JAMIA MILLIA ISLAMIA

FACULTY OF LAW

Economics project

Status of microfinance institutions in India

Submitted by; Submitted to; Prof. Bilal khan

Rishu Kumar Singh

Semester-2
B.A.LL.B (Hons.) SF
 INDEX

CONTENT

ACKNOWLEGEMENT

MICROFINANCE

ORIGIN OF MICROFINANCE IN INDIA

MICROFINANCE IN INDIA

MICROFINANCE MODELS IN INDIA

GROWING MICROFINANCE IN INDIA

CHALLENGES AND ISSUES OF MICROFINANCE

IN INDIA
GOVERNMENT SCHEME OF MICROFINANCE
PROGRAMME

BIBLIOGRAPHY

ACKNOWLEDGMENT

I feel highly elated to work on the topic “status of microfinance institutions in India”.
The practical realization of this project has obligated the assistance of many persons. I
express my deepest regard and gratitude for Prof. Bilal khan. His consistent supervision,
constant inspiration and invaluable guidance have been of immense help in understanding
and carrying out the nuances of the project report. I would like to thank my family and
friends without whose support and encouragement, this project would not have been a reality.
 INTRODUCTION
Up until around a decade ago, Micro-finance was associated almost exclusively with small
scale loans to individuals and businesses in poor communities. Today it is used to describe a
selection of financial products such as payments, savings and insurance, that are adapted to
meet the needs of low income individuals, businesses and NGOs. Micro-finance also serves
people who do not have access to typical banking services.

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

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

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

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

It is very helpful to small-sized enterprise owners as well as entrepreneurs with low capital.
There are many people across the world, especially in India, who do not have access to
proper financial assistance. They live in rural areas as well as in urban areas of India and do
not have sufficient knowledge and access to take help from conventional sources of finance
such as banks and investors.

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

can use these funds offered by banks at very low rates of interest to start their own small
venture or to make their other dreams come true. Many of the underprivileged people in the
nation do not have any idea about saving money or managing their finances. When they
acquire microfinance from a reliable institution, they will get exposure to managing money
on their own and also about utilising funds in a sensible manner.
 Microfinance is also offered to people who are interested in purchasing equipment or vehicles
of high value that are required for carrying out their business activities. These can be tractors
for agriculture, machines for manufacturing textiles, trucks for transportation of the goods
created by the small entrepreneurs, etc.

DEFINITION OF MICROFINANCING

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

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

FEATURES OF MICROFINANCE

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

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

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

 Microfinance typically does not require loan applicants to submit any collateral while
applying for the loan. These loans are usually unsecured in nature. Even if a microfinance
institution does ask for a collateral, they are very reasonable. They understand the financial
condition of the applicant.
 Microfinance is also offered to people living below poverty line (BPL) since they do
not have access to other forms of financing.

 Microfinancing promotes simplified and small savings among poor people. It

encourages them to build their funds step-by-step.

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

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

when they have health issues.

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

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

 Microfinance institutions have easy and quick loan application processes.

 The interest rate for microfinance is very low.

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

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

 Microfinance aims at developing financial sustainability among economically

downtrodden people.

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

 Microfinance institutions aim to eliminate interest rate ceilings as they believe that
these ceilings can restrict poor people from securing finance.
 Microfinance focuses on offering financial transparency by offering loans to
individuals without any hidden costs or fees or charges.

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

OBJECTIVES AND GOALS OF MICROFINANCE

 Microfinance primarily works towards making the disadvantaged population self-

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

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

 It intends to organise and conduct simple training programmes for unemployed people
so that they have some means of livelihood.

 Microfinance also intends to assist disabled people who are economically

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

 Microfinance aims to help women of poor families. Institutions that offer

microfinance believe that women are more responsible with money and hence, they have
exclusive microfinance loan options specially designed for women borrowers.

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

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

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

 Microfinance lays emphasis on optimum utilisation of local resources available in

nearby areas and villages in order to minimise transportation costs for bringing resources,
etc.
 Microfinance aims to raise the wages of the underprivileged people so that their lives
can be improved at least a little.

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

the society.

 It serves as a great instrument to eradicate poverty.

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

ROLE OF MICROFINANCE

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

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

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

household economic welfare and enterprise stability and growth.

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

promoting gender-equity and improving household well-being.

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

ACTIVITIES IN MICROFINANCE

Micro credit:

It is a small amount of money loaned to a client by a bank or other institution. Micro credit
can be offered, often without collateral, to an individual or through group lending.

