8/6/2019 sm poj 1

1/54

1

A PROJECT ON

ENVIRONMENTAL FACTORS AFFECTING

MICROFINANCE IN INDIA

(w.r.t. BANK OF BARODA)Submittedin partial fulfillment ofthe

Requirements ofthedegree of., (Hons.)

For the course

MARKETING MANAGEMENT

Submitted by: Submitted to:

B.B.A., LL.B. (Hons.) Faculty In-chargeSemester VRoll No.

FACULTY OF MANAGEMENT

NATIONAL LAW UNIVERSITY, JODHPUR

8/6/2019 sm poj 1

2/54

2

TABLE OF CONTENTS

S. No. Content PageNo.

1. Acknowledgements iii.

2. Executive Summary iv.

3. Research Objectives v.

4. Research Methodology vi.

5. Environmental Factors: Concept 1.

6. Microfinance Industry In India: An Overview 12.

7. Bank of Baroda: In the field of Microfinance 24.

8. Field Study-Questionnaire 27.

9. Field Study: Analysis 31.

10. Conclusion 42.

11. Recommendations 43.

12. Annexure 45.

13. Limitations 46.

14. Bibliography 47.

8/6/2019 sm poj 1

3/54

3

ACKNOWLEDGEMENT

I am highly thankful to the faculty of Strategic Management , who not only guided me

throughout this project, but also gave her valuable time to me in patiently solving all my

queries with respect to the microfinance industry and various environmental factors affecting

the industry, due to which I was able to complete this project. I owe sincere gratitude for her

untiring and instant academic, intellectual support and guidance. I shall always be thankful to

her for her assistance, guidance, and time.

I am also thankful to , Assistant Manager, Bank of Baroda, Masuda (Beawar) who provided

me the relevant information without whose help and cooperation the would be incomplete.

Last but not the least it would be mean on my part if I do not mention my colleagues who

helped me out in the completion of this project and also the members of Library committee of

my University who provided me with the books and other related material which helped me

and also guide me a lot to build my project.

EXECUTIVE SUMMARY

8/6/2019 sm poj 1

4/54

4

The project aims at analysing the various environmental factors which affects the

functioning of microfinance industry in India. For this purpose firstly I have discussed

various environmental factors present in the surrounding of the business organisations

and the interaction between the two. Then I have tried to explain the concept of

microfinance in India, varoius models of microfinance followed here and the current

trends and challenges faced by the industry as a whole.

For the better understanding of the impact of the environmental factors on the

performance of microfinance industry the field study was conducted with respect to Bank

of Baroda. The study aims at analysing the major environmnetal factors which have an

impact on its planning and strategy formulation. Then, to understand how the Bank deal

with these issues and the strategies adopted by the bank to function affectively in this

field.

RESEARCH OBJECTIVES

8/6/2019 sm poj 1

5/54

5

To identify various environmental factors affecting microfinance To analyse the impact of the above environmental factors on Regional Rural

Banks

To identify the strategies adopted by the banks in maximizing theopportunities and minimizing the threats

RESEARCH METHODOLGY

8/6/2019 sm poj 1

6/54

6

TOPIC: A Study of Environmental Factors Affecting Microfinance In India

(w.r.t. Bank of Baroda)

RESEARCH METHODOLOGY

The methodology that is adopted in this subject is deductive in nature.

RESEARCHTOOLS:

The research tools used in the project are both primary and secondary. Primary

data are collected from the field study conducted for this project where an interview

method was used by presenting a questionnaire to the Assistant Manager of Bank of

Baroda, Masuda (Beawar) while the secondary data was collected from Internet,

magazines, articles, books and newspapers.

FOOTNOTING

NLU footnoting style has been used through out the project.

Chapter 1

Environmental Factors:Concept

8/6/2019 sm poj 1

7/54

7

An organization, being a sub system of the broader societal system, has to work within

the framework provided by the society and its various constituents. In this working the

organization interacts with the force lying outside it, commonly known as external

environment or only as environment.1 When they interact with each other both of them

lay down an impact on other as it is a two-way process but the impact of the organization

on its environment is not as significant as that of the environment on the functioning of

the organization.

Thus defining Environment, The environment includes all the conditions,

circumstances and influences surrounding and affecting the total organization or any

of its subsystems.

External environment can be further classified into two parts- Macro-environment and

micro environment. The following figure explains the same-

Figure.12

Micro-environment-The micro environment consists of those factors

having impact directly on the firm and its activities in relation to a particular market in

which it operates. They are those forces which are closer to the operation of the firm and

1 L.M.Prasad, Business Policy:Strategic Management, (Sultan Chand & Sons, Educational Publishers, NewDelhi, 3rd edition, 2001) pg 1122http://marketingteacher.com/Lessons/lesson_marketing_environment.htm , visited on August 10, 2007

8/6/2019 sm poj 1

8/54

8

the organization has some degree of control over them. In other words the organization

can exercise a degree of influence over these factors. For eg. it includes suppliers that

deal directly or indirectly, agents, consumers and customers, distributors, other

distributive intermediaries and competing firms. Thus it is a more local relationship and

the firm may exercise a degree of control over them or can regulate them.3 Following are

the major factors constituting micro- environment:-

SuppliersenvironmentIt includes other business firms or individuals who provide the marketing firm with raw

materials, services or other tangible goods to create or enhance a product or service for

sale, or in the case of retailing firms, possibly the finished goods themselves. Any firm or

organization has to depend on numerous suppliers or creditors for its functioning. Both

buyer/supplier tries to form a good mutual and stable relationship but the factors in the

supply environment keeps on changing. For example any dispute between them may

affect the delivery of the goods to the buying organization or if there is shortage of the

raw material then the supplier may not be able to supply in time or the sufficient amount

of raw material or if the prices of the raw materials rise then it will definitely have an

impact on the prices charged by the supplier. Also if there are only few competitors, each

individual purchase represents only a small amount of their companys sales, there arenot good substitutes of the product purchased, and the product or service is unique then

the supplier will be more powerful. Thus, the any changes or development in the supplier

environment will have an impact on the planning of the organization.

DistributiveenvironmentThis environment includes marketing intermediaries like wholesalers, dealers, physical

distributors, agents, marketing service agencies and other financial intermediaries.Thesefactors are required by the organizations where it cannot reach its consumers directly thus

to ensure that their products reach the final consumer through these intermediaries. Thus,

they constitute an important component of the value delivery network of the company

3http://www.rocw.raifoundation.org/management/mba/mba_marketing/lecture-notes/Lesson-17.pdf, visitedon August 11, 2007

8/6/2019 sm poj 1

9/54

9

and consist of the sources that are involved in promoting, selling and distributing its

goods to the final buyers.4 Normally these intermediaries deal in various brand of the

same product, hence it is very important for the company to maintain the good relations

with the resellers in order to motivate them to promote their brand.

Physical distribution firms are the one who are involved in storing the companies

products and moving them to the place of sale. Marketing service agencies consists of

marketing research firms, media firms, advertising agencies that promote the companies

product to the target market and give information to them. Financial intermediaries

constitute, insurance companies, banks, credit companies who insure and take the risk

associated with the products / services.5

Changes in the distributive environment occur relatively slowly, and there is therefore a

danger of marketing firms failing to appreciate the commercial significance of

cumulative change. But for the growth of the business the organizations are required to

have a constant look on the intermediaries and maintain good relations with them along

with identifying the new and potential intermediaries.

CompetitiveenvironmentFor any organization to achieve success, the key option is to provide better products than

its competitors. Apart from meeting the needs and wants of the target markets the

organization needs to provide the products which prove better than its opponents. While

buying goods or products the consumer always has this thing in mind that how a

particular product is different and better than other one. It is how the strategies are used

by the organization to help the people choose its products. It is on the company to keep a

constant track of competitors strategies and change as and when required.

