activities in India. The third section presents brief case

studies of two typical MFIs from West Bengal. The financial management and

operational challenges of yet another MFI is discussed in the fourth section. The fifth and

final section concludes with insights from these case studies and an attempt to

generalize the findings.

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MICROFINANCE IN INDIA

As mentioned before, microfinance activities in India, particularly microcredit, have

had a considerable history in India. Traders and moneylenders have traditionally

provided credit to the rural poor, usually at exorbitant rates of interest leading to

considerable hardship and impoverishment of borrowers. Over the past few decades

government initiatives, both in the form of establishment of a network of Regional

Rural Banks (RRBs) and apex institutions like the National Bank of Agriculture and

Rural Development (NABARD) charged with the role of distributing credit to the

rural and micro-industries, as well as the main poverty alleviation program, Integrated

Rural Development program (IRDP), have sought to boost development and poverty

alleviation through use of rural and micro-credit. However, most of these banks and

programs have been plagued by mismanagement and misuse of funds and abysmal

repayment rates and have failed to emerge as self-sustaining vehicles of microfinance.

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Over the last quarter century, a few organizations, outside the purview of the public sector,

have succeeded in effective poverty alleviation through micro-credit. Self Employed

Womens Association (SEWA) in the Western Indian state of Gujarat and Working

Womens Forum in the Southern state of Tamilnadu were among the pioneers in this

effort. The sector received a major boost in the 1990s with the entry of several non-

government organizations (NGOs).

Many of these NGOs have been previously functioning in different developmental roles

among the poor, and now added microcredit to the list of services they provided. A few

others, impressed by the success of microfinance elsewhere, started off as MFIs. Self-

Help Groups (SHGs) among the poor, mostly women, have rapidly become a common

rural phenomenon in many Indian states.

NGOs provide the leadership and management necessary in forming and running such groups

in most cases. They also act as the crucial link between these groups and the formal

banking system. Presently well over 500 NGO-MFIs are actively engaged in microfinance

intermediation across the country. NABARDs Bank Linkage Program, pilot-tested in 1991-

92 and launched in full vigor in 1996, has been a major effort to connect thousands of

SHGs across the country with the formal banking system. By late 2002, it connected

about half a million SHGs to the banking system with total loan disbursement of about Rs.

1026 crores.

Efforts of other organizations supplement that of NABARD. By March 2001, SIDBI,

for instance, had disbursed over Rs 30 crore to SHGs through 142 MFI-NGOs.In spite

of the impressive rise of microfinance institutions, the scope of further microfinance

efforts in India is almost unlimited. Indeed poverty alleviation in India is a Herculean

task. India has roughly about 60 million poor households, accounting for over 350

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million people, about 35% of the entire population.

Even NABARD aims at reaching only 100 million of the poor (less than a third) by

2008. Clearly, a quantum leap in microfinance activities is necessary if it is expected

to make a serious impact on the poverty situation in India. There are, of course, other

issues connected with microfinance and poverty alleviation. As elsewhere in the

world, it is contended that in India too microfinance often eludes the poorest of the

poor and it is people above poverty line - barely or comfortably - who can benefit

from such microfinancial services. Finally, the distribution of microfinance within

India is far from uniform. While Andhra Pradesh probably has the most widespread

and developed microfinance sector in India. some of the Hindi belt states and the

North-East have significantly lower penetration level of microfinance. However,

given the lack of studies documenting the penetration rates of miccrofinance in

different parts of India, it is difficult to provide more precise information on the

relative spread of microfinance in the different states of India.

Self-Help Groups (SHGs) - voluntary groups of individual savers and borrowers,

usually from the same village, have emerged as the fundamental unit of micro-

borrowing. Non-banking Financial Corporations (NBFCs) and other non-government

organizations (NGOs) typically connect these SHGs to local banks or to the funds

provided by wholesale credit suppliers like NABARD or SIDBI (Small Industries

Development Bank of India). The SHGs develop a habit of saving among its members

for a period of time and then begin making loans to applying members from the

collective savings of the group. After a few rounds of successfully repaid loans, an

SHG begins borrowing from an outside source (i.e. a bank). Banks usually consider

SHGs bankable after six months of their existence. Several alternative models of

SHG-NGO-bank relationship have emerged in recent years. One such model is where

the bank lends directly to the SHG and the latter further lends it to individual

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members. As a variant of this model, an NGO may provide training and guidance to

the SHG still dealing directly with the bank. This has been the most popular model in

the Indian context. Alternatively, the NGO itself may act as an intermediary between

the bank and the SHG, borrowing from the bank and lending it to (usually multiple)

SHGs. Yet another model involves the bank lending directly to the individual

borrower with the NGO and the SHG acquiring an advisory role. Here the NGO

assists the bank in loan monitoring and recovery. Figure 1 gives the approximate

nationwide distribution of SHGs among the different bank financing models.

There are several major legal, regulatory and financial challenges for NGOs involved

in Microfinance activities. Legally, they are usually registered as societies and trusts

with no equity capital and consequently can never be capital adequate in leveraging

debt.

Also, these NGOs do not come under any specific control by any regulatory body and their

only responsibility is to submit annual accounts to the registrar of societies. This lack of

specific regulatory provisions has acted as a mixed blessing in the area - it has allowed for

organic growth and spread of NGO MFIs and at the same time has led to lack of financial

sustainability for most of these organizations, sometimes with disastrous effects on the

goodwill of microfinance at large.

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INTRODUCTION OF SELF HELP GROUP

Self Help Groups (SHGs) form the basic constituent unit of the microfinance

movement In India. An SHG is a group of a few individuals - usually poor and often

women - who pool their savings into a fund from which they can borrow as and when

necessary. Such a group is linked with a bank - a rural, co-operative or commercial

bank- where they maintain a group account. Over time the bank begins to lend to the

group as a unit, without collateral, relying on self-monitoring and peer pressure within the

group for repayment of these loans.

An SHG consists of five to twenty persons, usually all from different families. Often a

group like this is given a name. Each such group has a leader and a deputy leader,

elected by the group members. The members decide among themselves the amount of

deposit they have to make individually to the group account. The starting monthly

individual deposit level is usually low - Rs. 10 or Rs. 20 (about 20-40 US cents). For

a group of size 10, this translates to Rs. 100 to 200 (about $2 to $ 4) of group savings

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per month. On the basis of the resolutions adopted and signed by all members of the

group, the manager of a local rural or commercial bank opens a savings bank account. The

savings are collected by a certain date (often the 10th of the month) from individual

members and deposited in the bank account.

Joining an existing SHG is often a costly affair for an aspiring villager. In order to

maintain parity among the members a new member has to join by depositing the total

accumulated individual savings and interest of the group. Besides the new member

has to be accepted by every member of the existing group. Thus it is often easier for a

person not affiliated with an SHG to start a new SHG than joining a pre-existing one.

Loans are then given out to individual members from out of these funds upon

application and unanimous resolution drawn at a group meeting. The bank permits

withdrawal from the group account on the basis of such resolutions. Such loans, fully funded

out of the savings generated by the group members themselves, are called inter-loans.

The repayment periods of loans are usually short, 3-6 months. After regular loan

issuance and repayment for six months, the bank considers making a bank loan to the

SHG. The maximum loan amount is a multiple (usually 4:1) of the total funds in the group

account.

