Introduction

Microfinance is defined as any activity that includes the provision of financial services such as credit,
savings, and insurance to low income individuals which fall just above the nationally defined poverty
line, and poor individuals which fall below that poverty line, with the goal of creating social value.
The creation of social value includes poverty alleviation and the broader impact of improving
livelihood opportunities through the provision of capital for micro enterprise, and insurance and
savings for risk mitigation and consumption smoothing. A large variety of sectors provide
microfinance in India, using a range of microfinance delivery methods. Since the ICICI Bank in India,
various actors have endeavored to provide access to financial services to the poor in creative ways.
Governments also have piloted national programs, NGOs have undertaken the activity of raising
donor funds for on-lending, and some banks have partnered with public organizations or made small
inroads themselves in providing such services. This has resulted in a rather broad definition of
microfinance as any activity that targets poor and low-income individuals for the provision of
financial services. The range of activities undertaken in microfinance include group lending,
individual lending, the provision of savings and insurance, capacity building, and agricultural
business development services. Whatever the form of activity however, the overarching goal that
unifies all actors in the provision of microfinance is the creation of social value.

Microfinance Definition

According to International Labor Organization (ILO), “ Microfinance is an economic development

approach that involves providing financial services through institutions to low income clients”.

In India, Microfinance has been defined by “The National Microfinance Taskforce, 1999” as

“provision of thrift, credit and other financial services and products of very small amounts to the poor

in rural, semi-urban or urban areas for enabling them to raise their income levels and improve living

standards”.

"The poor stay poor, not because they are lazy but because they have no access to capital."

The dictionary meaning of ‘finance’ is management of money. The management of money denotes

acquiring & using money. Micro Finance is buzzing word, used when financing for micro

entrepreneurs. Concept of micro finance is emerged in need of meeting special goal to empower
under-

privileged class of society, women, and poor, downtrodden by natural reasons or men made; caste,

creed, religion or otherwise. The principles of Micro Finance are founded on the philosophy of
cooperation and its central values of equality, equity and mutual self-help. At the heart of these

principles are the concept of human development and the brotherhood of man expressed through

people working together to achieve a better life for themselves and their children.

Traditionally micro finance was focused on providing a very standardized credit product. The poor,

just like anyone else, (in fact need like thirst) need a diverse range of financial instruments to be able

to build assets, stabilize consumption and protect themselves against risks. Thus, we see a broadening

of the concept of micro finance--- our current challenge is to find efficient and reliable ways of

providing a richer menu of micro finance products. Micro Finance is not merely extending credit, but

extending credit to those who require most for their and family’s survival. It cannot be measured in

term of quantity, but due weightage to quality measurement. How credit availed is used to survive and

grow with limited means.

Concept and Features of Micro-financ e :

1. It is a tool for empowerment of the poorest.

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

3. It is essentially for promoting self-employment, generally used for:

(a) Direct income generation

(b) Rearrangement of assets and liabilities for the household to participate in future

opportunities and

(c) Consumption smoothing.

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

5. Because micro credit is aimed at the poorest, micro-finance lending technology needs to mimic

the informal lenders rather than the formal sector lending. It has to:

(a) Provide for seasonality

(b) Allow repayment flexibility

(c) Fix a ceiling on loan sizes.

Microfinance approach is based on certain proven truths which are not always recognized. These are:

1. That the poor are bankable; successful initiatives in micro finance demonstrate that there need

not be a tradeoff between reaching the poor and profitability - micro finance constitutes a

statement that the borrowers are not ‘weaker sections’ in need of charity, but can be treated as

responsible people on business terms for mutual profit .

2. That almost all poor households need to save, have the inherent capacity to save small amounts

regularly and are willing to save provided they are motivated and facilitated to do so.

3. That easy access to credit is more important than cheap subsidized credit which involves

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

SHGs at higher rates - this may prevent the groups from enjoying a sufficient margin and

rapidly accumulating their own funds, but members continue to borrow at these high rates,

even those who can borrow individually from banks).

4. 'Peer pressure' in groups helps in improving recoveries.

 CHAPTER 2

LITRATURE REVIEW

Mohammed Anisur Rahaman (2007)

Has examined that about microfinance and to investigate the impact of microfinance on the poor

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

client’s (the poor people, who borrowed loan from microfinance institutions) perspective and build up

our research based on it. Therefore, the objective of this study is to show how microfinance works, by

using group lending methodology for reducing poverty and how it affects the living standard (income,

saving etc.) of the poor people in Bangladesh. Microfinance has the positive impact on the standard of

living of the poor people and on their life style. It has not only helped the poor people to come over
the poverty line, but has also helped them to empower themselves.