Thus, the organization must be alert to the potential threat of other companies marketing

similar and substitute product. Competition is good for the consumers as it gives them a

choice but it posses threat to the competing organizations.6

It is essential that marketing

4http://www.da-group.co.uk/geoff_lancaster/micro_macro_handout.doc, visited on August 14, 20075Supra note 36http://www.iamot.org/conference/viewpaper.php?id=1300&cf=4, visited on August 13, 2007

8/6/2019 sm poj 1

10/54

10

management has a full understanding of competitive forces. Thus, they must keep a

constant track on the competitors and the benefits they are offering to the market. If the

company has all the necessary information as to its competitors and a check on their

changing strategies then, the company will have a greater opportunity to compete

effectively.

CustomersCustomers are an essential part of any business, without the customer there would be no

need for the business. The aim of every business organization is understand the behaviour

and demand of its customers and provide the products accordingly. A successful business

strategy involves designing products and marketing programmes that incorporate

attributes which provide value to consumers. To ensure that the product satisfies the

customers many organizations go into the consumer research, study the demand and

customer-related factors to make plans effectively.

Needs and demands of the customers keeps on changing with new products in the market

thus it is advisable to the organizations to have a continuous eye on this aspect and study

the behavior of various types of customers. Like there are Consumer markets, Business

markets, Reseller market, government markets (buy the goods and services to provide itto the people who need it) etc.

Only by keeping a track of what the customers want one can grab the opportunities

emerging in the environment.

Macro environment- Macro environment consists of all those external

factors which can influence and affect a companys planning and performance, but that

are out of its control. This environment is concerned with broad trends and patterns in the

society as a whole, which affects the markets at large. Changes in the wider macro-

environment may not be as close to the marketing firms day-to-day operations, but they

are just as important.

8/6/2019 sm poj 1

11/54

11

Eg. Political factors, socio-cultural factors, economic factors and technological factors.

The factors are continuously changing, and the company needs to be flexible to adapt.

There may be aggressive competition and rivalry in a market. Globalization means that

there is always the threat of substitute products and new entrants. The wider environment

is also ever changing, and the marketer needs to compensate for changes in culture,

politics, economics and technology.7These are the four main factors which constitutes

macro-environmental:-

1. Political and legal factors2. Economic factors3. Social and cultural factors4.

Technological factors

These factors are often referred to as PEST factors in the marketing analytical context. It

is sometimes referred to as STEP also and it refers to listing all possible points that may

affect the organisation under review under each of the P.E.S.T. headings and analyzing

their impact on the organisation in order to plan the strategies accordingly. Now days, it

is referred to as PESTLE also by adding L (standing for legal) and E (standing for

environmental). Some writers have incorporated yet another E (standing for ecological)

with the new acronym STEEPLE.

The figure below shows the PEST factors-

7http://www.da-group.co.uk/geoff_lancaster/micro_macro_handout.doc, visited on August 14, 2007

8/6/2019 sm poj 1

12/54

8/6/2019 sm poj 1

13/54

13

In developing countries like India where the political and economical situation is usually

less stable the Marketing firms operating in such volatile conditions clearly have to

monitor the local political situation very carefully.

Many of the legal, economic and social developments, in our own society and in others,

are the direct result of political decisions put into practice, for example the privatization

of state industries or the control of inflation. Thus, while operating in such environment

the organisation has to consider following issues in to mind-

y How stable is the political environment?y Will government policy influence laws that regulate or tax your business?y What is the governments position on marketing ethics?y What is the governments policy on the economy?y Does the government have a view on culture and religion?y Is the government involved in any trading agreements?

To summarize, whatever industry the marketing firm is involved in, changes in the

political and legal environments at both the domestic and international levels can affect

the company and therefore needs to be fully understood.

Socio-culturalenvironmentSocial and cultural factors refers to cultural attitudes, ethical beliefs, shared values, level

of differentiation in lifestyle, demographics, education levels, etc. Observing social

factors helps organisations maintain their reputation among stakeholders.

The type of goods and services demanded by consumers is a function of their social

conditioning and their consequent attitudes and beliefs. The needs and demands of the

same product vary with the culture and societal structure. Core cultural values are those

values which are firmed in the society but the secondary cultural values are those whichkeep on changing. The organisation as such has no role in its control mechanism but what

it can do is to have a research mechanism in order to know their demands and priorities

based on their social environment.

For eg. The decline in the popularity of smoking is a classic example of how changes in

social attitudes have posed a significant threat to an industry, forcing tobacco

8/6/2019 sm poj 1

14/54

14

manufacturers to diversify out of tobacco products and into new areas of growth. In food

industry, the firms are responding to the changes in attitude towards health. These days

the people are now questioning the desirability of including artificial preservatives,

colourings and other chemicals in the food they eat. Also when the attitude of people

towards cold drinks changed due to health issues and they shifted to other substitutes like

fruit juices and other soft drinks, which provided an opportunity to the juice

manufacturers to respond to their demands quickly. Thus, it includes following factors10

:-

y Demographicsy Class structurey Educationy Living conditionsy Growth rate, population, age distributiony Culture (gender roles, etc.)y Entrepreneurial spirity Attitudes (health, environmental consciousness, etc.)y Leisure interests etc.

TechnologicalenvironmentTechnology is a major macro-environmental variable which has influenced the

development of many of the products we take for granted today, for eg. television,

computers, video games etc. Technological factors are the scientific advances, which

influence the competitive position of the enterprise. It refers to changes in technology that

can alter the firms competitive position. Maintaining awareness of new technologies

decreases the probability of becoming obsolete and promotes innovation. That is the

reason why many organisations have their own research departments and those who dont

have sponsors research through other institutions. Advancements in technology can

impact the transformation plan in many ways. It is obvious that the new technology can

10http://www.12manage.com/methods_PEST_analysis.html, visited on August 11, 2007

8/6/2019 sm poj 1

15/54

15

change the demand for a product, render current manufacturing processes obsolete,

reduce costs to undercut competitors, produce new products and a host of other

possibilities. For example- in toys market when the manufacturers came out with the new

remote control cars, the other players have been forced to respond to that and

manufacture cars with new technological features in it instead of normal cars. Thus the

technology environment includes following issues to be considered11:-

y Does technology allow for products and services to be made more cheaply and toa better standard of quality?

y Do the technologies offer consumers and businesses more innovative productsand services such as Internet banking, new generation mobile telephones, etc?

y How is distribution changed by new technologies e.g. books via the Internet,flight tickets, auctions, etc?

y Does technology offer companies a new way to communicate with consumers e.g.banners, Customer Relationship Management (CRM), etc?

EconomicenvironmentThe economy has a significant impact on the viability of a corporate strategy. Economicconditions, economic policies and the economic system are the important external factors

that constitutes the economic environment of business. It refers to a societys economic

structures and such variables as the stock exchange, interest and inflation rates, the

nations economic policies and performance, exchange rates, etc. Economic factors are of

concern to marketing firms because they are likely to influence, among other things,

demand, costs, prices and profits.

The factors like the nature of the economy, the stage of development of the company,

economic resources, the level of income, the distribution of income and assets, etc. are

among the very important determination of business strategies. For eg. A reduction in the

cost of production may be necessary to facilitate price reduction. It may even be

necessary to invent or develop a new low-cost product to suit the low income market.

11http://www.12manage.com/methods_PEST_analysis.html, visited on August 12, 2007

8/6/2019 sm poj 1

16/54

16

The economic policy of the government has a very greater impact on the business. Some

are favourably affected while some are adversely or some may have a neutral impact.

Like an industry that falls within the priority sector in terms of government policy may

get a number of incentives and other positive support from the government, whereas

those industries which are regarded as inessential may have odds against them.

It is therefore vital that marketing firms continually monitor the economic environment at

both domestic and world levels. Economic changes pose a set of opportunities and

threats, and by understanding and carefully monitoring the economic environment, firms

should be in a position to guard against potential threats and to capitalize on

opportunities.