This limit is also reached gradually starting from a lower (2:1 or 1:1) figure. Thus a

10 member SHG with individual monthly deposit level of Rs. 20, completing a six-

month successful inter-loaning, accumulates total savings of Rs.1200/- (part of

which may be lent out to individual members) and is eligible for a maximum bank

loan of Rs. 4800/-. Self Help Groups are almost always formed with outside

assistance. Developmental NGOs, often with considerable history of working in a

particular area for projects like literacy, sanitation etc., take to organizing SHGs,

bringing together people, explaining the concept to them, attending and helping

coordinate a few of the initial group meetings, helping them maintain

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accounts and linking them with the banks. Of late, some of the rural banks themselves

are being designated as Self Help Promoting Institutions (SHPIs) and they help in the

formation and nursing of SHGs. The country-level breakdown of SHGs according to

their promoting institution. While over half of the SHGs are formed by government

agencies, it should be remembered that about 60% of government-formed SHGs come

from a single state, Andhra Pradesh, where the state government has played a very

pro-active role in SHG financing. While most of the SHG formation/nursing process

has initially been in non-government hands, the developmental potential of the SHG-

based microfinance process has not gone unnoticed by the government. In recent

years, government developmental programs have also sought to target the poor

through the SHGs. The most important of the government programs using the SHG

approach is the Swarnajayanti Gram Swarojgar Yojana (SGSY) launched in 1999 .

With increasing acceptance of the SHG based developmental approach there is

pressure set on village and block level administrators to achieve targets of forming a

certain number of SHGs by a specified date. Thus Panchayats are also promoting

SHGs in many areas. Government involvement in microfinance has, however, not

been an unmixed blessing. Politicizing of the subsidy allotment among SHGs has

become a big problem. Qualification for government subsidy is easily influenced by

Panchayat members. Thus, Panchayats are now competing with NGOs and rural

banks in forming SHGs. While the Panchayat-formed SHGs have the lure of

government grants they are often open to political pressure and misuse of funds by the

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recommending Panchayats and/or political parties. Besides, the NGO-formed SHGs have

the benefit of honest and expert counseling from the nursing NGOs. Thus the quality of

NGO-formed groups are usually superior to those formed by the local government

(Panchayats) and villagers are often keen to join

the former. These age-old problems of government initiatives in poverty reduction,

unless stemmed quickly, can actually harm the movement by eroding the fundamental

precepts of self-help and empowerment of the poor.

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Micro-Finance in the new economy

Micro-Finance is emerging as a powerful instrument for poverty alleviation in the

new economy. In India, 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'. Based on the philosophy of

peer pressure and group savings as collateral substitute, the SHG programme has

been successful in not only designing financial products meeting peculiar needs of the

rural poor, but also in strengthening collective self-help capacities of the poor at the

local level, leading to their empowerment.

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IFAD and the National Bank for Agriculture and Rural Development, in association

with several other agencies, implemented the ' Maharashtra Rural Credit Project'

during1995-2002, having micro-finance as a crucial component. The official statistics

and related MIS for savings and purpose-wise loans to 73,454 members of 4921 Self

Help Groups are now available. These data have some unique features. For example,

the compositional multivariate time series nature of the savings and loans data is a

valuable component of the knowledge base for future. Further, our analysis shows

that SHG is a useful instrument for savings mobilization and enhancing access to

credit for the rural, unreached poor. Besides consumption smoothening, SHG loaning

had supported working capital requirements and other productive investments as

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CHAPTER-II

MFIs IMPACT ON RURAL & URBAN POVERTY

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POVERTY ENDURES

Alleviation of poverty, for a long time, has remained a very complex and critical

concern among third world countries. It has been at the top of the agenda of policy

planners & development specialists and a lot has been written on the subject right from

the days of Adam Smith's 'Wealth of Nations' (1776) to Prof. Amartya Sen's Public

Action to Remedy Hunger (1991).

Today, it virtually denotes the core of all developmental effort. Though

conventionally identified with subsistence level of living - linked to lack of adequate

food - it is now widely accepted that the problem of poverty is more deep rooted

covering several interlocked aspects such as assetlessness, underemployment,

uncertain & relatively unproductive employment, low remuneration, lack of

bargaining power, economic vulnerability, illiteracy, proneness to disease, social

disadvantage and political powerlessness. A large number of government & non-

governmental organizations and international funding agencies all over the world

have been engaged in this seemingly unending war against poverty using several

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strategies and instruments.

According to the latest estimates, globally, 1.2 billion people live in extreme poverty

(defined as subsisting on less than one dollar a day) of which 44% are in South Asia; 75

% live in rural areas. In India, as a result of sustained efforts aimed at poverty

alleviation, despite an estimated number of over 300 million people crossing the

poverty line during 1973-74 to 1993-94, the official data has maintained that 37.3 % of

the population remained poor.

A more recent estimate showed a further dip in poverty level down to 26 % in the year

2000.

However, the sheer size of the population in the country would indicate that about 260

million people still subsist below poverty line, even if one were to go by the official

estimates.

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INSTITUTIONAL CREDIT AND POVERTY

In India, institutional credit agencies (banks) made an entry in rural areas initially to

provide an alternative to the rural money lenders who provided credit support, but not

without exploiting the rural poor. After the nationalization in 1969, commercial banks in

the country took upon themselves a massive task of improving access of the poor to formal

credit and accelerate the flow of credit to the rural economy. Their role in poverty

alleviation was more appreciated when the Government, as a major paradigm shift,

decided to launch a direct attack on poverty, through its special employment generation

strategies and productive asset creation programs like Integrated Rural Development

Program (IRDP).

As a part of this strategy, a multi-agency rural credit delivery structure comprising

Commercial Banks, Regional Rural Banks and Cooperative Banks, with a large

network of more than 1,53,000 retail credit outlets (one for every 4,100 population)

was established across the country. Yet, reaching the poorest, whose credit

requirements are very small, frequent and unpredictable was found to be difficult.

Further, the emphasis was on providing credit rather than financial products and

services, including savings, insurance, etc. to the poor to meet their simple

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requirements. The mismatch in perception - regarding how the poor actually use and

value financial services - of those who demanded and supplied financial services,

even resulted in some undesirable adverse impression in the minds of service

providers regarding the credit worthiness of the poor. Further, the systems and

procedures of banking institutions with emphasis on complicated qualifying

requirements, tangible collateral, margin, etc., also resulted in a large section of the

rural poor shying away from the formal banking sector. The banks too experienced

that the rapid expansion of branch network was not contributing to an increasing

volume of business to meet high transaction costs and risk provisioning, which even

threatened the viability of banking institutions and sustainability of their operations.

At the same time, it was not possible for prudent banking to allow a population of

close to 300 million - even if poor - to remain outside the fold of its business. The

search for an alternative mechanism for catering to the financial service needs of the

poor was thus becoming imperative.

MICROFINANCE-INSTRUMENT FOR POVERTY ALLEVATION

Equitable gains from development on a sustainable basis and ensuring viability of

financial services are key elements in a strategy of poverty reduction by means of

credit support to the poor. As micro-finance is seen to be an approach addressing

these concerns effectively, it has assumed significance in all the developing countries as an

effective tool in fighting poverty.