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

Remittances:

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

Product Design:

The starting point is: how do MFIs decide what product s to offer? The actual loan products
need to be designed according to the demand of the target market. Besides the important
question of what risks to cover, organizations also have to decide whether they want to
bundle many different benefits into one basket policy, or whether it is more appropriate to
keep the product simple. For marketing purposes, MFI‘s sometimes prefer the basket cover,
since it can make the policies sound comprehensive, but is that the right approach for the
low-income market? After picking products, one must also understand how they are priced.
What assumptions do the organizations make with regard to operating costs, risk premiums,
and reinsurance, and how did they come to those conclusions? Would their clients be willing
to pay more for greater benefits? From price, the logical next set of questions involves
efficiency. Indeed, given the relative high costs of delivering large volumes of small policies,
maximizing efficiency is a critical strategy to ensuring that the products are affordable to
the low-income market. One way is to make the products mandatory, which increases
volumes, reduces transaction costs and minimizes adverse selection. What does an
organization lose by offering mandatory insurance, and how does it overcome the
disadvantages? MFI‘s can combine a mandatory product with some voluntary features
to make the service more us to mar-oriented while.
Techniques of Product Design:

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

DIFFERENCE BETWEEN MICROCREDIT AND MICROFINANCE

MICROCREDIT

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

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

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

MICROFINANCE
 Microfinance is a broad spectrum of financial services provided to the people of low-
income groups who cannot take bank’s assistance banking and allied services. The
service is available to extremely poor people, no matter where they live.

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

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

 Microfinance plays a revolutionary role in any country’s economy. It helps the poor
people to fulfil their basic needs and safeguard them from any risks. It raises the per
capita income. It encourages women empowerment by providing term economic
assistance and hence promotes gender equality.

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

businessman but also deliver such financial services to the poor people who are
constantly avoided by the formal financial sector.

 ORIGIN OF MICROFINANCE IN INDIA


 Microfinance has been quite a popular and effective mode of financing in the Indian
subcontinent. From an early period, people in India used to be involved in lending and
credit operations through individual money lending, chit funds, and other indigenous
financial institutions. All these modes practiced the system of microfinance very
successfully.
 The modern and systematic method of offering microfinance or microcredit to
individuals started in the 1970s in India.
 It chiefly originated when the Grameen Bank was started by Professor Mohammed
Yunus in the year 1976 in Bangladesh. It was a pilot project of having a unique
lending system where micro loans are offered to the disadvantaged sections of the
society, especially the rural poor. This programme was launched to introduce the
concept of financial services to the rural poor who never had access to any form of
credit.
 This iconic event led to the conversion of the project into an autonomous bank. This
was done through a government legislation and it came to be known as Grameen
Bank. The bank has assisted several poor people in both Bangladesh and India to be
financially secure and to improve their financial conditions. This even resulted in the
creation of a ‘Grameen model’ which is used by many financial institutions and banks
to offer affordable loans to the poor.
 There was also Self-Employed Women's Association (SEWA) that was started by Ela
Bhatt. This organisation was unique in its own way. It was an all-women’s bank. It is
the first microfinance bank in the country. It was set up in Ahmedabad, Gujarat in the
year 1972. It was set up to help women of low-income groups to earn the rights that
they are entitled to. It works towards making women independent by offering them
the right funds at the right time to help them be self-employed. The institution also
offers first-class training to women to help them specialise in handicrafts and other
forms of artistry.
 India also saw the establishment of National Bank for Agriculture and Rural
Development (NABARD) which is exclusively committed to offering inexpensive
modes of credit and bank accounts to the people living in rural areas. These people are
mainly engaged in agriculture and other artistry activities in the country. The bank
observed many unique banking models in order to offer high-quality and affordable
financial solutions to the unbanked people. The bank also focused on including
women by encouraging them to open bank accounts in their names and taking small
loans to meet their requirements. The bank also promoted rural people to be involved
in alternative activities apart from agriculture in order to earn additional income.
 The Regional Rural Banks (RRBs) were launched in 1975-76. These banks were
established to have banking operations in the rural areas and semi-urban areas of the
various states of the country. Some of the regional rural banks are also set up in urban
areas where they offer banking services to the poor people of the society.
 There is also the Micro Finance Institution (MFI) that was set up in India in the year
1974. The operations of the institution started to pick up only in the 1990s.
 All these institutions had a common objective and that was to provide financial
assistance to the unbanked people of the society. They worked on setting up many
bank branches in the most remote areas of the country. They mainly focuses on
empowering the disadvantaged sections of the society.
 Until the banks in India were nationalised in the year 1969, co-operative banks were
the only banks that provided small loans to the economically underprivileged sections
of the society. Small borrowers did not have any other source of financial assistance.
Loan applicants had to furnish some form of security to the bank those days. They
also had to make arrangements for a guarantor in order to apply for a loan. The chief
objective of banking was profit, which is still prevalent in today’s commercial banks.
Institutions offering microfinance started to emerge and began to change this profit-
oriented banking scenario. Nationalisation of banks also changed the old banking
setup and started to build branches in different rural parts of the nation.
 Microfinance institutions also enhanced the condition of self-help groups. More and
more self-help groups were created by impoverished people with the objective of
making them financially self-sufficient. With these groups, the members did not have
to go begging rich moneylender who mainly lent money solely to make profits. They
also did not have to depend on others to get any form of employment. They created
their own small venture by coming together by honing their skills.