Susy Cheston (2002)

Has examined that Microfinance has the potential to have a powerful impact on women’s

empowerment. Although microfinance is not always empowering for all women, most women do

experience some degree of empowerment as a result. Empowerment is a complex process of change

that is experienced by all individuals somewhat differently. Women need, want, and profit from credit

and other financial services. Strengthening women’s financial base and economic contribution to their

families and communities plays a role in empowering them. Product design and program planning

should take women’s needs and assets into account. By building an awareness of the potential impacts

of their programs, MFIs can design products, services, and service delivery mechanisms that mitigate

negative impacts and enhance positive ones.

Linda Mayoux (Feb 2006)

Has examined that Micro-finance programmes not only give women and men access to savings and

credit, but reach millions of people worldwide bringing them together regularly in organized groups.

Through their contribution to women’s ability to earn an income, micro-finance programmes can

potentially initiate a series of ‘virtuous spirals’ of economic empowerment, increased well-being for
women and their families and wider social and political empowerment Banks generally use individual

rather than group-based lending and may not have scope for introducing non-financial services. This

means that they cannot be expected to have the type of the focused empowerment strategies which

NGOs have

Eoin Wrenn (2005)

Has examined that microfinance creates access to productive capital for the poor, which together with

human capital, addressed through education and training, and social capital, achieved through local

organization building, enables people to move out of poverty (1999). By providing material capital to
a 10 poor person, their sense of dignity is strengthened and this can help to empower the person to

participate in the economy and society. The impact of microfinance on poverty alleviation is a keenly

debated issue as we have seen and it is generally accepted that it is not a silver bullet, it has not lived

up in general to its expectation (Hulmeand Mosley, 1996). However, when implemented and managed

carefully, and when services are designed to meet the needs of clients, microfinance has had positive

impacts, not just on clients, but on their families and on the wider community.

Cheston & Kuhn (2004)

Has examined that in their study concluded that micro-finance programmes have been very successful

in reaching women. This gives micro-finance institutions an extraordinary opportunity to act

intentionally to empower poor women and to minimize the potentially negative impacts some women

experiences. We also found increased respect from and better relationships with extended family and

in-laws. While there have been some reports of increased domestic violence, Hashemi and Schuler

found a reduced incidence of violence among women who were members of credit organizations than

among the general population.

Dr. Jyotish Prakash Basu (2006)

Has examined that the two basic research questions. First, the paper tries to attempt to study how a

woman’s tendency to invest in safer investment projects can be linked to her desire to raise her

bargaining position in the households. Second, in addition to the project choice, women
empowerment is examined with respect to control of savings, control of income, control over loans,
control over purchasing capacity and family planning in some sample household in Hooghly district
of West Bengal. The empowerment depends on the choice of investment of project. The choice of safe
project leads to more empower of women than the choice of uncertain projects. The Commercial
Banks and Regional Rural banks played a crucial role in the formation of groups in the SHGs -Bank
Linkage Program in Andhra Pradesh whiles the Cooperative Banks in West Bengal.

Chintamani Prasad Patnaik (March 2012)

Has examined that microfinance seems to have generated a view that microfinance development could

provide an answer to the problems of rural financial market development. While the development of

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

poor and low-income households and their enterprises, it is inadequate to address issues of rural

financial market development. It is envisaged that self-help groups will play a vital role in such

strategy. But there is a need for structural orientation of the groups to suit the requirements of new

business. Microcredit movement has to be viewed from a long-term perspective under SHG 11
framework, which underlines the need for a deliberate policy implication in favour of assurance in

terms of technology back-up, product market and human resource development.

Hunt, J & Kasynathan (2002)

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

donors should continue to facilitate this. Research suggests that equity and efficiency arguments for

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

targeted to women, where they control income, than when it is targeted to men. Microfinance must

also be re-assessed in the light of evidence that the poorest families and the poorest women are not

able to access credit. A range of microfinance packages is required to meet the needs of the poorest,

both women and men. Donors need to revisit arguments about the sustainability of microfinance
programmes. Financial sustainability must be balanced against the need to ensure that some credit

packages are accessible to the poorest.

R. Prabhavathy (2012)

Has examined that collective strategies beyond micro-credit to increase the endowments of the

poor/women enhance their exchange outcomes the family, markets, state and community, and socio-

cultural and political spaces are required for both poverty reduction and women empowerment. Even

though there were many benefits due to micro-finance towards women empowerment and poverty

alleviation, there are some concerns. First, these are dependent on the programmatic and institutional

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

can alone reach the ultra-poor, third the extent of positive results varies across household headship,

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

LPG to sustain the benefits of social service providers.