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The micro-finance scene in India is dominated by Self Help Groups (SHGs) - Banks

linkage program for over a decade now. As the formal banking system already has a

vast branch network in rural areas, it was perhaps wise to find ways and means to

improve the access of rural poor to the existing banking network. This was tried by

routing financial services through Self-Help Groups, formed as grass roots level

institutions developed for social/economic and financial intermediation for focusing

on the poor. Drawing lessons from experiments carried out in various parts of the

world, particularly Asia - Pacific, an attempt was made to build financial relationship

between informal groups of people and formal agencies like banks for catering to the

financial service requirements of the poor, especially women. Over the years, SHG-

Bank linkage model has emerged in India as a core strategy for the banking system to

extend their outreach to the poorest among poor. Though SHGs existed even before

the linkage program, the banks could not recognize their potential as business clients

and both operated independently, without knowing the strength of the other.

Intervening to forge a linkage, NABARD was instrumental in the emergence of a very

strong micro-Finance movement in the country.

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The SHG - Banks linkage program was conceived with the objectives of developing

supplementary credit delivery services for the unreached poor, building mutual trust &

confidence between the bankers and the poor and encouraging banking activity both

on thrift as well as credit and sustaining a simple and formal mechanism of banking

with the poor.

The linkage program combines the flexibility, sensitivity and responsiveness of the

informal credit system with the technical, administrative capabilities and financial

resources of the formal financial sector. It is a design relying heavily on collective

strength of the poor, closeness of NGOs to people and large financial resources of

banks. Further, the SHGs have also undertaken effective social mobilization functions

contributing to an overall empowerment process. The banks have externalized what

would otherwise have been high transaction costs for mobilizing savings of the poor,

appraisal and sanction of loans and improved loan recovery through the financial

intermediative role played by SHGs.

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CHAPTER III

RESEARCH DESIGN, METHODS & SAMPLE

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THE SAMPLE SURVEY

Questionnaire design

The research design phase of the academic project called for preliminary field

research at each study site to develop a better understanding of the local context,

refine the set of hypotheses, select the most relevant impact variables, identify a local

survey firm, and pilot test a draft questionnaire.

Preliminary fieldwork in survey included:

Discussion of financial and non-financial services with key MFIs and NGO.

Discussion of the research design framework and methodology with the

research staff of MFIs. Interview of local researcher and practitioners about current socionomic trends

in Maharashtra and Uttar-Pradesh state.

Field visits to interview clients of SKS & CASHPOR Microfinance about theirinvolvement with these MFIs.

Quantitative data analysis

Analysis of the data for both rounds of the survey followed the core academic data

analysis plan. This called for a set of descriptive tables for data from round 1 and 2, plus

two types of statistical analysis-gain score analysis and ANCOVA. In addition other

forms of cross-section and longitudinal analyses were carried out.

Description of sample

What follows are brief descriptions of the sample survey panel of 100

women/households and the case study sample of 6 women/households.

Survey sample

Demographics: individual

Age: all three samples consist, by design, of women from low.income households

who were 18or older and economically active when first interviewed. Forty.three per

cent of the total sample were in the younger (18.34) age group; fifty.four per cent

were in the middle age (35.54) group; only 6.3 per cent were 55 or older.

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The borrower group was somewhat older on average (39) than the saver (35) or

control group (36) (see Table, below).

Marital Status: A large majority of respondents (87%) were married. Over seven per cent

were widowed and 1.5 per cent had been divorced or deserted. Just four per cent had never

been married. The borrower group had the highest percentage of married women (90%)

and the control group the lowest (81%).

Literacy: Forty percent of all respondents had never attended school. Nearly as many

(38%) had been only to primary school, while 17 per cent had attended high school

and four per cent had received some higher education. In all three sample groups,

about forty percent had never attended school. This compares favorably to the rates of

female illiteracy for India as a whole (61%) and for UP state (52%). Within our

sample, the saver group had the highest percentage of women who attended secondary

school (21%) and college (1.5%), while the borrower group had the highest

percentage of women who attended primary school only (44.3%). Only two women, a saver

and a control, reported having received technical training and only one woman (a borrower)

reported having attended a literacy program.

Place of Origin: A large majority (85%) of the total sample had lived in Gorakhpurfor a

long time. About seven per cent migrated to Gorakhpur from a rural area of Uttar-

Pradesh, while fewer than three per cent migrated from another city in UttarPradesh and

five per cent or so migrated from another state.These patterns are quite consistent across

the three groups.

Primary Economic Activity: SEWA divides its membership into three categories of

women who work in the informal sector of the economy:

Small.scale vendors and hawkers who sell a range of goods from vegetables to

garments to

household utensils;

Home.based producers who work either on their own account or as sub.contract

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Survey findings: The impact of microfinancial services on households,

individuals, and their economic activities.

The analytical framework of the core impact assessment of MFIs carried out under

the academic project has just been presented. Survey respondents and other

households engage in a wide range of economic activities to support their family. The

average household had 2.63 income sources. Informal sector economic activity

contributed 70.5 per cent of total income in round 1. This includes micro enterprises in

trade, services, and manufacturing and sub-contracting. Semi-permanent

employment and salaried jobs, labor, both primarily male activities, brought in 17.4 % and

11.5 % of household income respectively. Men earned 60% of household income, women

40%. Micro enterprise was the primary economic activity of fewer than half of our survey

respondents. Almost as many were sub-contract workers, while 20.7% were casual laborer.

Micro-Finance initiatives under Maharashtra Rural Credit Project

The International Fund for Agricultural Development (IFAD), Rome, since its

inception in 1977, has directed it's financing to benefit the rural poor by using a wide

variety of support mechanisms. Guided by the experience that banking with the rural

poor is indeed a viable proposal, the Maharashtra Rural Credit project (MRCP) (1995-

2002) was conceived with a large component of micro-Finance built into it. The

project has been implemented in 12 districts of Maharashtra State in association with

the Government of Maharashtra, Non Governmental Organizations (NGOs) and a

number of other para-statal agencies. The National Bank for Agriculture and Rural

Development (NABARD) was responsible for Project Management. The project

aimed at increasing the outreach of financial services to the rural poor for poverty

alleviation and rural development. A unique feature of the project was its

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participatory approach involving the village community in planning development and

forging a strong relationship between the village community and the service area

banks. The objectives of the project were sought to be achieved through three

components:

i. development of formal financial services,ii. informal sector savings and credit and

iii. infrastructure support for projectimplementation.

Development of entrepreneurial skills for promoting micro enterprises, mainstreaming

gender concerns and empowerment of women were other salient features of the

project. The project was implemented initially in four districts, (Pune, Chandrapur,

Yawatmal and Nanded) commencing 1995. Which are backward and tribal

dominated, were included. The project resulted in financing 64850 individuals for

taking up income generating activities, formation of more than 9000 micro-Finance

groups and credit linking 7717 groups with the formal banking system.

Micro-Finance in MRCP : Database

In order to build up a MIS for the project, an extensive sample survey (virtual

enumeration) of 4921 SHGs covering 73,454 individual members, spread over the

entire project area was conducted during the year 2001-02 which forms the basis for

this paper. For the sake of simplicity, a one page schedule covering key parameters of

the functioning of SHGs as on 31 March 2001 was canvassed with the help of trained

workers of NGOs promoting the SHGs. Sample surveys of such a large coverage are

rare in the literature on micro-Finance. Looking into the savings and borrowing

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behaviour of such a large number of rural poor groups has been made possible due to this

survey.