 HISTORY OF MODERN MICROFINANCE
 In the late 1970s the concept of microfinance had evolved. Although, microfinance
have a long history from the beginning of the 20th century we will concentrate mainly
on the period after 1960.Many credit groups have been operating in many countries
for several years, for example, the "chit funds" (India), tontines" (West Africa),
"susus" (Ghana), "pasanaku" (Bolivia) etc. Besides, many formal saving and credit
institutions have been working for a long time throughout the world. During the early
and mid 1990s various credit institutions had been formed in Europe by some
organized poor people from both the rural and urban areas. These institutions were
named Credit Unions, People's Bank etc. The main aim of these institutions was to
provide easy access to credit to the poor people who were neglected by the big
financial institutions and banks. In the early 1970s, few experimental programs had
started in Bangladesh, Brazil and some other countries. The poor people had been
given some small loans to invest in micro-business. This kind of micro credit was
given on the basis of solidarity group lending, that is, each and every member of that
group guaranteed the repayment of the loan of all the members. Many banks and
 financial institutions have been pioneering the microfinance program after 1970.
These are listed below:
 ACCION INTERNATIONAL

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

 SEWA BANK

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

 GRAMEEN BANK

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

HOW DOES MICROFINANCE WORK IN INDIA?

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

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

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

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

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

 NEED OF MICROFINANCE IN INDIA

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

microfinance from a bank or an NBFC, he or she can make use of the funds for being
 financially independent. It can help the borrower to be involved in a variety of
activities that he or she could not have done without the microfinancing.
 Many poor adults in the country may not have had sufficient funds during the early
stages of their lives to be educated. Hence, they tend to miss out on the various
employment options that are offered to educated people. Therefore, many of them
remain unemployed.
 There is another category of poor adults who are not educated, but are involved in
unskilled labour. Unskilled labour refers to working in the segment that requires
limited skills and that offers low wages to the labourers. Unskilled labourers have
limited qualification such as high school or diploma or no qualification. Unskilled
labour can include construction work, domestic help, security work, laundry, etc.
 There is also a category of individuals who live in rural areas and semi-urban areas
who are dedicated to farming. They are agriculturists and many of them earn very low
incomes. Many of these farmers do not earn enough money for the hard work they put
in. They do not have adequate funds to buy a land for sowing crops. They have to rely
on rich landlords for renting land and they are forced to pay the little money that they
make, to the landlords.
 There are also many people who are originally from rural India who move to urban
areas for alternative sources of employment apart from agriculture. They get into
fields such as cooking, construction, restaurants, housekeeping, etc. and earn low
incomes.


 HOW DOES MICROFINANCE HELPS BORROWERS IN INDIA?

 There are many impoverished people in the country who do not have any knowledge
about alternative sources of finance apart from conventional bank loans. They also do
not know that they can engage in other sources of employment to earn a livelihood.
However, they do have the need for funds in order to meet their essential necessities.
With the help of microfinance, they can learn to procure inexpensive forms of credit
for a short period and also learn to manage their expenses efficiently. They will
understand how to allocate money for different purposes and save a particular amount
for emergencies. They can also save money to utilise it for other big purposes.
 Microfinance will teach a less fortunate person to slowly get out of his or her
economic situation. A few poor people may also be in high-debt situations due to
previous credit. Microfinance can help them tackle previous debts proficiently as they
will learn to manage their finances.
 Microfinance has succeeded in making poor people and poor enterprises sustainable
and strong by providing them with funds, training, production skills, access to market
platforms, insurance, innovation, technology, and equipment. They aim to continue to
work with the same goals by using advanced techniques and newer ideas.