Reginald Indon (2007)

Has examined that informal businesses represent a very large cross-section of economic enterprises

operating in the country. Informal businesses may be classified as either the livelihood/ survival type

or the entrepreneurial/ growth-oriented type. Livelihood enterprises are those which show very limited

potential for growth in both income and employment generation. There are existing policies, program

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

information are currently being offered by different institutions. These programs and support services

fail to reach or remain inaccessible to informal business operators and owners. This is borne out of
and perpetuated by lopsided economic policies and poor governance that inadvertently encumber
informal businesses from accessing mainstream resources and services.
Mallory A. Owen (2006)

Has examined that microfinance has signaled a paradigm shift in development ideology. Using my

experiences with microfinance in a fishing village in Senegal, this study will address the claims
driving the microfinance movement, debate its pros and cons and pose further questions about its
validity and widespread implementation. Instead of lifting people out of poverty and empowering
women, microfinance may have regressive long term potential for borrowers. How loans get used is a
central theme of this essay. How microfinance and the notion of the “entrepreneur” fit into the rural,
Senegalese cultural context is also addressed. Microfinance programs should be implemented with

complementary measures that challenge the systematic causes of inequality examined in this article.

The microfinance model (group lending based on joint liability) uses the social capital generated by

group membership to ensure that loans get re-financed. If one woman fails to pay back her loan, she

puts her entire loan group at jeopardy. As a result, “Women’s participation in microenterprise does not

show any signs of creating the new forms of solidarity among women that the advocates of

empowerment desire. Instead, women are placed under enormous pressure to maintain existing modes

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

survival of families.”

Jennifer Meehan (2004)

Has examined that it will need to do three things simultaneously. First, it will need to rapidly scale up,

in key markets, like India, home to high numbers of the world’s poor. Second, in this process, clear

priority is needed for philanthropic, quasi-commercial and commercial financing for the business
plans of MFIs targeting the poorest segments of the population, especially women. Third,
microfinance will need to realize its possibility as a broad platform and movement, more than simply
an intervention and industry. The pioneering financings completed by leading, poverty-focused MFIs
have shown the

industry what is possible – large amounts of financing that allows for rapid expansion of financial

services to new poor customers. The MFIs offer a model to others that are interested in tapping the

financial markets. If leading MFIs continue on their present course and adopt some or all of the
suggestions offered, financial market interest – or more specifically, debt capital market interest – in

leading, poverty-focused MFIs is expected to grow.

Jacob Levitsky and Leny van Oyen (1999)

Has examined that micro-businesses to large corporations, located in large urban centres, in rural
areas and in the formal and informal sectors. Financing needs are therefore of varying nature. In
describing experiences, a link is made between size of enterprises, financing schemes/instruments and
typical delivery channels. When referring to enterprises in this paper, focus is predominantly on

businesses, both existing and potential, in the manufacturing sector and related services. It is clear
from this paper

that increasing the volume of finance available and the delivery of such funds in various appropriate

forms, to support enterprises in Africa, is a difficult challenge. Central banks have to be given more

independence, strengthened with qualified, experienced personnel, able to fulfil adequately the role of

supervising and monitoring the performance of commercial banks in the provision of loans to those

enterprises able to make effective use of them. Formal financial institutions such as commercial banks

and, in a few cases, development banks, have to be encouraged and pressed to make appropriate loans

to those who have proved themselves by paying off a number of loans they have received from NGOs

or from formal financial institutions. The minimalist credit approach has clear limitations, and for

credit schemes to be effective and have impact, complementary services are needed.

Marguerite S. Robinson (1995)

Has examined that HIID's role in the formulation of the initial hypotheses and HIID's contributions in

planning and coordinating the underlying research, advising on the policies and implementation

strategies that put concept into practice, analysing the results, and disseminating the findings.
Drawing on work in Asia, Africa, and Latin America, the paper analyses the paradigm shift in
microfinance from government and donor-funded subsidized credit to sustainable financial
intermediation. This shift has occurred because of the work of many people in many countries. This
paper, however, is limited to HIID's contribution. The policy implications of the 'new microfinance'
for governments, donors, banks, and NGOs are explored. HIID is advising BRI on its program for
international visitors. In addition, HIID is analysing and teaching - in universities, financial
institutions, donor agencies, bank superintendence’s, and NGOs - the principles and the results of the
new microfinance paradigm.
Pillai (1995)

Has examined that the emergence of liberalization and globalization in early 1990's aggravated the

problem of women workers in unorganized sectors from bad to worse as most of the women who
were engaged in various self-employment activities have lost their livelihood. Microfinance is
emerging as a powerful instrument for poverty alleviation in the new economy. In India, Microfinance
scene is dominated by Self Help Group (SHGs)-Bank Linkage Programme as a cost effective
mechanism for providing financial services to the "Unreached Poor" which has been successful not
only in meeting financial needs of the rural poor women but also in strengthening collective self-help
capacities of the poor leading to their empowerment. Micro finance is necessary to overcome
exploitation, create confidence for economic self-reliance of the rural poor, particularly among rural
women who are mostly invisible in the social structure. Micro finance can contribute to solving the
problems of inadequate housing and urban services as an integral part of poverty alleviation
programmes. The challenge lies in finding the level of flexibility in the credit instrument that could
make it match themultiple credit requirements of the low income borrower without imposing

unbearably high cost of monitoring its end use upon the lenders.