We are using the word sample, primarily to convey a part coverage of the total

population. (4921 groups out of about 9000 SHGs - 55 %). The coverage of SHGs is not

representative or selective. It is practically an enumeration attempt. The objective of this

analysis is to assess the role that micro-Finance groups have played in serving the financial

service requirements of rural poor in the project area.

SURVEY RESULTS

Gender & age profile of the sample

Women constituting half the population, have had much less access than men to

productive means, including borrowed capital. It has been increasingly recognized

that women are better managers of credit as Women have plans for themselves, for

their children, about their home, the meals. They have a Vision. A man wants to enjoy

himself.Our sample shows that out of the 73,454 members, 70,384 respondents -

nearly 95 %, were women, implying that the benefits from the project were

overwhelmingly meant for women. The age profile of the members showed that about

43 % of the members were from the age group of 31 to 40 and nearly 95 % of the

members were from the age group of 21 to 50 which is the age for the active work

force.

Coverage of poor and vulnerable sections

The composition of SHGs showed that 58.3 % of the sample members belonged to the

poor category (known as Below Poverty Line or BPL) as per the definition of

Government of India. Those who are not covered under this category have been

termed Non-BPL members [about 42 %]. The size of Non BPL which appears to be

on the higher side, is insignificant as the saving and borrowing pattern of the

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BPL and Non BPL suggests that the dividing line between the two categories is very

thin and difference in their economic status is more due to the process of listing BPL

which has its own limitations. Moreover, field experience suggests that in a typical

Indian rural society, for initiating social mobilization functions, a mixed composition

of BPL and Non BPL can be helpful.Nearly 38 % of the sample members belonged to

the socially disadvantaged groups, known as Scheduled Castes and Scheduled Tribes

(SC/STs) the most vulnerable sections of the population. Within the BPL members,

SC/STs constituted a much larger share of 48%. SC/STs membership of SHGs was

nearly double their corresponding proportion in the State population (20%).

The sample data suggest that the poor and vulnerable sections had not only a sizable

share in the membership, but more or less a corresponding share in availing credit as

well. The total loans were shared almost equally by the BPL and Non BPL while the

SC/STs had a share of about 40 % of funds provided as credit by SHGs to their BPL

members.

Poor can save

Savings by members of SHGs enumerated were around Rs. 4,72,66,484 ( Rs. 47.26-

million ), with average saving per Group working out to Rs. 9605 (US $200 approx.)

during the reference period. It is interesting to note that this amount has come out of

very small monthly contributions. Data show that in respect of 3922 SHGs (80%) the

monthly contribution was upto Rs. 30 (about 0.6 US $) per member. The important

point is that SHGS enabled the rural poor women even to save small amounts

regularly and as a matter of discipline. In the absence of the SHG mechanism, it

would have not been

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possible for the rural women to make deposits of a small amount of Rs 30 per month in a

Bank. Even for the banks, it would not have been viable to transact such small and

intermittent deposits. Not only was the saving regular, nearly 89 % of the SHGs had

managed even to increase their monthly savings.

The increase in savings contribution was upto Rs. 5 (about 16 % of the original

contribution) for 73 % of the Groups. This can be viewed as an indicator of continued

mutual trust among members and increasing desire to save. Moreover, the pooled

savings were managed very well by the SHG members, initially for internal lending

among themselves and later, to establish a credit linkage with banks and avail larger

group loans.

Borrowing by SHG members

Out of the total 73,454 members covered, 50,118 (68 %) were borrowing from the

groups, implying access to credit by a large number of members. Those who had

borrowed more than once after repaying old loans (active borrowers) constituted 63 % of

the borrowers indicating that a substantial proportion of borrowers had used the first

loan very well, repaid it and had further access to credit.

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Total loans mobilized by the members worked out to Rs. 17,87,20,624 (Rs. 178.7

million) with average loan amount per SHG being Rs. 36,318 and the savings to total

loan ratio of 3.78. Forty four per cent of this amount was sourced as loans from the

banks and the balance 56 % was from internally generated resources indicating the

financial strength the SHGs have attained. It is also interesting to note that the poor

are able to meet margin requirements of close to 50% from their group savings.

Preponderance of small loans

To analyze the pattern of borrowing by SHG members, the loans were classified

according to different sizes. The size-class of loan accounts and loan amount are

shown in the following table :

Sl. No. Range ( Loan size) Number of loan Amount of loan Rs. Average

accounts loanamountRs.

1 Rs. 0 to Rs.500 46,687 (37.3%) 1,72,52,074 ( 9.7 %) 370

2 Rs. 500-Rs. 1000 37,125 (29.7%) 3,48,79,579 (19.5 %) 940

3 Rs.1000 to Rs. 3000 3,0382 (24.3 %) 6,16,59,704 ( 34.5%) 2,029

4 Rs. 3000 to Rs. 5000 7591 (6.1 %) 3,39,40,225 ( 19.0%) 4,471

5 Rs. 5000 to Rs. 7000 1326 (1.1 %) 82,59,600 (4.6 %) 6,229

6 Rs. 7000 to Rs. 10000 1329 (1.1 5) 1,23,93,264 (6.9 %) 9,325

7 Rs. 10,000 to Rs. 15,000 366 (0.3%) 48,61,456 (2.7 %) 13,283

8 Rs. 15,000 and above 229 (0.2 %) 54,74,722 (3.1 %) 23,907

Total 1,25,035 (100%) 17,87,20,624 (100%) 1,429

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It can be seen that the size of loan accounts was very small as nearly about 91 % loan

accounts were in the size class below Rs. 3000.( 60 US$). Even in the case of amount

of loan taken, nearly 64 % of the loans were below Rs. 3000 indicating preponderance

of small loans. Catering to such small demand has been virtually impossible for the

formal banking system in the past, mainly due to the high transaction and process

costs involved.

Utilization of borrowed funds

For obtaining further insight into the borrowing by SHG members, the purposes forwhich

the borrowed funds were utilized were examined. These included meeting urgent

consumption needs, agricultural expenses, financing off-farm enterprises and

education.The percentage shares of each of these purposes in the total loan accounts and

loan amount are given below.

Purpose % share in number of loan % Share in loan amountaccounts

Consumption 35.27 28.99

Agricultural loans 53.37 57.41

Off-farm enterprises 7.98 10.95

Loans for education 3.38 2.65

100 100

The data show that agricultural loans (crop cultivation expenses) was the most

important purpose having a share of about 53 % in the loan accounts and 57 % share in the

loan amount. This was followed by consumption loans which accounted for about 35 %

in the loan accounts and about 29% in the loan amount. Evidence of some diversification in

terms of borrowing for enterprises for non agricultural purposes is also available.

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The purpose wise borrowing pattern for the BPL and Non BPL members remained

more or less the same, indicating that such economic segregation between the two

categories is only illusory. In real life situations, money is fungible. Borrowing from the

SHGs therefore, had given the borrowers the required flexibility to manage their

consumption and working capital needs simultaneously.