IMPACT OFENVIRONMENT

As discussed earlier, there is a continuous interaction between the organisation and its

environment. Such an interaction affects the functioning of both, in other words impact

lies on both. But as in the earlier section the point is made clear that the impact of

organisation on environment is not as significant as that of environment. The figure

below shows the environment and organisation interaction and explains how it affects the

objectives achieved by the organisation.

The figure below makes it clear that the environmental factors have a direct impact on the

organisations operations which includes both business functions in the form of

production of goods, its marketing, finance and personnel and at the same time its

management functions which includes planning, organizing, directing and controlling

which will further be made clear in coming chapters.

8/6/2019 sm poj 1

17/54

17

Environment-organisationinteraction

Environmental factors

Organizational

operations

Business functions Management functions

ProductionMarketing

FinancePersonnel

PlanningOrganising

DirectingControlling

Objective achievement

8/6/2019 sm poj 1

18/54

8/6/2019 sm poj 1

19/54

19

help the poor people in 1904. Co-operative banks were established to target the rural

areas to provide the primary services and were the first to provide financial services to

the poor. Among the most prominent is the Self-Employed Womens Association

(SEWA) Bank, which primarily services urban women.

It was in the year 1974 that the Micro Finance Institution (MFI) also showed their

emergence in the field of microfinance and the first MFI in India was set up in the same

year, but the momentum was achieved only during the 1990s.

Again with the establishment of Regional Rural Banks in 1975 the microfinance activities

appeared in their completely formal shape. In the year 1982, Integrated Rural

Development Program (IRDP) was one of the largest poverty alleviation programs to

include a microfinance component. It was in the same year that the NABARD (National

Bank for Agriculture and Rural Development) was established as an apex agency for

rural finance. It came out with various ideas for the rural development like to provide and

regulate credit for the promotion and development of agriculture, small scale industries,

cottage and village industries, and handicrafts in rural areas. NABARD was the first bank

which introduced the concept of SHG (Self help Groups) Bank Linkage Program which

links these groups to the banks in order to encourage the microfinance activities for rural

development.

In the year 1990; the Small Industries Development Bank of India (SIDBI) was

established as the main coordinator and principal financial institution for the promotion,

financing, and development of industry in the small scale sector. But it was in the year

1999 the SIDBI Foundation for Micro Credit (SFMC) was established to promote the

growth and sustainability of the microfinance sector by providing a range of financial and

non-financial services to MFIs, including loan funds, grant support, equity, and

institution building support.

Thus, the emergence of microfinance services in India was through two main delivery

channels:-

8/6/2019 sm poj 1

20/54

20

y The SHG (Self Help Group)-Bank Linkage Channel (SBLC), which wasdeveloped from field experiments in the early 1990s by NABARD

y The second channel is Micro Finance Institution (MFI) which also showed itsdrive during 1900s

In early days both these channels worked independently and there was no willingness on

the part of the formal financial institutions to be involved with the MFIs, and social

entrepreneurship was also in short supply. But in recent years the idea of banks has

changed and the banks and other MF institutions, helped by supportive public policies,

have become more aware of the commercial viability of the micro finance services.

Instead of competing with each other they have developed innovative partnership models

between themselves. These have increased availability of funding to the sector and have

subsequently enabled MFIs to increase their scale of operations and outreach.

Both these channels are growing with a faster rate over the last five years. While the

cumulative number of SHGs linked to the banking system has grown almost tenfold

during the period 2001-2006, the outreach of MFIs grew by 29 times during the same

period. Social entrepreneurship is now getting more sophisticated and diffused leading to

many financial and service delivery innovations in a decentralized manner.

TypesofMicrofinanceOrganizations

In Indian context the Microfinance providers or organizations can be categorized under

three heads:

Formal, Semiformal, and Informal Formal Sector

The formal sector in the field of microfinance comprises of various banking units. The

Banking sectors comprises of 105 commercial banks, 196 regional rural banks and

12,128 cooperative banks. Banks hold a larger size in the form of formal financial sector

but its outreach to the poor remains rather limited.

8/6/2019 sm poj 1

21/54

21

As per RBI the commercial banks are required to give 40% of its lending to the priority

sectors in which 18% is for agriculture and 10% is for disadvantaged groups. These days,

banks are increasingly using microfinance to meet these targets.

Now days, NABARD, SIDBI, State bank of India, Bank of Baroda etc. as public sector

banks and ICICI, HDFC, Andhra Bank etc. as private banks have emerged as major

players in this field. Like ICICI, the largest private bank in India, has begun to partner

with MFIs to serve their clients and in some cases has bought out their portfolio in lieu of

opening microfinance retail branches directly.12

The HDFC has been making continuous

and sustained efforts to reach the lower income groups of society, especially the

economically weaker sections. They are providing small loans to the poor people in

collaboration with organizations both, Governmental and Non-Governmental.

Semi-Formal SectorThe semi-formal sector for microfinance consists of a variety of MFIs (Microfinance

Institutions), NGOs and SHGs (Self Help Groups). This sector covers the maximum

organizations providing microfinance. These are the various institutions registered under

various Acts like as societies, public trusts, or non-profit companies. The largest and most

profitable MFIs in India are registered as non-banking financial companies (NBFC).While the vast majority of the 37,000 NBFCs target the rural and urban middle class, a

few such as BASIX focus on providing microfinance services to the poor. Unlike NGOs,

NBFCs, with permission from RBI, are able to mobilize savings and can thus provide a

wider array of services. For thebetter understanding letusseethe role ofthese

organizations/institutions-

RoleofMicro FinanceInstitutions

There is no standard definition of a micro finance institution (MFI). An MFI generally

provides relatively small loans (in the Indian context, loans of less than Rs. 50,000) to

low income individuals. The loans could be for income generation or for consumption.

Sources of MFI funds however can be varied, including grants and loans from

12http://www.wws.princeton.edu/research/PWReports/F04/wws591g_2.pdf, visited on August 12, 2007

8/6/2019 sm poj 1

22/54

22

commercial banks, insurance companies, governments, foundations and others. MFIs can

give direct loans to the SHGs or via NGOs also. Like YCO, a Andhra Pradesh based

NGO acts as an intermediary between various MFIs and SHGs. Presently many

microfinance institutions like have joined the hands with various banking institutions and

both are working together efficiently instead of competing with each other. Current

position of MFIs in India13-

About 60 % of the MFIs are registered as societies About 20 % are Trusts About 65 % of the MFIs follow the operating model of SHGs. Large concentration of these MFIs in South India 600 MFI initiatives have a cumulative outreach of 1.25 crore poor hoseholds

RoleofNGOs

These days the role of NGOs has changed to mere facilitatorto a lender. Many of them

are engaged in activities related to community mobilization for their socio-economic

development and has initiated savings and credit programmes for their target groups.

They are playing a crucial role in the formation and bank linkage of SHGs. They are

helping the SHGs to reach the Banks to enjoy the benefit of microfinance, in other words

they are acting as intermediaries between banks and SHGs. These days, many NGOshave emerged as successful financial intermediaries between banks and apex institutions

on the one hand, and individuals, SHGs, and other groups of borrowers on the other.

Thus on the basis of microfinance activities these NGOs can be divided into two parts-

y NGOs supporting SHG Federations, andy NGOs directly retailing credit borrowers or groups of borrower

Few of the NGOs supporting SHG Federations include MYRADA in Bangalore, SEWA

in Ahmedabad, PRADAN in Tamilnadu and Bihar, ADITHI in Patna, SPARC in

Mumbai, ASSEFA in Madras etc. While few of the NGOs directly retailing credit to

13Supra Note 1

8/6/2019 sm poj 1

23/54

23

borrowers are SHARE in Hyderabad, ASA in Trichy, RDO Loyalam Bank in Manipur

etc.