Crabb, P. (2008)

Has examined that the relationship between the success of microfinance institutions and the degree of

economic freedom in their host countries. Many microfinance institutions are currently not self-

sustaining and research suggests that the economic environment in which the institution operates is an

important factor in the ability of the institution to reach this goal, furthering its mission of outreach to

the poor. The sustainability of the micro lending institutions is analyzed here using a large cross-

section of institutions and countries. The results show that microfinance institutions operate primarily

in countries with a relatively low degree of overall economic freedom and that various economic

policy factors are important to sustainability.

Fehr, D. and G. Hishigsuren. (2006)

Has examined that microfinance institutions (MFIs) provide financial services to the poorest

households. To date, funding of MFI activities has come primarily from outright donor grants,

government subsidies, and often debt capital, including debt with non-market terms favorable to the

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

maximum services. There is a subset of the pool of mainstream equity investors who would consider

investing in MFI opportunities, even knowing that they would not expect to earn the full economic
rate of return that such investments would otherwise require. However, as part of their investment

evaluation process, these investors would ask: What would the market determine required expected

rate of return for my MFI investment be? What return on investment (ROI) do I expect to earn on my

MFI investment? Is the difference in the above two returns acceptable given my level of social

motivation? How will I "monetize" my investment and when? The purpose of this article is to employ

modern corporate finance techniques to address these questions.

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

Has examined that this paper (i) presents new indicators of banking sector penetration across 99

countries, based on a survey of bank regulatory authorities, (ii) shows that these indicators predict

household and firm use of banking services, (iii) explores the association between the outreach

indicators and measures of financial, institutional, and infrastructure development across countries,
and (iv) relates these banking outreach indicators to measures of firms ‘financing constraints. In
particular, we find that greater outreach is correlated with standard measures of financial
development, as well as with economic activity. Controlling for these factors, we find that better
communication and transport infrastructure, and better governance are also associated with greater
outreach. Government ownership of financial institutions translates into lower access, while more
concentrated banking systems are associated with greater outreach. Finally, firms in countries with
higher branch and ATM penetration and higher use of loan services report lower financing obstacles,
thus linking banking sector outreach to the alleviation of firms’ financing constraints.

Srinivasan, Sunderasan (2007)

Has examined that micro banking facilities have helped large numbers of developing country
nationals by supporting the establishment and growth of microenterprises. And yet, the microfinance
movement has grown on the back of passive replication and needs to be revitalised with new product
offerings and innovative service delivery. Renewable Energy systems viz., solar home systems, biogas
digesters, etc., serve to improve indoor air quality, provide superior light and extend working and
study hours. Such applications are not inherently income generating and returns on such investments
accrue from cost avoidance, but should qualify for micro funding, as such 'quality of life' investments,
reflect borrower maturity and simultaneously contribute to MFI sustainability.

Basu, P., Srivastava (2005)

Has examined that the current level and pattern of access to finance for India's rural poor and
examines some of the key microfinance approaches in India, taking a close look at the most dominant
among these, the Self Help Group (SHG) Bank Linkage initiative. It empirically analyzes the success
with which SHG Bank Linkage has been able to reach the poor, examines the reasons behind this, and
the lessons learned. The analysis in the paper draws heavily on a recent rural access to finance survey
of 6,000 households in India, undertaken by the authors. The main findings and implications of the
paper are as follows: India's rural poor currently have very little access to finance from formal
sources. Microfinance approaches have tried to fill the gap. Among these, the growth of SHG Bank
Linkage has been particularly remarkable, but outreach remains modest in terms of the proportion of
poor households served. The paper recommends that, if SHG Bank Linkage is to be scaled-up to offer
mass access to finance for the rural poor, then much more attention will need to be paid towards: the

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

linked to SHGs price loans at cost-covering levels. At the same time, the paper argues that, in an

economy as vast and varied as India's, there is scope for diverse microfinance approaches to coexist.

Private sector micro financiers need to acquire greater professionalism, and the government, too, can

help by creating a flexible architecture for microfinance innovations, including through a more

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

can, at minimum, serve as a quick way to deliver finance to the poor, the medium-term strategy to

scale-up access to finance for the poor should be to 'graduate' microfinance clients to formal financial

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

an eye to improving access for the poor.