An attempt was made to assess the volume of demand for loans by the rural poor by

developing a model using compositional multivariate time series analysis using our

database. It was observed that the proportion of agricultural loans in the total loans was

the highest during the month of July, which is a busy month as far as the

agricultural operations are concerned. The element of seasonality observed in respect of

agricultural loans in the multivariate time series and the corresponding lowest

proportion of consumption loans during the period suggest that the SHG loans could offer

the required flexibility for utilizing their borrowed amount. The volume of demand

projected in above also shows that SHGs can be useful financial intermediaries

in stepping up the flow of working capital support to very small and marginal farmers in

meeting the seasonal agricultural credit requirements. With the total number of SHGs

financed by banks in India reaching 3,70,490 as on 31 March 2002, the potential volume

could be large.

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CHAPTER IV

MICROFINANCE EFFECT ON INDIA ECONOMY

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Forms of Microfinance Institution

Not-for-Profit MFIs: These include Societies registered under Societies Registration

Act1860 or similar State Acts, Public Trusts registered under the Indian Trust Act

1882 and Non-Profit Companies registered under Section 25 of the Companies Act

1956.

Mutual Benefit MFIs: Such as State Credit Co-operatives, National Credit

Cooperatives andMutually Aided Co-operative Societies (MACS).

For-Profit MFIs: Bodies like Non-Banking Financial Companies (NBFCs) registered

underthe Companies Act 1956 and Banks which provide micro finance along with their

other usualbanking services could be termed as micro-finance service providers of this type.

Development process through Microfinance

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Microfinance intervention through different organisation

Fact Related to Demand-Supply of Micro-Finance

There is a vast unmet gap in the provisions of financial services to the poor. A very

littlesegment of the poor people is being served by the formal financial system for

micro-credit. Majority of the poor population depends on informal financial system for

their credit needs. Let us look at some facts.

According to the World Development Report (2000), 1.8 billion people live in

extremepoverty, subsisting on less than US $ 1 a day and almost half of the world

population (2.8 billion) live on less than US $ 2 a day. South Asia is the home to half

of the worlds poor families. In African countries, women account for more than 60

per cent of theagriculturelabour force and contribute up to the 80 per cent of the total

food production, yet receive less than 10 per cent of the credit provided to

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small farmers.In India, various estimates put the requirements of micro credit at Rs. 150

billion to Rs. 500 billion per year. As against these estimates, bank advances to weaker

section aggregated about Rs. 100 billion per year and SHGs are estimated to provide

about 1 billion per year.About 36 per cent of the rural households are outside the fold of

institutional credit.

Growth of Micro-Finance Sector at Global Level

Let us look at the historical account of the emergence and growth of micro-finance

sector at the global level. The Grameen Bank, Bangladesh, was started as an

experiment in 1976 and accorded a special banking charter in 1983. In 1981 NDF

(National Development Foundation), Jamaica, was started with support of Pan

American Development Foundation.In 1983 ADEMI (Association for Development

of Micro Enterprises) was established in Dominican Republic, Santo Domingo with

support from ACCION, an International Agency. In 1984 BRI (Bank Rakayat

Indonesia) started micro-finance in Indonesia. In 1984, K-REP (Kenya Rural

Enterprise Programme) was set up by USAID (United States Agency for International

Development) to develop credit programmes for micro-enterprises through NGOs

intermediation. In 1986 ACEP (Agence de Credit Pour L Enterprise Privee) was

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establishedin Senegal with the support of USAID. In 1986 PRODEM (Foundation for

the Promotion and Development of Micro-Enterprises), which was established by

USAID & ACCION International in Bolivia, started micro finance. Later on it was

converted into a bank called Bancosol (Banco Solidario) in 1992. In 1987 IDH

(Instituto de Desarrollo Hondurando) was started in Honduras with the support of

Opportunity International. In 1992, BANPECO (Banco Nacional del Pequeno

Comercio) that is, National Bank for Small Traders was renamed as BNCI (Banco

Nacional de Comercio Interior), that is National Bank for Domestic Commerce and

started micro-financing in urban areas of Mexico. Micro-Credit Summit (2-4

February, 1997) held at Washington D.C. was organised to launch a global movement to

reach 100 million of the worlds poorest families, especially the women of those families,

with credit for self-employment, by the year 2005.

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CHAPTER V

MFIs STRATEGY TO REMOVE POVERTY IN INDIA

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A Critical Analysis of Institutional Initiatives of Poverty Alleviation in India

The institutional initiatives taken in extending micro-credit in India after

independence can be understood in conjunction with the process of rural development

and the role played by several developmental institutions for poverty alleviation and

employment generation programmes. This process can be categorized under

community development programme,RFIs (Rural Financial Institutions) programmes

and development of co-operativesprogrammes. Apart from these, PDS (Public

Distribution System) and agricultural / landreforms are also supposed to be major

initiatives for providing the benefit to the poor section of the society and attacking

poverty.There is a huge network of institutions of development in India to alleviate

poverty andgenerate employment. However, several things went wrong. Anti-poverty

programmes could not be implemented properly. Studies conducted by Ansari (1980),

Jain (1984), Chaturvedi & Mitra (1987) and Ray (1992) show that the rural

development programmes were centrally invented (lacking participation of local level

institutions), politically motivated, having leakage and miss-appropriation and heavy

administrative expenses.

Consequently, poor quality assets were provided to the beneficiaries for productive

purposes.Similar is the story of rural banking sector. Studies conducted by Basu

(1979), Chippa(1987), Netherlands Development Co-operation (1992) and Rayudu

(1992) show that rural credit schemes were politicised.

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Long-term credit institutions were more necessarily needed to finance for long period

so as to enable the farmers to bring about lasting improvement.Nevertheless, this

could not be done. There was lack of mobilising local savings. Regional distributions

of agriculture credit were inequitable.Studies conducted by Choudhari (1972 et al.),

Attwood (1984), Baviskar & Attwood (1984) and Attwood & Baviskar (1987) on the

effectiveness of co-operatives in agriculture sector show that it is not only the process

of production and distribution which leads to success or failure of cooperatives in

different regions of India, but also more importantly, the social system has a bearing on

the same. Participation of poorer members of co-operatives in decision making was

less. The rich members used loans and other financial facilities. Most of the cooperatives

were formed with selfish motives of big landlords. In agriculture and land reforms, a

strong lobby of agriculture landholders gradually started to dominate in the political

systems, and made the political decisions in its favour.

Observations made by Mathur (1996: 183-184) will substantiate this statement.

To quote, Another change also began to be discerned at the central level. The

occupational pattern of the members of the Lok Sabha began to shift towards the

agriculturists, who began to emerge as the largest single group in the parliament.

at the time of the Fourth and/or Fifth Plans, agriculturists had become

the single largest group in the Lok Sabha. This trend got strengthened in

subsequent years. . The consolidation of vote banks was also the

consolidation of power of the land-owning classes. Thus, while on the one hand, they

were careful to thwartany effort to implement land ceilings, they were happy to

welcome special schemes toalleviate poverty, on the other.

In a nutshell, the following statement made by Shah (1996: 89-90) will substantiate

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the whole scenario of institutional initiatives in micro-credit and rural development.

At more informal levels, numerous stories of the stolen borewells, and of the

circulating IRDP buffalo, of the devastating vetpatwari-bank officer

traderbeneficiary combine began doing the rounds in development folklore. By the mid-

1980s, however, the nation came to a near consensus that only a tiny fraction of the

resources earmarked for target groups actually reach to them; Prime Minister

Indira Gandhi conceded this, somewhat gradually, as early as 1984. Prime Minister

Rajiv Gandhi conceded this categorically, owing up that no more than 15 per cent of

the money that his government has earmarked for anti-poverty programmes

had actually reached the poor.