Not only this in some areas they are acting as intermediaries between banks or MFIs and

SHGs i.e. inspite of just linking the banks with SHGs they are performing the task of

intermediates which in turn affecting the microfinance activities. Being an NGO they

have to perform their other activities along with the role of financial intermediate and the

job of microfinance provider is not so easy, since the work flow is intense and time-

bound and any loading of staff with other work shows up in the form of delinquency or

default. Thus many NGOs have decided that they should not be financial intermediaries

and so have taken to the role of forming SHGs only and linking those with banks.

While a census of NGOs in micro-finance is yet to be carried out, there are perhaps 250-

300 NGOs, each with 50-100 Self Help Groups (SHG). Few of them, not more than 20-

30 NGOs have started forming SHG Federations.

ModelsofMicrofinanceinIndia

Individual Banking modelThe individual banking model is divided into two sub-models: one where joint liability

groups are formed thereby providing social collateral to the lending institution, the other

being direct lending to individual clients. BASIX which is one of the major MFI offers

both the products, in addition to offering loans to intermediaries for on-lending. This

model is feasible only for the larger clients like those who either carry out enterprise on

their own, or carry out enterprises that hire the other poor who want to be self employed.

The main reason why this model works with larger clients is because in this model total

transaction cost is justified as the transaction size is large enough.

The Grameen ModelThe Grameen Model is perhaps the most well known, admired and practised model in the

world. The model involves the following characteristics14

:-

Homogeneous affinity group of five14http://www.iimb.ernet.in/iimb/microfinance/Docs/mr03206b.pdf, visited on August 12, 2007

8/6/2019 sm poj 1

24/54

24

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 instalments

The Grameen model is a more disciplined model. Here the customers are supposed to

pass a test before the lending could start, in other words the group members tend to be

selected or at least strongly vetted by the bank. Thus, it is very cost intensive as it

involves building capacity of the groups. The staff members can conduct only two

meetings a day and thus are occupied for only a few hours, usually early morning or late

in the evening. The model is also rather meeting intensive which is fine as long as the

members have no alternative use for their time but can be a problem as members go up

the income ladder. But the Grameen model is very simple in the design of its products

and delivery.

However, the Grameen model works only under certain assumptions like-

y As all the loans are only for enterprise promotion, it assumes that all the poorwant to be self-employed.

yThe repayment of loans starts the week after the loan is disbursed the inherentassumption being that the borrowers can service their loan from the ex-ante

income.

This model cannot be considered as best model for the poors like the SHG model due to

its rigidity and its assumptions. One of the necessary conditions for this model to work is

discipline and growth of the number of clients. That is the reason why by design this

model might not be appropriate for sparsely populated areas like Kutch in Gujarat, or

areas where there is a widespread migration of the labour class such as in parts of

Rajasthan and some parts of Gujarat.

SHGModel ofMicrofinanceIt was during the early 1990s that the NABARD introduced the NABARD Self Help

Group (SHG) bank linkage modelto overcome the problems associated with rural

8/6/2019 sm poj 1

25/54

25

outreach through this model, which used participation, social intermediation and financial

intermediation for advancement through access to financial services.The essential designelements of the SHG model are as follows15:

Homogenous affinity group of 15-20 members Regular meetings Regular savings Lending decisions are of the group Group selects their leaders Group accesses external funds

SHG is a group of individuals consists of 5-20 persons, 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. The size of individual loans is determined either by the volume

of individual savings or by the groups savings as a whole, and interest rates is set by

members for the group loans while the banks followed their own interest rates. In simple

words when the bank lends money to the group as a whole it charges its own interest rate

but when the members take the loan from the group then the group also charges its own

interest rate.

Usually all these people are from different families having similar socio-economic

background or people from same community or same caste etc. Generally, after forming

the group, it 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 which may ranges from Rs 10-Rs

100 or even more on monthly basis i.e. it is on the group to decide what will be the

amount for saving on the basis of socio-economic conditions of the group members. 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

15ibid

8/6/2019 sm poj 1

26/54

26

collected by a certain date from individual members and deposited in the bank account

and if the bank finds it feasible then it can give loans to these groups the range of which

may exceed according to their performance. Generally all the banks and other MFIs

follow their own criteria for giving loans and charging interest rates.

Who helps in the formation ofSHGs?Non Governmental Organisations (NGOs) Social Workers, health workers, village level

workers, etc Informal Associations of local people, development oriented government

departments Banks, Bank personnel and other individuals (in their personal capacities)

Farmers Clubs under the Vikas Volunteer Vahini ( VVV) Programme of NABARD

and other development institutions helped to form these groups.16

The main purpose of forming the SHGs is to provide financial assistance to the poor

people who do not have access to formal financial institutions. They act as the forum for

the members to provide space and support to each other. It also enables the members to

learn to cooperate and work in a group environment. The SHGs provide savings

mechanism, which suits the needs of the members and it also provides a cost effective

delivery mechanism for small credit to its members.17It also helps the poor people to

develop the habit of working in order to save as they have to return the money back after

the term of loan is over and even the co guarantee given by the members also served as a

check on default, as the threat of denial of further credit to the entire group for the default

of a single member incentivized the group to pay up themselves, or put pressure on the

borrower to pay back the dues.

This model accounts for 70 percent of microfinance in India and NABARDs bank

linkage program has cumulatively reached a total of 9.4 lakh SHGs with about 1.4 crore

households. SHGs may borrow directly from an MFI or a bank and are often organized

into federations to obtain external funds in bulk. Currently, the predominant financing

model for SHGs is one in which the MFI acts as facilitator between banks and SHGs,

16http://www.indianngos.com/ngosection/newcomers/selfhelpgroups.htm, visited on August 12, 200717ibid

8/6/2019 sm poj 1

27/54

27

while in other cases lending goes to SHGs through the financial intermediation of MFIs.

Thus, the lending may go to the SHGs in following ways-

y Directly to SHGs by the banks, no intermediariesy Banks give money to NGOs and then NGOs to SHGsy Banks give money to MFIs and then they give to SHGsy Banks give to MFIs, then they give to financial intermediaries, then it goes to

SHGs

y NGOs just acts as a linkage between banks and SHGs (SHG bank linkageprogramme)

With traditionally loss-making rural banks shifting their portfolio away from the rural

poor in the post-reform period, SHG-based microfinance, nurtured and aided by NGOs,

have become an important alternative to traditional lending in terms of reaching the poor

without incurring a fortune in operating and monitoring costs.

Informal SectorInformal sector unlike formal and semi-formal includes money lenders and various social

networks. In early times and even today also the people prefer to go to friends and family,

moneylenders, landlords, and traders in order to get small loans or other needs. They

continue to play a significant role in the financial lives of the poor. The studies suggest

that the informal sector accounts for 84 percent of poor households credit usage inspite

of highest interest rates on loans.18 But due to various MFIs and Banks coming out in this

field these informal players are increasingly being driven down by competition from

these microfinance providers.

Currenttrendsandchallenges-inthefieldofMicrofinance

The microfinance sector in India, largely unfettered by tedious regulation and

interference is young and dynamic. The biggest obstacle until recently was little access to

commercial markets and the forbidding cost of capital funds. As private banks,

18http://www.wws.princeton.edu/research/PWReports/F04/wws591g_2.pdf, visited on August 12, 2007

8/6/2019 sm poj 1

28/54

28

spearheaded by ICICI in 2003, entered the microfinance market, this barrier has partly

disappeared and microfinance is growing at a break-neck pace on all fronts viz. loan

outstanding, client outreach, product and service diversification or geographic spread.

Following are the major issues (challenges) which the microfinance organizations need to

address in order to achieve growth19-

skilled human resources, flexible product design, reducing transaction costs, filing the gap between demand and supply ensuring adequate management information systems, standard credit information, better use of advances in technology, expanding into underserved areas, and Dealing with regulatory hurdles and political risks

The main default in this industry is that till now there is no Act which can regulate the

functioning of microfinance institutions in India. A Microfinance Bill called The Micro

Financial Sector (Development and Regulation) Bill, 2007 (henceforth the Microfinance

Bill) was introduced in the Lok Sabha on March 20, 2007 but the Act has not come into

picture yet. Thus, there is an urgent need for structured long term financing to the sector

to fully address these important issues and smoothly transition into a well functioning

mature industry. Here are some of the challenges faced by the microfinance

organisations:

LimitationsofMicrofinanceindustry

It takes an average of thirty-three weeks to get a single loan approved. Inadequate regulation is one element curbing this sectors healthy expansion.