Robinson, M. (2001)
Has examined that the timing of this book is excellent it has few close substitutes in terms of its

sweeping overview of the terrain, and the revolution is now so advanced that the time is right for a

history, or at least a retrospective. As with any revolution, however, splits have emerged within the

movement. On one side are those who argue that the way forward is to require microfinance

institutions to meet the test of financial sustainability essentially, requiring these institutions to cover

their costs, even if this means that the very poorest of the poor remain under-served. Against this, the

poverty lending approach emphasizes the importance of outreach, especially to the very poorest

borrowers, as a poverty fighting approach. Monique Cohen (2002)

Has examined that the ideas presented in this paper are designed to direct the arena of discourse

towards a more holistic market driven or client focused microfinance agenda. Currently, the debate on

market-driven microfinance is primarily framed by the ‘problems’ of competition and dropouts among

established MFIs. The solutions to the problems are defined in terms of more responsive products, the

creation of new products, and the restructuring of existing ones. Appropriate products will not only

benefit the operations of an institution they will also have a positive impact on the wellbeing of the

client, reducing the risk of borrowing and the poor’s vulnerability. In presenting current thinking on a

client-led agenda, this paper finds itself in a precarious position in the midst of this debate. Client-led

models are still in their infancy, and the fact that this topic is the theme of this special edition of the

Journal of Development Studies is itself an important milestone. When this author began to focus on

clients in microfinance six years ago, the notion that clients deserved a voice in the design and
delivery of services was dismissed out of hand.

Shannon Doocy, Dan Norell, Shimeles Teffera, and Gilbert Burnham (2005)

Has examined that Management decision making in MFIs is becoming increasingly tied to collecting

information about social performance. This paper examines the impact of participation in an
Ethiopian

microfinance program on indicators of socioeconomic status including wealth, income, and home or

land ownership. A survey assessing these outcomes was conducted in May 2003 in two predominantly
rural sites in Southern Ethiopia and included 819 households. The article discusses management

decisions made as the result of survey findings about socioeconomic status and food security to

increase retention rates and to facilitate client savings. Additionally, the management was prompted to

increase the number of female clients and raise the proportion of female loan officers. This paper

illustrates how data from routine monitoring and evaluation can be linked to MFI management
decision making, which ultimately results in providing better microfinance services. Household asset

data indicates that participation in the WISDOM microfinance program did not result in increased

household wealth. Significant differences in household income were not observed between participant

groups in either survey site and client status was not a significant predictor of income in univariate or

multivariate regression models.

John A. Brett. (2006)

Has examined that having borrowed money from a microfinance organization to start a small
business, many women in El Alto, Bolivia are unable to generate sufficient income to repay their
loans and so must draw upon household resources. Working from the women's experience and words,
this article explores the range of factors that condition and constrain their success as entrepreneurs.
The central theme is that while providing the poor access to credit is currently very popular in
development circles, the social and structural context within which some women operate so strongly
constrains their productive activity that they realize a net income loss at the household level instead of
the promised benefits of entrepreneurship. This paper explores the social and structural realities in
which women seek out and accept debt beyond their capacity to repay from the proceeds of their
business enterprise. By examining some of the "hidden costs" of microfinance participation, this paper
argues for a shift from evaluation on outcomes at the institutional level to outcomes at the household
level to identify the forces and factors that condition women's success as micro-entrepreneurs. While
there has been much discussion on the benefits of microcredit lending and increasing critique of it on
both ideological and grounds, there have been few ethnographically informed studies on
consequences to users.
 CHAPTER 3

INDUSTRY PROFILE

The Origin of Microfinance

Although neither of the terms microcredit or microfinance were used in the academic literature nor by

development aid practitioners before the 1980s or 1990s, respectively, the concept of providing

financial services to low income people is much older. While the emergence of informal financial
institutions in Nigeria dates back to the 15th century, they were first established in Europe during the
18th century as a response to the enormous increase in poverty since the end of the extended
European wars (1618 – 1648). In 1720 the first loan fund targeting poor people was founded in
Ireland by the author Jonathan Swift. After a special law was passed in 1823, which allowed charity
institutions to become formal financial intermediaries a loan fund board was established in 1836 and a
big boom was initiated. Their outreach peaked just before the government introduced a cap on interest
rates in 1843. At this time, they provided financial services to almost 20% of Irish households. The
credit cooperatives created in Germany in 1847 by Friedrich Wilhelm Raiffeisen served 1.4 million
people by 1910. He stated that the main objectives of these cooperatives “should be to control the use
made of money for economic improvements, and to improve the moral and physical values of people
and also, their will to act by themselves.” In the 1880s the British controlled government of Madras in
South India, tried to use the German experience to address poverty which resulted in more than nine
million poor Indians belonging to credit cooperatives by 1946. During this same time the Dutch
colonial administrators constructed a cooperative rural banking system in Indonesia based on the
Raiffeisen model which eventually became Bank Rakyat Indonesia (BRI), now known as the largest
MFI in the world.