Despite of the strong base of our rural economy, and despite all the rhetoric, there is

consensus that more than 250 million people remain poor in India, even after 50 years

of independence, irrespective of the debate on the methodology and indicators used

for poverty estimates. As per the Eighth Five-Year Plan document, there is an

estimated backlog of unemployment of nearly 23 million persons in April 1992. There

will be an additional inflow of about 35 million in the labour force during the plan

period. The document suggests that employment growth rate should be 4 per cent if

we want to provide employment to all during the plan period and it should be 3 per

cent for providing employment to all by 2000 A.D. But the harsh reality of

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employment growth rate is also stated in the document by narrating that the realm of

feasibility is between 2.6 to 2.8 per cent.

Development efforts were hindered by the growth in rural population and unemployed

labour force. According to the UNDP (United Nations Development Programme)

Report 2001, India ranks as low 115 out of total 162 countries. There are also other

problems of development related to education, health, environment, housing, anitation and

atrocities on women and people of backward castes and minorities.

Failure of institutional initiatives in providing micro-credit to the poor people in

starting their enterprises and meeting household requirements gave way to

noninstitutional sources of credit. In other words, financial and organisational health of

the RFIs is very poor due to the reasons of political interference, bureaucratic

functioning, high degree of regulatory control, poor industrial relations and lack of

customer driven functioning. Moreover, banks see rural lending as social obligation than

as business proposition.

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NGOs Involvement in Micro-Finance and Strategies of Peoples Livelihood

However, there is no smooth flow of funds from any sources to provide loans to the rural

poor for establishing their micro enterprises in the RNFS. Karmakar (1999: 164) laments

that:

Moneylenders rarely provide credit for capital assets acquisition. They concentrate

on lending for consumption needs and social/ medical contingencies while trader

lenders provide working capital. Thus, venture capital for the rural non-farm sector is

generally financed from own resources and supplemented by loans from friends

and relatives. The time taken for getting a loan sanctioned by a bank for the rural

non-farm sector can very from two months to 18 months. Some moneylenders do

provide bridge loans to those rural borrowers who have been sanctioned bank loans

but have yet to receive the funds.

Based on the observations of the failure of development policy and administration,

with a weak role played by the State in supporting the institutions of development,

Shah (1996) emphasized the importance of developing NGOs as change agents.

Government of India (1985a, 1985b) also realized its failure in properly implementing

development projects and decided to involve NGOs during the Seventh Five-Year

Plan, in executing development projects. The NGOs strength lies in target group

approach, flexibility, experimentation, innovation, grassroots presence and

motivation. By learning from the example of Grameen Bank, Bangladesh, many

NGOs in India, came forward to provide financial services to the rural poor and

RNFS enterprises. For NGOs, it is also a shift in approach from development to

empowerment wherein they can plan their withdrawal strategy from service delivery

projects and think of their own sustainability by providing financial services. At

present there are almost 600 NGOs involved in micro-finance delivery systems in

India. These NGOs have adopted different strategies of promoting peoples

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livelihood through micro-finance. These strategies are based on their clientele,

approach, focus area, interest rate, savings linkages, collateral, coverage and

organizational legal structure. These strategies can be classified into four broad

categories, namely, SHG promotion, MFI, micro-enterprise development and social

development.

SHG Promotion Strategy

The SHG promotion approach is based on the premise that the NGO promotes SHGs

and provides them services as financial advisor. This ultimately leads to build the

capacity of SHGs in terms of savings mobilisation, linking them with banks and

providing technical support in starting viable micro enterprises by the members of

SHGs members. In this approach NGO basically is a mediating contact between

SHGs and banks. NGO also examines creditworthiness of the SHGs so that bank can

lend money to the SHGs. In all this NGO gets some financial support in terms of

grant from Apex Financial Institutions (AFIs) like NABARD and RMK (Rashtriya

Mahila Kosh). The examples of such NGOs who are following SHG promotion

approach are:

MYRADA in Karnataka, SHARE in Andhra Pradesh, RDO (Rural Development

Organisation) in Manipur, PREM (Peoples Right and Environment Movement) in

Orissa & Andhra Pradesh, YCO (Youth Charitable Organisation) in Andhra Pradesh,

Anarde (Acil Navsarjan Rural Development Foundation) in Gujarat, PRADAN

(Professional Assistance for Development Action) & RUDSOVAT (Rural

Development Society for Vocational Training) in Rajasthan and ADITHI in Bihar.

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Micro-Finance Institution Strategy

The approach of promoting MFIs is based on the premise that AFIs like SIDBI (Small

Industries Development Bank of India), RMK and other donor agencies provide bulk

lending, soft loan and some grant to such NGOs which can act as MFIs by on-lending

the money to the poor people/ SHGs/ Federations/ smaller NGOs. These MFIs

stimulate the credit demand of the poor people. They also provide technical support

for the beneficiaries to ensure proper utilisation of loans and repayment. At the same

time they meet their cost of funds, cost of credit management and cost of default

through the spread of interest and generate surplus for the viable operation of micro-

finance.The examples of such MFIs are Sewa Bank & FWWB in Gujarat, BASIX in

Andhra Pradesh and RGVN (Rashtriya Grameen Vikas Nidhi) in north-eastern states,

Orissa and Bihar.

Micro-Enterprise Development Strategy

Entrepreneurship is one of the most important inputs in the economic development of

a country and of the regions within the country. Economic growth and

industrialisation are the by-products of entrepreneurship. It is a breeding ground for

the development of small-scale enterprises. The term EDP (Entrepreneurship

Development Programme) means a programme of entrepreneurship development

designed to help a person in strengthening his/ her entrepreneurial motive and in

acquiring skills and capabilities necessary for playing his/ her entrepreneurial role

effectively. It inculcates entrepreneurial traits into a person and develops his/her

personnel, financial, technical, managerial and marketing skills. There are number of

programmes which are aimed at providing informational or managerial inputs

required by a new entrepreneur. However, a programme not touching upon

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entrepreneurial motivation and behaviour cannot be called an EDP (Desai, 1991). EDP

covers mainly three variables:

(i) target group,

(ii) location and

(iii) enterprise development or entrepreneurial activities.

All of these variables are strongly inter-linked with each other. To make EDP

successful and effective, the role of the NGOs has significant importance in terms of

identification of place or location, pre-promotional activities, selection of potential

entrepreneurs, entrepreneurial training, monitoring and follow-up mechanism. NGOs

are playing important role as catalyst in helping the rural unemployed persons to

acquire training through MEDPs (Micro-Enterprise Development Programmes) so

that they can become self-employed by starting their enterprises in RNFS. Moreover,

they can also become job providers instead of job seekers. Thus, institutionalisation of

MEDPs through NGOs can be an alternative approach of rural development in India.

The success of any MEDP in terms of starting the enterprises by the trainees trained

under it depends mainly upon the availability of loan. Micro-finance sector can

provide help to solve this problem. Micro-finance for micro-enterprise development is

a proper approach in India. Some of the NGOs in India have adopted the approach of

micro-enterprise development through micro-finance. The examples are CDF (Co-

operative Development Foundation) in Andhra Pradesh, LHWRF (Lupin Human

Welfare Research Foundation) in Rajasthan, UPLDC (Uttar Pradesh Land

Development Corporation) in Uttar Pradesh and Group Enterprise Development

Project of EDI (Entrepreneurship Development Institute of India) in Nagaland.

