it is a report on microfinance in india.

1. A RESEARCH PROJECT REPORT On “Impact of Micro Finance on Living
Standard Empowerment and Poverty Alleviation of Poor Women: A Case
Study of North India” Submitted to: Kurukshetra University, Kurukshetra in
partial fulfillment for the degree of Master of Business Administration
(Session -)Under the Supervision of: Submitted by:Ms. Shelly
SinghalFaculty MBA Uni. Roll. No.………..MAIMT MBA (F)MAHARAJA
AGRASEN INSTITUTE OF MANAGEMENT & TECHNOLOGY (ISO 90012008),JAGADHRI-135003 (YAMUNA NAGAR), Approved by AICTE and
HRD Ministry, affiliated to Kurukshetra University, Kurukshetra 1
DECLARTIONI hereby declare that this research project report entitled
"Impact of Micro Finance onLiving Standard Empowerment and Poverty
Alleviation of Poor Women: A CaseStudy of North India” submitted by me
for the partial fulfillment of the degree ofMaster of Business Administration,
submitted to Kurukshetra University,Kurukshetra is an original work done
by me.I also hereby declare that this project report has not been submitted
at any time to anyother university or institute for the award of any Degree
or Diploma. (student name) 2
ACKNOWLEDGEMENTThe project on “Impact of Micro Finance on Living
Standard Empowerment andPoverty Alleviation of Poor Women: A Case
Study of North India’’ would not haveseen the light of the day without the
following people and their priceless support andcooperation. Hence I
extend my gratitude to all of them.As a student of MAHARAJA AGARSEN
INSTITUTE OF MGT & TECH,JAGADHRI. I would first of all like to express
my gratitude to Dr. Raj Kumar,Director, MAIMTfor granting me permission
to undertake the project report in theiresteemed organization.I would also
like to express my sincere thanks to Mr.AdarshAggarwal (H.O.D MBADepartment) for supporting me and being always there for me
whenever I needed.During the actual research work, Ms. Shelly Singhal
(Research Guide) and other officestaff who set the ball rolling for my
project. They had been a source of inspirationthrough their constant
guidance; personal interest; encouragement and help. I conveymy sincere
thanks to them. In spite of their busy schedule they always found time

2. toguide me throughout the project. I am also grateful to them for reposing
confidence inmy abilities and giving me the freedom to work on my project.
Without their invaluablehelp I would not have been able to do justice to the
project.I express my sincere thanks to Ms. Shelly Singhal, Faculty MBA,
MAIMT for thevaluable suggestion & making this project a real successful.
(Student name) PREFACE 3
MBA Students of Kurukshetra University are required to undergo Research
Project asan integral part of curriculum.To accomplish this project as
“Impact of Micro Financeon Living Standard Empowerment and Poverty
Alleviation of Poor Women: ACase Study of North India” there is need to
become familiar with the project.It can be possible through theoretical
inputs as well as practical exposure in which mypractical knowledge is
helpful acquired at the college. I have also done this study fromsecondary
sources. 4
CHAPTER 1INTRODUCTION 5
IntroductionMicrofinance is defined as any activity that includes the
provision of financial services such as credit,savings, and insurance to low
income individuals which fall just above the nationally defined povertyline,
and poor individuals which fall below that poverty line, with the goal of
creating social value. Thecreation of social value includes poverty
alleviation and the broader impact of improving livelihoodopportunities
through the provision of capital for micro enterprise, and insurance and
savings for riskmitigation and consumption smoothing. A large variety of
sectors provide microfinance in India, usinga range of microfinance
delivery methods. Since the ICICI Bank in India, various actors
haveendeavored to provide access to financial services to the poor in
creative ways. Governments also havepiloted national programs, NGOs
have undertaken the activity of raising donor funds for on-lending,and
some banks have partnered with public organizations or made small
inroads themselves inproviding such services. This has resulted in a rather
broad definition of microfinance as any activitythat targets poor and low-