19http://ifmr.ac.in/cmf/wp-content/uploads/2006/11/MF-in-India-(WA4.10.06).pdf, visited on August 12,2007

8/6/2019 sm poj 1

29/54

29

Savings products have not been offered until now, the microfinance is stressingonly on micro-credits. The provision of savings products will enable MFIs to

offer a more complete suite of products to low income groups.

There is disproportionate reliance on group lending. The MFIs in particular needto shift from group to individual-based lending.

Higher interest rates due to high transaction cost

These are some of the current limitations which the industry needs to look upon.

8/6/2019 sm poj 1

30/54

30

Chapter 3

Role of Bank of Baroda-In the field of microfinance

Our mission statement

To be a top ranking NationalBank of International Standards committed to augmenting

stake holders'value through concern, care and competence.

Bank of Baroda was founded by the great visionary Maharaja Sayajirao Gaekward III, on

20th July 1908. It was established with the name The Bank of Baroda Ltd. which was

later changed to Bank of Baroda on 19th July, 1969. The vision of Maharaja Sayajirao

Gaekward III was that, a bank of this nature willprove a beneficial agency for the

lending, transmission and deposits of money and a powerful factor in the development of

art, industries and commerce of the State and adjoining territories.

Thus, about a hundred years ago, the Bank was established to serve Agriculturists, Small

traders and entrepreneurs and by the completion of 100th year the bank has done a lot for

the development in this field. The Bank assures that they are characterized by diversity,

their network of branches spans geographical and cultural boundaries and rural-urban

divides and their customers come from a wide spectrum of industries and backgrounds.

From humble beginning, this great institution has grown into a multi specialist national

Bank with international presence.

During these years, the bank has been in the forefront for social commitment with its

innovative approaches and products. The initiative for this was taken in the year 1969 to

fulfill the requirements of rural people and for providing them the opportunities for

growth that the Bank operated from 433 branches. In this year only the Bank committed

itself to the new role of national development and it gave social banking a new

dimension, with its Multi Service Agency (MSA) model for urban micro-credit. It was in

the year 1976; the Bank opened the first of its 19 Regional Rural Banks complementing

its own operations in the rural heartland. Consequent to the merger of 17 (out of 19)

8/6/2019 sm poj 1

31/54

31

RRBs into 4 larger RRBs during 2005-06, the number of RRBs Sponsored by the Bank

stood at 6 having 1,700 branches all over by the end of March, 2007. Not only this, the

Bank has also taken the initiatives like opening of Gram Vikas Kendra and Baroda

Swarojgar Vikas Sansthan for providing appropriate skill upgradation to unemployed

youth and women for their gainful employment. A passion for agriculture and rural

development and to serve the common man is ingrained in the Banks philosophy and

business strategies.

Rural India contributes a major chunk to the economy every year. To give this sector a

stronghold on finance and to enable economic independence, today the Bankof Baroda

has special offerings that extend credit facilities to small and marginal farmers,

agricultural labourers and cottage industry entrepreneurs. The Bank has always been in

the forefront in the area of Priority Sector and Agriculture Lending.

With the objective of developing rural economy through various promotional

mechanisms like growth in agriculture lending and also extending credit facilities

particularly to small and marginal farmers, agricultural labourers and small entrepreneurs,

Bank of Baroda, over the years, has reached out to larger part of rural India. The bank has

made it explicit that they extend loans not only for the agricultural activities and a host of

services for farmers but also for those poor people who requires micro-credits or other

microfinance facilities.

Bank in the field ofMicrofinance

With the above aim in mind the Bank has taken a major footstep in the form of providing

Microfinance activities in order to offer financial assistance to those poor and needy

people who are below poverty level and not in the position to afford large loans. The

Bank is not only providing the micro-credit facilities but at the same time micro-saving

facilities also thus to promote the savings habit among them. This is an important

decision taken by the bank not with the sole idea of commercial benefits but also to help

those economically backward rural farmers or artisans or other poor people who could

not get financial assistance through any other means, the reason being obvious that giving

8/6/2019 sm poj 1

32/54

32

loan to such poor people is not feasible for the many financial institutions as it incurs a

large transactional cost and also no assurance for the return of the money in the case of

credit transactions. But the Bank has taken an initiative in this field also like other ones

for rural development and adopted the strategies to assure the success in this field also.

Microfinance is covered under the priority lending by the bank i.e. among the 40%.

Within this 40%, agriculture contributes 18% while 10% amounts for the weaker sections

of the society. Thus, the microfinance is included under that 10% lending.

As per the data of March, 2007 it shows that the Banks credit-linked Self Help Groups

(SHGs) were expanded by 9,382 to reach 55,375, during the year. Credit assistance

extended under the SHG-Bank Linkage Programme stood at Rs.66.87 crore as at end-

March 2007. Currently the bank is charging 10.25 % p.a. as rate of interest on micro-

credit. Here is the SHG model followed by the bank-

Bank SHGBranch Clients

SHG-Bank Linkage

Branches assess credibility and monitor repaym ent from SHGs

Group formation by NGOs

N GO

The bank follows SHGs Bank Linkage Model provided by the NABARD. It gives micro-

credit through both direct and indirect means. It provides direct loans in the areas where

it has its existence while in other areas it uses NGOs to link these SHGs with them.

Recently, the Bank introduced a slew of initiatives to harness the emerging opportunities

for rural lending. The Bank appointed an Advisory Committee on Agri. Lending with Dr

V S Vyas, an eminent Agri. Economist as Chairman of the Committee for advising the

Bank on New Business Model, New Delivery Model and Innovative Products and

Schemes with regard to agri. Lending, weaker sections and other rural development.20

20http://www.bankofbaroda.com/fin/fin_directorreport.asp, visited on August 13, 2007

8/6/2019 sm poj 1

33/54

33

Chapter 4

Field Study And Questionnaire

In order to fulfill the objectives of the Project Environmental Factors affecting

Microfinance in India a field study was conducted in Bank of Baroda, Masuda

(Beawar). A questionnaire was prepared to identify various environmental factors

affecting microfinance in India, their impact on the functioning of Bank of Baroda and

the strategies adopted by the Bank to deal with them. For this I presented the

questionnaire to Mr. Charan Kumar, Assistant Manager, Bank of Baroda, Masuda

Branch (Beawar) and made a conversation with him. Analysis of the response to the

questionnaire has been included in the Analysis of the Field Work.

The response to the questionnaire given to him is as follows:

1. Since what time has the Bank of Baroda started the scheme of microfinance?

To my first question he replied that the Bank started its scheme of microfinance in

the year 1997.

2. Who is your target group?

To this question he replied that basically they target to those poor people who are

below poverty level which includes poor farmers, artisans or other economically

backward rural people. They dont target to an individual poor person but give the

micro-credits to the group of these poor people which is called as Self Help Group

(SHG). Thus they prefer giving loans or allow savings to a group thus to reduce their

transactional cost and for assurance of return.

3. What all activities are covered under microfinance by your bank?

[ ] Savings [ ] Loans [ ] Both [ ] Any other

Giving answer to this question he replied that their Bank provides both, savings and loans

facilities, infact savings precedes loans. They give loans to SHGs only if they have

8/6/2019 sm poj 1

34/54

34

sufficient funds in their savings account after watching a period of six months from the

date of savings and not before that.

4. Who all are your major competitors in this field?

Mr. Charan Kumar told me that at present Bank dont face any major competition.