EVOLUTION OF MICROFINANCE IN INDIA (1960 TO TODAY)

Microfinance in India emerged as an effort to reach out to the un-banked, lower income segments of

the population

1960 to 1980 1990 2000

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

1.Nationalization of private 1.Peer-pressure 1.NGO-MFIs and SHGs

commercial banks 2.Establishment of MFIs, gaining more legitimacy
2.Expansion of rural branch typically of non-profit origins
 Network 2.MFIs emerging as strategic
3.Extension of subsidized credit partners to diverse entities
high growth area interested in the low-income
4.Establishment of Rural segments
Regional Banks 3.Consumer finance emerged
5. Establishment of apex as high growth area
institutions such as National 4.Increased policy regulation
Bank for Agriculture and Rural 5.Increasing commercialization
Development and Small Indu-
stries Development Bank of
India

Phase 1: In the 1960’s, the credit delivery system in rural India was largely dominated by the

cooperative segment. The period between 1960 and 1990, referred to as the “social banking” phase.

This phase includes nationalization of private commercial banks, expansion of rural branch networks,

extension of subsidized credit, establishment of Regional Rural Banks (RRBs) and the establishment

of apex institutions such as the National Bank for Agriculture and Rural Development (NABARD)
and the Small scale Industries Development Board of India (SIDBI).

Phase 2: After 1990, India witnessed the second phase “financial system approach” of credit delivery.

In this phase NABARD initiated the Self Help Group (SHG) - Bank Linkage Bank Linkage program,

which links informal women's groups to formal banks. This concept held great appeal for non-

government organizations (NGOs) working with the poor, prompting many of them to collaborate
with NABARD in the program. This period also witnessed the entry of Microfinance Institutions
(MFIs), largely of non-profit origins, with existing development programs.

Phase 3: In 2000, the third phase in the development of Indian microfinance began, marked by further

changes in policies, operating formats, and stakeholder orientations in the financial services space.

This phase emphasizes on “inclusive growth” and “financial inclusion.” This period also saw many

NGO-MFIs transform into regulated legal formats such as Non-Banking Finance Companies
(NBFCs). Commercial banks adopted innovative ways of partnering with NGO-MFIs and other rural

organizations to extend their reach into rural markets. MFIs have emerged as strategic partners to
individuals and entities interested in reaching out to India's low income client segments.
Policy Attention to Microfinance After 2000

1999 --- Official definition of microfinance by RBI

August 2000 --- 'Micro Credit/Rural Credit' included in the list of permitted non-banking financial

company (NBFC) activities considered for Foreign Direct Investment (FDI)

2005 --- MFIs acknowledged for the first time in the Budget Speech by the Finance Minister

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

classify and rate such institutions, and empower them to intermediate between the lending banks and

the beneficiaries.”

January 2006 --- Announcement of the business correspondent model

February 2006 --- Budget Speech by the Finance Minister promises a formal statutory framework for

the promotion, development and regulation of the microfinance sector

March 2006 --- Comprehensive guidelines by RBI on loan securitization

July 2006 --- RBI master circular allows NGOs involved in microfinance to access External

Commercial Borrowings (ECB) up to USD 5 million (INR 20.25 crores) during a year.

March 2007 --- Finance Minister introduces the “Micro Finance Sector Development and Regulation

Bill 2007” in Lok Sabha

Entities in Micro Finance:-

Indian Microfinance dominated by two operational approaches:

 SHG

 Initiated by NABARD through SHG Bank Linkage Program.

 Largest outreach to microfinance clients in the world.

 MFIs

 Emerged in the late 1990s to harness social and commercial funds.

 Today the number of Indian MFIs has increased and crossed 1000.

SHGs and MFIs disbursement till 2007- USD 3.7 billions

SHGs comprise twenty or fewer members, of whom the majority are women from the poorest castes
and tribes. Members save small amounts of money, as little as a few rupees a month in a group fund.

Members may borrow from the group fund for a variety of purposes ranging from household
emergencies to school fees. Banks typically lend up to four rupees for every rupee in the group fund.

Groups pay a reasonable 12-24% annual rate of interest. Nearly 1.4 million SHGs comprising

approximately 20 million women now borrow from banks, which makes the Indian SHG-Bank

Linkage model the largest microfinance program in the world.

MFI is an organization that offers financial services to low income populations. Almost all of these

offer microcredit and only take back small amounts of savings from their own borrowers, not from the

general public. Term refers to a wide range of organizations - NGOs, credit unions, cooperatives,

private commercial banks and non-bank financial institutions.

Microfinance Today

In the 1970s a paradigm shift started to take place. The failure of subsidized government or donor

driven institutions to meet the demand for financial services in developing countries let to several new

approaches. Some of the most prominent ones are presented below.