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Social Development Strategy

The social development approach of micro-finance is based on the premise that

people should earn money by investing in viable micro-enterprises. They should earn

profit from their enterprises. Major share of the profit should be reinvested in

enterprises for their growth. The other share of the profit should be spent on social

development that is, health, education, housing, sanitation etc. By earning profit from

the viable micro-enterprises, people will increase their paying ability for services

delivered to them under different social development projects run by NGO and States/

Central Government. For the NGOs and Government it can be a process of gradual

withdrawal and for people, decrease dependency on the NGOs and Government.

Such projects have micro-finance as a major component coupled with social

service delivery. These projects have demonstrably positive effects. The examples of

such projects are Indo- Canada Agriculture Extension Project in Uttar Pradesh,

IFFDC (Indian Farm & Forestry Development Corporation) project of farm and

forestry development in Uttar Pradesh and Rajasthan, ICDS (Integrated Child

Development Services) project of RASS (Rayalseema Sewa Samiti) in Andhra

Pradesh and Conversion of ICDS project into Indira Mahila Yojana.

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CHAPTER VI

ROLE OF APEX FINANCIAL INSTITUTIONS

IN MICROFINANCE

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ROLE OF APEX FINANCIAL INSTITUTIONS IN MICRO-FINANCE

Since the emergence of micro-finance sector in India, role of AFIs has become

significant. NABARD initiated the process of micro-finance in India through linkage

programme of SHGs under Automatic Refinance Scheme. SIDBI is second important

player in microfinance, providing bulk lending to MFIs. RMK is the third player

providing loans to NGOs for on lending to the women SHGs. These are the three

major AFIs in India. Each has a different approach in micro-finance sector. While

NABARDs emphasis is entirely on SHGs linkage programme by mobilising their

own savings also, SIDBI is focusing on building and creating larger MFIs and RMK

is lending money to smaller NGOs as well.Taking into consideration the growth and

potential of micro-finance sector in India, other organisations and international

agencies have also made their entry in the micro-finance sector by providing loans

and grants to NGOs for different income generating projects as well as for

incorporating micro-finance component in the service delivery projects of social

development. The important names among them are HUDCO, NBCFDC (National

Backward Classes Finance Development Corporation), NMFDC (National Minorities

Finance Development Corporation), National Handicrafts Development Corporation

(NHDC), OXFAM (Oxford Committee for Famine & Relief), NOVIP (Dutch

International Development Agency), GTZ (Gesellschaft fur Tecnische

Zusammenarbeit), CIDA (Canadian International Development Agency), ActionAid,

CARE India, International Fund for Agriculture Development (IFAD), UNDP,

UNIFEM (United Nations Development Fund for Women), British Department of

Foreign and International Development (DFID) and Consultative Group to Assist the

Poorest (CGAP).

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MICROFINANCE INSTITUTIONS IN INDIA

Strengthening the provision of microfinance services in India

Introduction to Sa-DhanSa-Dhan has come a long way in this period, so has the microfinance sector in India.

The association that was started by 19 organizations in 1999 has today a membership

of 229 organizations representing the diversity of the microfinance sector across

twenty one states. The growth and acceptability of the association has been

commendable. The portfolio and outreach of the microfinance sector has increased

tremendously in this period.Microfinance has been acknowledged as an effective tool

for rural upliftment and development the world over. Microfinance enables the poor

to have access to much-needed finance, which goes a long way towards the

betterment of their lives. Several MFI (Microfinanace Institution) models, primarily

promoted by Non-Government Organisations (NGOs), have been working

independently for a long time in India too.Yet, there has been a long-felt need to form

a specialised network of Community Development Finance Institutions

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(CDFIs) that could take forward the collective requirements of these organisations:

dialoguing with policy makers, capacity building, and identification and development

of minimum standards of performance in a participatory manner, so that the challenge

of professionally creating a large number of sustainable livelihoods is made possible.

Despite India having one of the largest programmes for poverty alleviation like IRDP

(Integrated Rural Development Program), its achievements have been limited.

Regional Rural Banks promoted by Nationalised Banks and Commercial Banks, the

National Bank for Agriculture and Rural Development (NABARD) and other

financial institutions have also reached only certain segments and areas of population.

It is thus clear that NGOs, MFIs, the concerned government departments and the poor

themselves have to work together in order to bring about meaningful change. But this

can happen only with increased collaboration between these agencies. This requires a

common platform which can enable a qualitatively better dialogue, especially

between the MFIs and the government departments. The need for a common platform

was felt by the key Microfinance practitioners in India, who recognized that despite

their diversity, they had to increase the outreach of existing programmes, launch new

initiatives and negotiate with policy makers for a favourable environment.

Sa-Dhan was designed and developed as such a platform. At the preparatory policy

workshop organised by WWB-New York, consensus quickly emerged on the strategy

to expand Microfinance service provision as articulated by draft Dhaka paper,

which strongly argued for the need to adopt a three-track approach in working on

increasing the provision of Microfinance services. Following this agreement, it

became necessary to define the contours for the Association.

On 14th September 1998, the leading Microfinance stakeholders, got together to

establish the body, and agreed on Mr. Mathew Titus to lead and establish the

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Association. The Association - Sa-Dhan - was thus incorporated on July 21st, 1999.

Scope of work

Broadly speaking Sa-Dhan has the following scope of work, which emerges out of its aims

and objectives:

To provide a forum for organizations and individuals engaged in the field of

community development finance, to meet, share and exchange theirexperiences, expertise and resources.

To serve as a catalyst for further building the field of community developmentfinance in India.

To strengthen the capacities of CDFIs through research, consultancy andtraining in different aspects of community development finance.

To disseminate and publish sound financial practices from India and abroad.

To establish jointly, minimum standards of performance, both developmentaland financial, which members would have to adhere to and encourage CDFIs toadopt the same.

To establish linkages between members and resource institutions, such as

funding agencies, training, and consultancy and research institutions.

To establish linkages between members and resource institutions, such asfunding agencies, financial institutions, rating agencies, training andconsultancy and research institutions.

To work with other networks and coalitions of CDFIs.

To make representation to the Government of India (GoI), the Reserve Bankof India (RBI) and other regulatory and policy making bodies to promote

CDFIs and help create a favourable policy environment for CDFIs, both at thenational and international level.

To establish bodies to support and represent CDFIs.

To carry out other objects and purposes, which may be conducive to andbeneficial for the members involved in CDFIs such as to borrow and acceptgrants.

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Without prejudice to the generality of the above objects and for effectively

carrying out the same, the Association shall have power to receive, hold and

possess any property including securities of any kind and to enter into any contracts for or

in connection with the Association and to establish and maintain funds for the benefit of

members.

Sa-Dhan shall also have powers to frame rules and bylaws, and to amend them under

its Constitution, and the Governing Board shall have power to control the affairs of

the Association.