Being a public sector bank it works for social development and the government also

acts as a facilitator in this field. But in coming years Bank may face competition from

the private sector banks like ICICI, HDFC etc. and other new entering private and

international banks like Citibank and Deutsche Bank etc. These Banks are coming

with new plans and strategies to enter in to the market. These days other MFIs are

also there which are also providing microfinance products. Some how bank is

competing with them also but the impact of them on the Bank is not that prominent.

5. How do they affect your functioning?

Mr. Charan showed his concern to this question and replied that they have an adverse

impact on the functioning of bank because these banks are coming with new

technologies and strategic plans and with the help of NGOs and other intermediaries

trying to enter into the roots of the rural market.

6. How do you feel the interference of government and other political groups in

your microfinance activities?

He responded that the role of government is very limited as there in no law which

regulates microfinance. It comes only in the form of regulation of interest rates or the

lending to priority sector. The interest rates are set by RBI for all the banks and out of

40% of priority lending they are required to give 10% of their total lending to the

weaker sections. Government also has a helping role in the from of providing help in

the formation of SHGs and linking them to the Banks but in the Northern States the

support of State governments is very limited unlike Southern States.

7. In your opinion how does the society affects your microfinance functioning?

8/6/2019 sm poj 1

35/54

35

He said that the microfinance is such an activity which has larger societal interest

than the commercial one. When they provide this facility they always keep in mind

that their product should by consumer friendly as they are targeting such a section of

society which is economically backward and from rural background. Thus, they

perceives that it must be flexible enough to fulfill their needs. He said our main

advantage in this field is the trust relationship with the people. We feel that the

society has a large impact on our functioning and that is the reason why we have

adopted such an strategy thus to provide our products to each and every poor person.

8. What is your mode of giving loans?

[ ] Direct loans [ ] through some intermediaries [ ] both

He told me that their bank give loans to through both medium depending upon the

availability of distributors and feasibility. He said that the basically intermediaries

come in the form of NGOs only and they plays a very important role in the whole

process. Currently they are giving loans @10.25%.

9. What procedure do you follow in providing microfinance products to the

people?

He said that those poor people requiring loans or want to open saving a/c form their

groups (SHGs) not more than 5-20 members, and give a common name to the group.

The group is headed by a leader and his subordinate. The SHG collects the small sum

of money say Rs 10 or Rs 20 from the group members, depending upon their

capacity, and deposits it with the bank. The bank sees their activities for next 6

months and if thinks that the SHG is working efficiently then it can give loan to the

SHG ten times its savings at the specified rates. Even the group can also charge their

internal rates of interest from the members depending upon their individual loans.

The Branch manager makes weekly visits to these groups. Thus the whole lending

depends upon the performance of the group.

10.What are the major challenges faced by the Bank in this field?

8/6/2019 sm poj 1

36/54

8/6/2019 sm poj 1

37/54

8/6/2019 sm poj 1

38/54

38

have already entered into the market and many more are still entering into it. They are

coming out with new ideas and plans thus to dominate the market. Like recently the

Citibank has joined its hands with SKS Microfinance and has announced a USD 44

Million (Rs.1.8 Billion) groundbreaking financing program involving Citibank India

purchasing loans that are originated by SKS. Representing Citibanks increased foray into

rural microfinance, the program will deliver income generating loans of between

Rs.5000/- to Rs.20,000/- to a population of over 200,000 unbanked customers spread

across 7000 villages in 11 States of the country by financial year 2007-08.

These days many MFIs are encouraging active private sector involvement in this field

thus to raise funds and also this is a way for these investors to fulfill their corporate social

responsibility objectives by virtue of an investment and not as an expense. The study

shows that some foreign venture funds have entered the microfinance field, hoping to

maximize their returns and also benefit from the relatively low default rate.

Due to such a competition in the market it will have an impact on the functioning of all

the layers as they have to adopt such strategies through which they can compete with

their counter parts.

MarketingIntermediariesThe market of the microfinance involves a large network of many commercial banks,

MFIs, NGOs, SHG and other financial intermediaries. Here the target group is those poor

people who reside in the rural areas of India and the reach of these banks and other MFIs

is limited in that area. This is the reason which gave rise to various intermediaries like

NGOs and small microfinance institutions. These are the organizations which are closely

linked to these weaker sections of society. Being the welfare agency for the people, they

still have faith in them and their functioning. That is the reason why many banks and

MFIs like NABARD, Bank of Baroda, ICICI and Andhra Bank etc. have used them asboth distributors and intermediates. As a distributor their role is to take the funds from

banks on certain rates and distribute it among the SHGs after charging some interest on it

while in the other case their job is just to link these SHGs with the banks. here their role

is to act as an initiator in the formation of SHGs and link them to the particular group.

Similar is the case with MFIs, some of them are giving direct loans to the SHGs while

8/6/2019 sm poj 1

39/54

39

some of them have joined the hands with other commercial banks and acting as an

intermediary. The current position of microfinance in India reveals that both international

and Indian banks are striking partnerships with MFIs. Here there role is similar to the

NGOs i.e. to link these SHGs to a particular bank or taking loans from a particular bank

and distributing it among the SHGs on certain rates.

Thus the role of intermediaries and distributors is prominent in this industry. Apart from

the direct funding if the banks are providing funds vis NGOs or MFIs they have to keep

good relations and contacts with these institutions. They are one of the most important

environmental factors which can affect the functioning of these microfinance

organisations. Any organisation will work efficiently if it has a good distribution

channels and its products will reach to the final consumers. Similar is the case with

microfinance organisations. Their target market is rural area and if they have to sell their

product in the market they have to either go directly and give funds to the people or

maintain a good distribution channel specially in those parts where they cannot reach

directly they have to take the help of these intermediates. Any microfinance institution or

commercial banks will be in the position to work effectively if it continues good relation

with them.

Socio-cultural factorsSocial and cultural factors have a large impact on the microfinance industry. Banking

with the poor is a challenging task as the nature of demand requires doorstep services,

flexibility in timings, timely availability of services, low value and high volume

transactions and require simple processes with minimum documentation. It differs for the

men and women, for people with different economic backgrounds, age group, education

level, their living standard, life style, culture etc. Dealing with the people means taking

into account different aspect of their life before offering them any product. It is requiredthat the banks or other MFIs must show flexibility with respect to the unique

circumstances of the rural poor and they must show sensitivity to the families plight of

poverty. Additionally, the banks must increase their responsiveness to the poor and help

build trust and confidence between their institutions and the villagers.

8/6/2019 sm poj 1

40/54

40

Like if talking about food products, same type of food cannot be given to the person form

Rajasthan and a person from Tamil Nadu, there has to be some difference according to

their needs, requirements, taste, preference and culture. Similar is the case with

microfinance also. While dealing with the rural people all of them dont attribute same

level of understanding, economic background or their needs and preference thus the

banks or other MFIs are required to design their products and lending keeping in mind all

the parameters and use flexible plans. Like SKS microfinance is providing training to the

women in Southern part of the India as there the women are more active then women in

Rajasthan or Gujarat. They not only help them in the formation of SHGs but also

provided them with vocational trainings and then provide them with the required funds.

They even help them in utilizing the funds efficiently and properly. Thus, majority of the

MFIs are located in the Southern States and not in Northern States. Thus, the

microfinance industry is largely reactive to the changes in social and cultural

environment as these factors affect their functioning to a larger extent.

Economic factorsEconomic factors in the field of microfinance are not that prominent, as there is no such

governments economic policy or regulations which affect the functioning of this sector

to a large extent. The only affecting factors are the stage of economic development of thecountry as a whole and the guidelines of NABARD with respect to interest rates.

Seeing the economic structure of the country, many microfinance organisations are even

providing a very small amount in the form of loans. Like Citibank has agreed to pay the

loan starting from Rs 4000 seeing the economic conditions of the poor in India.