 MICROFINANCE FOR FARMERS

 There are exclusive microfinance loans that are provided to marginal farmers who
need funds for enhancing their productivity of crops. This can be done when they
invest in superior quality fertilisers, excellent farming tools, quality check processes,
marketing of their crops, packaging of their output, transportation of their output,
storage of their output in safe and hygienic warehouses, and proper sales techniques in
order to secure the profits that they are entitled to after putting in so much effort for
several months.
 Many farmers in India do not have sufficient funds or knowledge to invest in these
aspects of farming. Microfinance loans aim to guide farmers by providing them with
accurate information and funds required to enhance their output.

 MICROFINANCE OPTIONS FOR WOMEN
 There are many households that have irresponsible male members who do not
contribute towards saving money for the family. They tend to use money senselessly
on things that are absolutely not required. Many of them spend money on alcohol,
gambling, tobacco, etc. without keeping in mind about other expenditures. In such
households, the female members are more responsible with money. They are very
careful with the little money that they earn and spend it very judiciously. They make
sure that the money is not within the reach of the men of the house.
 Keeping this in mind, there are many banks, NBFCs, and microfinance institutions
that extend microfinance exclusively to women in India. These women borrowers
treat microfinance as their saviour and utilise the funds very sensibly.
 These microfinance options for women also help in empowering women. There are
many households where the men do not permit women to handle money. They expect
women to only take care of domestic chores. However, the truth is that many women
in several households have proved to be more financially responsible when compared
to men. They do not waste money on unnecessary purposes.
 Women also make sure that their children attend school sincerely without dropping
out of school. When these women take microfinance for their various needs, they will
ensure that the funds are utilised for a good purpose. They will ensure that their kids
go to school, and this, in turn, will help brighten the future of the society.
 One thing is for sure that women will repay their micro finance loans on time. Each
installment of the loan will be paid promptly without any delay. This is a great relief
for microfinance lenders. Microfinance loans can be repaid through equated monthly
installments (EMIs) promptly. Moreover, women will make well-planned decisions
for the household.
 There are many self-help groups in Indian rural places that are made by women for
women. Only women manage these groups and help each other in starting new low-
cost business ventures such as handicraft ventures, horticultural ventures, artistry,
pickle business ventures, paintings, trinket making activities, and many other business
activities that they are good at doing. Since many of them are naturally talented at
developing these creations at low costs, they can produce them on a large scale and
sell them on various platforms and make profits gradually. The capital for these small
business ventures can be generated from microfinance options. The borrower can
repay the funds on a monthly basis through installments.
 Most importantly, microfinance helps in job creation for women. In most regions of
the country, women are forced to be unemployed and are not allowed to step out of
their homes. They are restricted to the limits of their house. With the generation of
microfinance, women are given an opportunity to showcase their entrepreneurial
skills and management abilities. Microfinance also brings women together and
encourages them to work as a team to achieve the ultimate goal of being independent.
They do not have to rely on men for money or for other aspects. They also do not
have to wait for the approval of the male member in the house.

MICROFINANCE MODELS IN INDIA

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

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

1. Self-help group model

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

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

They can use this money to obtain training to create superior-quality products. They receive
training not only to make products, they also get trained on how to market, promote, and sell
their products. Many of the poor people are not aware of how to reach out to customers.
Some of them may not know how to assess their creation and fix an appropriate price for
their product. Hence, many of them may fail to make profits when they sell products without
proper knowledge. Being a part of a self-help group will give them proper awareness about
how to make a product, price it, package it, promote it, market it, and sell it to the end-
customer efficiently.

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

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

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

Some groups that apply the Grameen model have a Group Recognition Test (GRT) that refers
to a screening process to divide group members into serious and non-serious groups. Every
member must compulsorily save some money every week. This model is very particular
about group discipline. This is generally achieved with the help of peer pressure. Each group
member motivates the other to be very careful with the money that they borrow from their
lender. Under this model, a loan typically ranges from Rs.4,000 to Rs.10,000.

3. Co-operative credit union model

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

These federations encourage self-help group members to save money in different ways. The
federations recommend multiple savings methods to members so that they can make savings
with the help of the group and also through other modes. A few of these federations have
designed certain savings schemes that allow members to deposit their money and earn
savings over a particular period. They also attract funds from external sources and lend them
to members.