SKS believes that access to basic financial services can significantly increase

economic opportunities for poor families and in turn help improve their lives. Over

the last eight years, SKS has delivered a full portfolio of microfinance to the poor in

India and we are proud of our current outreach of over 500,003 clients in 11 states. As

a leader in technological innovation and operational excellence, SKS is excited about

setting the course for the industry over the next five years and striving to reach our

goal of 1,000,000 clients by 2010.SKS Microfinance empowers the poor to become

economically self-reliant by providing financial services in a sustainable manner.

Launched in 1998, SKS Microfinance is one of the fastest growing microfinance

organizations in the world, having provided over US $ 1.1 Billion (Rs 5,432 Crore)

and has maintained loans outstanding of US$ 425 Million (Rs 2,063 Crore)

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in loans to 3,429,252 women members in poor regions of India. Borrowers take loans for a

range of income-generating activities, including livestock, agriculture, trade (such as

vegetable vending), production (from basket weaving to pottery) and new age

businesses (Beauty Parlor to photography). SKS also offers interest-free loans for

emergencies as well as life insurance to its members. Its NGO wing SKS foundation runs

the Ultra Poor Program.

SKS currently has microfinance branches in 18 states across India. SKS aims to reach

8,000,000 members by 2010. In the last year alone, SKS Microfinance has achieved nearly

170 % growth, with 99% on-time repayment rate.

SKS Founder and CEO, Vikram Akula

Vikram Akula was named by TIME Magazine as one of the People Who Shape Our

World in 2006, the annual list of the worlds 100 most influential people. A former

management consultant with McKinsey & Company, he has over a decade of work

and research experience in microfinance. He was a Fulbright Scholar in India, during

which he coordinated an action-research project on providing micro-credit to farmers.

He was also researcher with the Worldwatch Institute, where he wrote articles focused

on poverty and development, and has worked as a community organizer with the

Deccan Development Society in India. He holds a B.A. from Tufts, an M.A. from

Yale, and has a Ph.D. from the University of Chicago. His Ph.D. dissertation focused

on the impact of microfinance. He has received several awards for his work with SKS,

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including the Echoing Green Public Service Entrepreneur Fellowship, Ernst &

Youngs Entrepreneur of the Year Award in the Startup category (2006), and the

Social Entrepreneur of the Year Award (2006) from the Schwab and Khemka

Foundations. Vikram has also been profiled in numerous publications, including the front

page of the Wall Street Journal.

SML started operations in 1989 as a not-for-profit society. It was the first MFI in

India to obtain a NBFC (non-deposit accepting) license and also the first Indian MFI

to carry out a microfinance securitization transaction. SML currently serves more than

one million members across the five Indian states of Andhra Pradesh, Chhattisgarh,

Karnataka, Maharashtra and Madhya Pradesh and has demonstrated approximately

90% client growth in the past three years. Presently, SML caters to the needs of poor

rural women through its 2,300-plus staff spread across the MFIs 312 branches. It

holds a total outstanding loan portfolio of over USD 95 million. SML has employed a

for-profit approach to create social returns by channelling funds from development

institutions and commercial banks as collateral-free loans to Joint Liability Groups

(JLGs). JLGs are the central element of the Grameen lending methodology adopted

by SML.

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Bandhan marked its entry into the microfinance world in July 2002. Initially it

believed in specialization hence it was only engaged in microfinance. But over the

years, we have realized that microfinance is not the last word for the development of

the poor. Therefore, we took an innovative initiative to design a program for the

poorest of the poor with an objective of graduating them to the mainstream

microfinance program. A health-education program was also introduced and is being

run in a sustainable manner. We plan to address the other pressing issues of the

society as well viz. child education and the like.1 branch in 1 state - it was then, 670

branches in 10 states - it is now! The organization has grown tremendously. The

figures were rising high and it was becoming difficult to manage the same under the

society entity. Hence, in 2006-07, we started operations under NBFC entity. Our

NBFC is called Bandhan Financial Services Pvt. Ltd. (BFSPL) where our employees

are the major stakeholders. We are in the process of transformation now and hope to

complete the same in couple of months. BFSPL would continue to do all financial

services and Bandhan society shall exist and undertake development activities.

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Chandra Shekhar GhoshFounder & CEO

He carries with himself vast experience of 20 years in the sector. This has led him to

be one of the microfinance mentors. This Senior Ashoka Fellow is a guest lecturer

and occasionally delivers lectures at institutes of high repute viz. Indian Institute of

Management, Calcutta (IIMC), National Institute of Technology, Tiruchirapalli

(NITT), Training Institute of Central Bank of India, State Institute of Panchayat and Rural

Development (SIPARD) at Tripura. He has been the panelist at some National and

International forums and has also made presentations at various conferences at Nepal,

France, Brussels, Marseilles and institutes like National Institute of Fashion Technology

(NIFT), Eastern Institute for Integrated Learning in Management (EIILM), Kolkata,

Institute of Chartered Accounts of India (ICAI) and the like. He is one of the Committee

Members of the Core Team that SIDBI has formed for its Partner MFIs to advice in the

policy making process. He is a Board member of READ India and also occupies an Advisory

Board seat in other MFIs.

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CASHPOR MICROCREDIT

CASHPOR Financial and Technical Services (CFTS) was started in September

1996 as a financial Company. The purpose of this Company was to give access to

financial services in the form of small amounts of credit, to poor rural women, as an

alternative to the existing money lenders which were known for charging usurious

rates of interest, as well as perpetuating a never ending cycle of debt. As the Company

began to expand, it became necessary to move to a different legal form, and so

CASHPOR Micro Credit (CMC) was started in Dec. 2002 as a subsidiary Section

25 company of CFTS. CASHPOR India has subsequently become known in the

microfinance sector, as a microfinance provider that devotes its attention exclusively

to the provision of micro-credit to the poorest of the poor, through its unique

targeting approach which filters the poorest clients and lends to them.

CASHPOR India started its operations in mid 1997 by disbursing its first loan on 15 th

September in Mirzapur District of Uttar Pradesh. The entity was CASHPOR

Financial and Technical Services (CFTS) Ltd, working with an objective to reduce

poverty in eastern U.P. and western Bihar through the provision of Micro finance

services to the rural poor women timely, honestly and efficiently. Its first six branches

were set up in July 1997, to cover the southern part, which was poorer part of the

district. Its next six branches were opened in October 1998, to cover rest of the

District. Its original branches having acute poverty level were finding it difficult

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to become financially viable, because of little demand of loan amount, low population

density and frequent casualties in the clients family leading to high portfolio at risk.

The lack of market infrastructure limited the avenues of profitable enterprise for the

poor.

CASHPOR India worked with same infrastructure until its financial breakeven. It broke

even first time in March 2003 and second time in the year of March 2008.The story of the

year has to be achivement of financial break-even by CASHPOR Micro Creadit, as

planned five year ago,with the achivement of an Operating SelfSufficiency of

103%,compared to the planned target of 104%.In the event,we needed operations in 13

instead of the 10 Districts planned; but otherwise the profileof breakeven is pretty much as

planned:303,145 Active Loan Client(as against the 286,965 planned), a portfolio of

Rs.1,473,157,654(as compared to the Rs.151.2 Crore planned),and PAR of 1.8%(well

within the target of


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BASIX is the first microfinance institution (MFI) in India, and among the first in the world,

to attract commercial equity investments internationally and within India. By lobbying

successfully for changes in Indian regulatory policy framework, BASIX helped create

a viable institutional

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