Another factor is transaction cost incurred by the institutions. As they are ready to

provide very small amounts also thus it has lead to the increment in cost incurred in each

transaction. This is the main reason why the interest rates are going high which in turn is

affecting the business of these organisations. As such there is no regulation to have a cap

on the interest rates thus it is facilitating the MFIs to increase their profit margin.

GovernmentPolicies

8/6/2019 sm poj 1

41/54

41

The main drawback of the Indian microfinance industry is that there is no regulatory

body or Act to regulate its functioning. This is proving as a boon to the MFIs and other

private organisations as there is no one to regulate and guide their functioning. There are

no interest caps to regulate the rate of interest and even no regulatory authority. This is

facilitating the MFIs to even act arbitrarily and gain profits by lending as per their

convenience. Thus, these institutions are booming the market. But a Microfinance Bill,

the Micro Financial Sector (Development & Regulations) Bill 2007 has been

introduced in the parliament in the month of March, 2007. The Act has not yet come into

force but if it will enforce it will have a great impact on the whole industry specially

MFIs and other private organisations.

In the proposed Bill the provision has been made to designate the NABARD as the

regulatory authority and also the provisions are made for registration of the MFIs which

has been in existence for at least three years, having net owned funds of at least Rs.0.5

million and satisfactory management. The Bill has also made the provisions to have a cap

on the interest rate. All these provisions if comes into existence will have a large impact

on the MFIs. It will affect their operation to a large extent.21

To analyse the impact of the above environmental factors on Bank of

Baroda

Questionsto be referred-1, 2, 5, 6, 7, 8 and 10

In earlier objective we have identified some major environmental factors which affect the

functioning of microfinance in India. Now in this section we will try to analyse the

impact of the above environmental factors on Bank of Baroda-

CompetitorsWith the continuous entrance of many players in the microfinance market the competition

is increasing day by day. But being a public sector bank it doesnt feel a major threat

from them the reason being that the aim of Bank is rural development than mere profit

making. It works for their progress and doesnt get attracted by mere commercial

purpose. But that doesnt take it out from the competitive market and the bank thinks that

21http://www.downtoearth.org.in/full6.asp?foldername=20070515&filename=news&sec_id=18&sid=24,visited on August 14, 2007

8/6/2019 sm poj 1

42/54

42

it may face threats in the near future from the private players and other international

banks. With the entrance of many players the competition has become huge. These new

players are coming in the market with new technology and new strategies thus to

penetrate the market. At present bank is providing only micro-credit facilities through

SHGs but the new entrants are coming with new products like savings, insurance, and

remittance to serve the swelling numbers of urban and rural poor. In most of the areas the

bank is providing direct loans while only in some parts where it doesnt have its reach it

is using NGOs as intermediaries. The bank feels that their network of rural market is so

strong that they prefer giving direct loan to SHGs. Through this they have entered in to

the roots of rural market especially in Northern States and in those areas where they dont

have their existence they give loans to various NGOs who further give them to SHGs.

But the new players are adopting new strategies like ICICI bank which is Indias top

Private bank has entered in to the microfinance market few years back and has joined its

hands with many NGOs and other organisation thus to have a larger share in the rural

market also. Currently it is holding a good network of urban market and now trying to

capture rural market also. Citibank has also entered into the market with its attractive

plans.While the coming players are using all the possible methods to capture the large

share of the rural market, Bank of Baroda feels that it has developed such a strong trust

relationship with its customers that it doesnt feel any threat from new entrants but it

accepts the presence of various large public sector banks like SBI, PNB etc. It assumes

that even if the new players are entering into the market or entered into the market it will

take time for them to set themselves into the market but they have the advantage of trust

from people and which is an opportunity also which they can utilize efficiently. Moreover

their microfinance plans are very flexible with regard to both loans and returns keeping in

mind the condition of the people.

Inspite of all these factors the bank is required to take the necessary steps in the coming

future to provide better products and use new strategies to compete with them and the

bank has started taking initiatives in this field.

Marketing intermediaries

8/6/2019 sm poj 1

43/54

8/6/2019 sm poj 1

44/54

44

Bank of Baroda is working in the field of agriculture and rural development in India

from such a long period of time that it is recognized by the rural people as a faithful

and trustworthy organisation. Bank has its strong setup in the Northern Part of India

and that is the reason why it has designed its microfinance products for them keeping

in mind their culture, income group, social status, mobility etc. the micro-credit

facility provided by the bank is very flexible in nature as there is no fixed term for

return of the credit. The time period for the return differs from purpose to purpose and

also keeping in mind the economic condition of the people. Like if a SHGs group

takes loan for buying a tractor so that they can use it in their farmers then the bank

doesnt count its return period from the day the loan was given but give some time

say 2-3 months to generate the income from it and then pay the money back. Same is

the case if lending is done for some other purpose. Generally bank doesnt bother

about the purpose of the lending but if they are informed the purpose and it feels that

the poor wont be in the position to return it back sooner they can divide the time and

installments accordingly i.e. the policies of bank are very flexible seeing the social

status of the people like in Rajasthan where the condition and status of the people are

lower than the rural people of Andhra Pradesh. Even the education level and the

living standard of the people there is better than the rural from here. In Rajasthan the

SHGs mainly take loans for buying tractors or for farming or for other small

businesses. Here the role of women is not as affective as is there in the Southern

States, where the women are indulged in many activities like stitching, leather work,

machineries and other small scale work and the banks and other MFIs are taking

active participation to provide them these activities. But the Bank of Baroda feels that

it has the social responsibility to provide growth opportunities to them here also, for

this reason only it has opened many training centers and providing the trainings to

women. Like in Ajmer (Rajasthan) the Bank has its training centre for the women

where they are provided with various activities to learn and after that the loans are

given to them for starting their small business in that field. Thus, the bank is not only

reacting quickly with the changing structure of the society and growing well but also

helping the rural people to develop by providing them with the opportunities.

8/6/2019 sm poj 1

45/54

45

Economic FactorsBank doesnt feel a greater impact of the environmental factors on its operation as there

is no such economic policy which affects their functioning. Microfinance being the

priority sector lending the government even acts as a helping body in this field. They

have to lend 40% of the total loans to priority sector and in the case they failed to do so

the balance amount is deposited with NABARD. The only thing for the concern is the

high transaction cost which affects its lending but till now the bank is not in the position

to react to this situation.

With regard to the economic background of the rural people of India the bank is

providing very small loans with an interest rate of only 10.25% p.a. on whatever sum of

money they are taking which looks quite arbitrary.

Governmental factorsAs it is made clear in the first issue itself that till now there is no regulatory body to

govern the functioning of microfinance in India but the bill has been introduced for the

same. At present there is no impact of the governmental factors as such but if the Bill is

approved by the parliament and comes into picture then it will have a favourable impact

on it. The Act provides for the registration of the MFIs and their regulations which

presently are unregulated. This will provide the bank to form a good image in the rural

market as it being the Public sector bank is already working with all the care and

cautions. The only point to be considered here is that if the interest rates are fixed as

suggested by the Act22 then the bank has to frame new strategies and plans in this regard.

In whole the impact of the Act will be more on the MFIs than the bank like Bank of

Baroda.

Thus this objective of the project has been fulfilled.

To identify the strategies adopted by the banks in maximizing the

opportunities and minimizing the threats

Questionsto be referred 3, 9 and 12

22 Banks lending less than Rs. 2,000 to individuals may not charge more than their prime rate, which iscurrently around 10.5 to 11 percent, while the rate at which they lend to MFIs or at which MFIs lend toclients is not regulated.

8/6/2019 sm poj 1

46/54

46

The bank has adopted following strategies to work affectively in the field of

microfinance-

The Bank is currently providing micro-credit 10 times the savingswhich was earlier only 3 times,

They are using SHG model which is more flexible in nature thus toreach each individual inspite of Grameen model which is rigid in

nature.

They are providing direct loans to the SHGs and also through NGOswhere the reach of NGOs is prominent.