5. Rotating Savings and Credit Associations (ROSCAs) model

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

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

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

6. Microfinance companies

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

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

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

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

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

In India there is much talk about the growth of microfinance possibly causing a repeat of the
2010 crisis, when the sector grew fast and there were allegations that multiple lending led to
the overleveraging of clients. Having largely recovered from the 2010 crisis, the growth of
microfinance today creates a new set of challenges.  The microfinance industry's gross
loan portfolio (GLP) stood at ₹1,87,386 crore at the end of March, up 38 per cent
year-on-year, said a MFIN report.
The total number of microfinance accounts was 9.33 crore at the end of March
2019, showing a growth of 21.9 per cent, said Microfinance Institutions Network
(MFIN), an RBI-recognised self-regulatory organisation and industry association
of the microfinance industry.
Non-Banking Finance Company-Microfinance Institutions (NBFC-MFIs) hold the
largest share of portfolio in micro-credit with the total loan outstanding of ₹68,868
crore, which is 36.8 per cent of total micro-credit universe.
As on March 31, 2019, aggregated GLP of NBFC-MFIs stood at ₹68,207 crore, 47
per cent year-on-year growth compared to March 2018, said MFIN.
In 2018-19, microfinance in India showed rapid, regionally-balanced and resilient
growth, said Harsh Shrivastava, chief executive officer, MFIN.
"Apart from the growth in loan size and loan accounts, the growth of the staff of
NBFC-MFIs was also heartening at 34 per cent, now totalling to 1,04,973 people,"
he said.
Eastern India's growth continues, with Bihar and Odisha now ranked 2 and 3 in
terms of states, MFIN added.
MFIN members constitute 53 NBFC-MFIs and, collectively, they have disbursed
3.25 crore loans worth ₹82,928 crore during 2018-19.
Compared with the financial year 2017-18, there has been a year-on-year increase
of 28 per cent in number of loans disbursed and 44 per cent in loan amount
disbursed.
In 2018-19, NBFC-MFIs received a total of ₹35,759 crore in debt funding (from
banks and other financial institutions).
"This represents a growth of 63 per cent compared to 2017-18. Total equity grew
by 42 per cent during the same period and is at ₹14,206 crore.
MFIN's current primary members consist of 53 NBFC-MFIs along with 38
associates including banks, small finance banks and NBFCs.

CHALLENGES AND ISSUES OF MICROFINANCE IN INDIA

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

Financial Struggles of the Poor People in India

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

Many of these people also cannot open bank accounts or apply for traditional loan
options as they generally do not meet the minimum eligibility criteria. Banks have
specific eligibility criteria where loan applicants or prospective

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

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

The purpose of microfinance is to assist low-income people who have the

enthusiasm to make their lives better. It provides the right amount of capital to low-
income people to start a new small business activity or to finance their child’s
education or to buy a small piece of land for carrying out agricultural operations.
Microfinance not only supports an individual in starting something new to earn better,
it also helps in sustaining their income to have a decent standard of living throughout
their life.

Major challenges faced by Indian microfinance industry

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

 High rates of interest,

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

Over-indebtedness due to multiple borrowings and inefficient risk

management

Microfinance institutions (MFI) provide financial services to the poorer section of the

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

High rates of interest as compared to mainstream banks

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

Over-dependence on banking system for funding

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

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

Lack of awareness of financial services

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

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

Problem in identification of appropriate model

In India, most of the MFIs’ follow Self-Help Group model (SHG model) or Joint

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

Information technology can help in financial inclusion

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

SCHEME OF MICROFINANCE PROGAMME BY

GOVERNMENT

BACKGROUND

Creating self-employment opportunities is one way of attacking poverty and solving

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

In India, Micro-credit programmes are run primarily by NABARD in the field of

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

Salient features of Micro- Finance Programme

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

(A) Arranging Fixed Deposits for MFIs/NGOs: 

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

(i) The Government of India will provide funds for Micro-Finance Programme to
SIDBI, which shall be called ‘Portfolio Risk Fund’ (PRF). This fund would be used for
security deposit requirement of the loan amount from the MFIs/NGOs and to meet
the cost of interest loss. At present, SIDBI takes fixed deposit equal to 10% of the
loan amount. The share of MFIs/NGOs would be 2.5% of the loan amount (i.e. 25%
of security deposit) and balance 7.5% (i.e. 75% of security deposit) would be
adjusted from the funds provided by the Government of India. The MFIs/NGOs may
avail the loan from the SIDBI for further on lending on the support of the security
deposit.

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

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

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

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

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

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

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

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

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

Budgetary Provision for the Scheme during 10th Plan

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

Administrative Arrangement

A Committee under the Chairmanship of Additional Secretary & Development

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

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