Bank Dagan Bali (BDB) was established in September 1970 to serve low income people in Indonesia

without any subsidies and is now “well-known as the earliest bank to institute commercial

microfinance”. While this is not true with regard to the achievements made in Europe during the 19th

century, it still can be seen as a turning point with an ever increasing impact on the view of politicians

and development aid practitioners throughout the world. In 1973 ACCION International, a United

States of America (USA) based non-governmental organization (NGO) disbursed its first loan in

Brazil and in 1974 Professor Muhammad Yunus started what later became known as the Grameen

Bank by lending a total of $27 to 42 people in Bangladesh. One year later the Self-Employed

Women’s Association started to provide loans of about $1.5 to poor women in India. Although the

latter examples still were subsidized projects, they used a more business oriented approach and
showed the world that poor people can be good credit risks with repayment rates exceeding 95%, even
if the interest rate charged is higher than that of traditional banks. Another milestone was the
transformation of BRI starting in 1984. Once a loss making institution channeling government
subsidized credits to inhabitants of rural Indonesia it is now the largest MFI in the world, being
profitable even during the

Asian financial crisis of 1997 – 1998.

In February 1997 more than 2,900 policymakers, microfinance practitioners and representatives of

various educational institutions and donor agencies from 137 different countries gathered in

Washington D.C. for the first Micro Credit Summit. This was the start of a nine yearlong campaign to

reach 100 million of the world poorest households with credit for self-employment by 2005.

According to the Microcredit Summit Campaign Report 67,606,080 clients have been reached
through 2527 MFIs by the end of 2002, with 41,594,778 of them being amongst the poorest before
they took their first loan. Since the campaign started the average annual growth rate in reaching
clients has been almost 40 percent. If it has continued at that speed more than 100 million people will
have access to microcredit by now and by the end of 2005 the goal of the microcredit summit
campaign would be reached. As the president of the World Bank James Wolfensohn has pointed out,
providing financial services to 100 million of the poorest households means helping as many as 500 –
600 million poor people.

Need for Micro-Finance: The gap between Demand and Supply

Since independence, various governments in India have experimented with a large number of grant

and subsidy based poverty alleviation programmes. These programmes were based on grant/subsidy

and the credit linkage was through commercial banks only.

Hence was adopted the concept of micro-credit in India. Success stories in neighboring countries, like

Grameen Bank in Bangladesh, Bank Rakiat in Indonesia, Commercial & Industrial Bank in
Philippines etc, gave further boost to the concept in India in the 1980s. India thus adopted the similar
model of extending credit to the poorest sector and took a no. of steps to promote micro-financing in
the country. Since the 1950s, various governments in India have experimented with a large number of

grant and subsidy based poverty alleviation programmes. Studies show that these mandatory and

dedicated subsidized financial programmes, implemented through banking institutions, have not been

fully successful in meeting their social and economic objectives:

The common features of these programmes were:-

 Target orientation

 Based on grant/subsidy, and

 Credit linkage through commercial banks.

These programmes:-

 Were often not sustainable

 Perpetuated the dependent status of the beneficiaries

 Depended ultimately on government employees for delivery

 Led to misuse of both credit and subsidy and

 Were treated at best as poverty alleviation interventions.

Who are the clients of micro finance?

The typical micro finance clients are low-income persons that do not have access to formal financial

institutions. Micro finance clients are typically self-employed, often household-based entrepreneurs.
In rural areas, they are usually small farmers and others who are engaged in small income-generating

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

diverse and include shopkeepers, service providers, artisans, street vendors, etc. Micro finance clients

are poor and vulnerable non-poor who have a relatively unstable source of income.

Access to conventional formal financial institutions, for many reasons, is inversely related to income:

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

poorer you are, the more expensive or onerous informal financial arrangements. Moreover, informal

arrangements may not suitably meet certain financial service needs or may exclude you anyway.

Individuals in this excluded and under-served market segment are the clients of micro finance.

As we broaden the notion of the types of services micro finance encompasses, the potential market of

micro finance clients also expands. It depends on local conditions and political climate, activeness of

cooperatives, SHG & NGOs and support mechanism. For instance, micro credit might have a far more

limited market scope than say a more diversified range of financial services, which includes various
types of savings products, payment and remittance services, and various insurance products. For

example, many very poor farmers may not really wish to borrow, but rather, would like a safer place
to

save the proceeds from their harvest as these are consumed over several months by the requirements
of

daily living. Central government in India has established a strong & extensive link between NABARD

(National Bank for Agriculture & Rural Development), State Cooperative Bank, District Cooperative

Banks, Primary Agriculture & Marketing Societies at national, state, district and village level.

The Need in India :-

 India is said to be the home of one third of the world’s poor; official estimates range from 26 to

50 percent of the more than one billion population.

 About 87 percent of the poorest households do not have access to credit.

 The demand for microcredit has been estimated at up to $30 billion; the supply is less than $2.2

billion combined by all involved in the sector.

Due to the sheer size of the population living in poverty, India is strategically significant in the global

efforts to alleviate poverty and to achieve the Millennium Development Goal of halving the world’s

poverty by 2015. Microfinance has been present in India in one form or another since the 1970s and is

now widely accepted as an effective poverty alleviation strategy. Over the last five years, the

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

banks. Despite this growth, the poverty situation in India continues to be challenging.