Recently they have come up with the opening of Grameen PramarshKendra in order to provide the sufficient information to the rural

people as to their credit schemes, savings and other facilities.

They are even helping in the formation of SHGs and even helpingthem in utilizing the fund properly.

Bank has opened many training centers for providing vocationaltrainings to the rural people and also providing them with the micro-

credit facilities. Like they have setup a training center in Ajmer which

provides vocational training to the women and also provides them with

the micro-credit.

The study makes it clear that the bank has adopted a very flexible approach while dealing

with the poor rural people. Their process of lending clearly states that their aim is not just

giving the loans but to ensure that it is utilized efficiently, thus bank is here acting as a

facilitator also. Bank in one of its strategy is using direct lending method in those areas

where it has its existence, the reason being that to deal with the people directly and

understand their problems. Their aim is to create strong relationship with them. For this

purpose only the Bank has recently started the scheme of Grameen Pramarsh Kendra

where it provides all the information about its rural products including microfinance, thus

the people can directly come and take the help of the bank people to solve their problems.

The other method used by them is the field visits. The branch manager and the Accounts

person make weakly visits to the rural areas to inform them about their various schemes.

8/6/2019 sm poj 1

47/54

47

In the case of microfinance they even help them to form the SHGs and managing their

activities. They provide them all the information time to time thus to help them in any

manner they require. They even keep an eye on the functioning of SHGs so that they

perform better. They even help them in maintaining their own registers for microfinance.

The most important is that they even ensures that the money given to them be distributed

equally among all the members as per their share or need. Thus above are some of the

strategies used by the bank.

8/6/2019 sm poj 1

48/54

48

Chapter 6

Conclusion

Environmental factors and business operations are closely related. Environmental factors

in the form of micro and macro environmental factors surround the business

organisations in such a way that any change in it will have a direct impact on its

functioning. Thus, the strategy promulgation to achieve the desired organisation objective

is not possible unless the organisation has the required competence to assess the impact

of either the impeding changes in environment or existing environmental dynamics.

Recent changes in environmental settings have far-reaching impact on strategy

formulation and strategy implementation of the organisation.

The above factors influence the microfinance activities in the same way. The study of

Bank of Baroda with respect to its microfinance activities clearly reveals that these

environmental factors have a large impact on the planning of the bank. Some of them

affects in positive way while some in negative, whatever the impact is the point that is

required to be remember is that the bank have to react to these changes if it wants to work

efficiently and build its share in the microfinance market. The study shows how the bank

has reacted to them and also how it is reacting to the coming changes and also the bank

has prepared its strategies in order to minimize the negative impact of these factors and

for its promotion. Seeing the overall position the bank is working efficiently in this field.

8/6/2019 sm poj 1

49/54

49

Chapter 7

Recommendations

The study shows that Bank of Baroda is doing well in providing microfinance activities

to the poor people thus playing an important role in the rural development. But here are

some of the suggestions made in which Bank is need to look upon so that it can modify

its strategies in order to have a balance with the changing environmental factors.

Following are the suggestions:

Try to reducethetransaction cost-this is one of the challenges which thebank is currently facing. It includes the total cost incurred on the transaction in

relation to microfinance activities. Microfinance included savings or credit of

small loans which increase the transaction cost which further forces the bank

to raise its interest rate. Thus the bank is required to frame some strategic

plans for this purpose.

Improvethedistribution channel- At present the bank has good positionand reach in Northern India and here it is providing direct loans to SHGs and

in some places via NGOs but the Bank has no such existence in Southern

States. One of the reasons being that it doesnt have good distribution channel

there, thus the Bank should make some plans to make its share in Southern

States also. One of the solutions would be to join the hands with major MFIs

or NGOs who are currently operating in these parts in order to expand their

reach in the rural market there also.

Come out withnew products- Currently the bank is providing only singleproduct i.e. Micro-credit. It is required to come out with new products like

savings and insurance like other banks are providing. Also the bank can come

out with such products which are especially for the women thus to encourage

them as currently the bank is providing training to them but that is not

sufficient seeing the present demand.

8/6/2019 sm poj 1

50/54

50

Research anddevelopment-research should be conducted in order to find outthe areas where the demand of microfinance is still unmet. The current figure

shows that the demand of microfinance is more than supply as there are still

many parts of the India where the poor people doesnt have sufficient

financial service and they still borrow from the informal means at a much

higher rate. So research can be conducted by the bank to identify the same

thus reaching the same.

8/6/2019 sm poj 1

51/54

51

Chapter 8

ANNEXURE

1) Since what time has the Bank of Baroda started the scheme of microfinance?

2) Who is your target group?

3) What all activities are covered under microfinance by your bank?

[ ] Savings [ ] Loans [ ] Both [ ] Any other

4) Who all are your major competitors in this field?

5) How do they affect your functioning?

6) How do you feel the interference of government and other political groups in

your microfinance activities?

7) In your opinion how does the society affects your microfinance functioning?

8) What is your mode of giving loans?

[ ] Direct loans [ ] through some intermediaries [ ] both

9) What procedure do you follow in providing microfinance products to the

people?

10)What are the major challenges faced by the Bank in this field?

11)For the promotion of microfinance what would be the advantageous factors for

your bank? (According to you)

12)What different strategies are used by the bank to promote the microfinance

activities?

8/6/2019 sm poj 1

52/54

52

Chapter 9

LIMITATIONS

The whole project was made with utmost care and the data was also collected and

interpreted with utmost reliability and consistency. But the project has a few limitations

as follows:

1. The study of this project is limited to a single Microfinance bank thus may notgive the true picture of whole microfinance industry.

2. Answers of the questionnaire depend on the knowledge and experience of theconcerned person of the Bank of Baroda which may differ.

The findings of this study are based on the information given by the concerned officer of

the bank on the assumption that he has given a true picture of his organisation.

8/6/2019 sm poj 1

53/54

53

Chapter 10

BIBLIOGRAPHY

WEBSITES:

http://www.banknetindia.com/banking/61124.htm http://ifmr.ac.in/cmf/ http://www.wws.princeton.edu/research/PWReports/F04/wws591g_2.pdf http://economictimes.indiatimes.com/articleshow/1648287.cms http://www.gdrc.org/icm/conceptpaper-india.html http://www.adb.org/Microfinance/default.asp http://www.uncdf.org/english/microfinance/pubs/newsletter/pages/2005_06/news

_india.php

http://www.wfp.org.in/ifadindia/IFAD_in_India/IFAD_in_India.htm http://economictimes.indiatimes.com/articleshow/1648287.cms http://www.basixindia.com/micro_finance_in_inda.asp http://www.responsability.ch/de/documents/GrameenFoundationUSAMicrofinanc

eImpact1205EN.pdf

http://www.nextbillion.net/newsroom/2006/04/17/icici-bank-expands-retail-microfinance-in-india

http://www.bankofbaroda.com/fin/fin_directorreport.asp http://www.downtoearth.org.in/full6.asp?foldername=20070515&filename=news

&sec_id=18&sid=24

http://www.indianngos.com/ngosection/newcomers/selfhelpgroups.htm http://www.iimb.ernet.in/iimb/microfinance/Docs/mr03206b.pdf http://marketingteacher.com/Lessons/lesson_PEST.htm

BOOKS:

Wheelan Thomas L & Hunger David J, Staregic Management &Business Policy:Entering 21

stCentury Global Society, (Addison-Wesley, 6th edition, 1998)

8/6/2019 sm poj 1

54/54

Kzmi Azhar, Business Policy, (Tata McGraw Hill, 2000) Prasad LM, Business Policy: Strategic Management , (Sultan Chand & Sons,

2001)

Mamoria & Mamoria, Business Planning & Policy, (Himalaya PublishingHouse, 1st edition, 1987)

Cherunilam Francis, Strategic Management: A Book on Business Policy/Corporate Planning , (Himalaya publishing House, 5

th edition, 2005)