Some principles that summarize a century and a half of development practice were encapsulated in

2004 by Consultative Group to Assist the Poor (CGAP) and endorsed by the Group of Eight leaders at

the G8 Summit on June 10, 2004:

 Poor people need not just loans but also savings, insurance and money transfer services.

 Microfinance must be useful to poor households: helping them raise income, build up assets

and/or cushion themselves against external shocks.

 “Microfinance can pay for itself.” Subsidies from donors and government are scarce and
uncertain, and so to reach large numbers of poor people, microfinance must pay for itself.

 Microfinance means building permanent local institutions.

 Microfinance also means integrating the financial needs of poor people into a country’s

mainstream financial system.

 “The job of government is to enable financial services, not to provide them.”

 “Donor funds should complement private capital, not compete with it.”

 “The key bottleneck is the shortage of strong institutions and managers.” Donors should focus

on capacity building.

 Interest rate ceilings hurt poor people by preventing microfinance institutions from covering

their costs, which chokes off the supply of credit.

 Microfinance institutions should measure and disclose their performance – both financially and

socially.

Microfinance can also be distinguished from charity. It is better to provide grants to families who are

destitute, or so poor they are unlikely to be able to generate the cash flow required to repay a loan.
This

situation can occur for example, in a war zone or after a natural disaster.

Financial needs and Financial services:-

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

the developed world as financial are not monetized: that is, money is not used to carry them out.

Almost by definition, poor people have very little money. But circumstances often arise in their lives

in which they need money or the things money can buy.

In Stuart Rutherford’s recent book The Poor and Their Money, he cites several types of needs:

 Lifecycle Needs: such as weddings, funerals, childbirth, education, homebuilding, widowhood,

old age.

 Personal Emergencies: such as sickness, injury, unemployment, theft, harassment or death.

 Disasters: such as fires, floods, cyclones and man-made events like war or bulldozing of
dwellings.

 Investment Opportunities: expanding a business, buying land or equi Poor people find creative
and often collaborative ways to meet these needs, primarily through creating

and exchanging different forms of non-cash value. Common substitutes for cash vary from country to

country but typically include livestock, grains, jewellery and precious metals.

As Marguerite Robinson describes in The Microfinance Revolution, the 1980s demonstrated that

“microfinance could provide large-scale outreach profitably,” and in the 1990s, “microfinance began

to develop as an industry”. In the 2000s, the microfinance industry’s objective is to satisfy the unmet

demand on a much larger scale, and to play a role in reducing poverty. While much progress has been

made in developing a viable, commercial microfinance sector in the last few decades, several issues

remain that need to be addressed before the industry will be able to satisfy massive worldwide

demand.

The obstacles or challenges to building a sound commercial microfinance industry include:

 Inappropriate donor subsidies

 Poor regulation and supervision of deposit-taking MFIs

 Few MFIs that mobilize savings

 Limited management capacity in MFIs

 Institutional inefficiencies

 Need for more dissemination and adoption of rural, agricultural microfinance methodologies

Role of Microfinance:-

The micro credit of microfinance progamme 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.

1.1 Strategic Policy Initiatives

Some of the most recent strategic policy initiatives in the area of Microfinance taken by the

government and regulatory bodies in India are:

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

 The National Microfinance Taskforce, 1999

 Working Group on Financial Flows to the Informal Sector (set up by PMO), 2002 pment,
improving housing, securing a job (which often requires paying a large bribe), etc.

 Microfinance Development and Equity Fund, NABARD, 2005

 Working group on Financing NBFCs by Banks- RBI

1.2 Activities in Microfinance

Microcredit: It is a small amount of money loaned to a client by a bank or other institution.

Microcredit can be offered, often without collateral, to an individual or through group lending.

Micro savings: These are deposit services that allow one to save small amounts of money for 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.

1.3 Legal Regulations

Banks in India are regulated and supervised by the Reserve Bank of India (RBI) under the RBI Act of
1934, Banking Regulation Act, Regional Rural Banks Act, and the Cooperative Societies Acts of the

respective state governments for cooperative banks.

NBFCs are registered under the Companies Act, 1956 and are governed under the RBI Act. There is

no specific law catering to NGOs although they can be registered under the Societies Registration Act,

1860, the Indian Trust Act, 1882, or the relevant state acts. There has been a strong reliance on self-

regulation for NGO MFIs and as this applies to NGO MFIs mobilizing deposits from clients who also

borrow. This tendency is a concern due to enforcement problems that tend to arise with self-regulatory

organizations. In January 2000, the RBI essentially created a new legal form for providing

microfinance services for NBFCs registered under the Companies Act so that they are not subject to

any capital or liquidity requirements if they do not go into the deposit taking business. Absence of

liquidity requirements is concern to the safety of the sector.

Development Process through Micro Finance