3. income individuals for the provision of financial services. The range
ofactivities undertaken in microfinance include group lending, individual
lending, the provision ofsavings and insurance, capacity building, and
agricultural business development services. Whateverthe form of activity
however, the overarching goal that unifies all actors in the provision
ofmicrofinance is the creation of social value.Microfinance
DefinitionAccording to International Labor Organization (ILO),
“Microfinance is an economic developmentapproach that involves providing
financial services through institutions to low income clients”.In India,
Microfinance has been defined by “The National Microfinance Taskforce,
1999” as“provision of thrift, credit and other financial services and products
of very small amounts to the poorin rural, semi-urban or urban areas for
enabling them to raise their income levels and improve
livingstandards”."The poor stay poor, not because they are lazy but
because they have no access to capital."The dictionary meaning of
„finance‟ is management of money. The management of money
denotesacquiring & using money. Micro Finance is buzzing word, used
when financing for microentrepreneurs. Concept of micro finance is
emerged in need of meeting special goal to empower under-privileged
class of society, women, and poor, downtrodden by natural reasons or men
made; caste,creed, religion or otherwise. The principles of Micro Finance
are founded on the philosophy ofcooperation and its central values of
equality, equity and mutual self-help. At the heart of theseprinciples are the
concept of human development and the brotherhood of man expressed
throughpeople working together to achieve a better life for themselves and
their children. 6
Traditionally micro finance was focused on providing a very standardized
credit product. The poor,just like anyone else, (in fact need like thirst) need
a diverse range of financial instruments to be ableto build assets, stabilize
consumption and protect themselves against risks. Thus, we see a
broadeningof the concept of micro finance--- our current challenge is to find
efficient and reliable ways ofproviding a richer menu of micro finance

4. products. Micro Finance is not merely extending credit, butextending credit
to those who require most for their and family‟ s survival. It cannot be
measured interm of quantity, but due weightage to quality measurement.
How credit availed is used to survive andgrow with limited means.Concept
and Features of Micro-finance: 1. It is a tool for empowerment of the
poorest. 2. Delivery is normally through Self Help Groups (SHGs). 3. It is
essentially for promoting self-employment, generally used for: (a) Direct
income generation (b) Rearrangement of assets and liabilities for the
household to participate in future opportunities and (c) Consumption
smoothing. 4. It is not just a financing system, but a tool for social change,
specially for women. 5. Because micro credit is aimed at the poorest,
micro-finance lending technology needs to mimic the informal lenders
rather than the formal sector lending. It has to: (a) Provide for seasonality
(b) Allow repayment flexibility (c) Fix a ceiling on loan sizes. 7
Microfinance approach is based on certain proven truths which are not
always recognized. These are: 1. That the poor are bankable; successful
initiatives in micro finance demonstrate that there need not be a tradeoff
between reaching the poor and profitability - micro finance constitutes a
statement that the borrowers are not „weaker sections‟ in need of charity,
but can be treated as responsible people on business terms for mutual
profit . 2. That almost all poor households need to save, have the inherent
capacity to save small amounts regularly and are willing to save provided
they are motivated and facilitated to do so. 3. That easy access to credit is
more important than cheap subsidized credit which involves lengthy
bureaucratic procedures - (some institutions in India are already lending to
groups or SHGs at higher rates - this may prevent the groups from
enjoying a sufficient margin and rapidly accumulating their own funds, but
members continue to borrow at these high rates, even those who can
borrow individually from banks). 4. Peer pressure in groups helps in
improving recoveries. 8
CHAPTER 2LITRATURE REVIEW 9

5. Mohammed AnisurRahaman (2007)Has examined that about microfinance
and to investigate the impact of microfinance on the poorpeople of the
society with the main focus on Bangladesh. We mainly concise our thesis
throughclient‟ s (the poor people, who borrowed loan from microfinance
institutions) perspective and build upour research based on it. Therefore,
the objective of this study is to show how microfinance works, byusing
group lending methodology for reducing poverty and how it affects the
living standard (income,saving etc.) of the poor people in Bangladesh.
Microfinance has the positive impact on the standard ofliving of the poor
people and on their life style. It has not only helped the poor people to
come over thepoverty line, but has also helped them to empower
themselves.SusyCheston (2002)Has examined that Microfinance has the
potential to have a powerful impact on women‟ sempowerment. Although
microfinance is not always empowering for all women, most women
doexperience some degree of empowerment as a result. Empowerment is
a complex process of changethat is experienced by all individuals
somewhat differently. Women need, want, and profit from creditand other
financial services. Strengthening women‟ s financial base and economic
contribution to theirfamilies and communities plays a role in empowering
them. Product design and program planningshould take women‟ s needs
and assets into account. By building an awareness of the potential
impactsof their programs, MFIs can design products, services, and service
delivery mechanisms that mitigatenegative impacts and enhance positive
ones.Linda Mayoux (Feb 2006)Has examined that Micro-finance
programmes not only give women and men access to savings andcredit,
but reach millions of people worldwide bringing them together regularly in
organized groups.Through their contribution to women‟ s ability to earn an
income, micro-finance programmes canpotentially initiate a series of
„virtuous spirals‟ of economic empowerment, increased well-being
forwomen and their families and wider social and political empowerment
Banks generally use individualrather than group-based lending and may
not have scope for introducing non-financial services. Thismeans that they
cannot be expected to have the type of the focused empowerment

6. strategies whichNGOs haveEoinWrenn (2005)Has examined that
microfinance creates access to productive capital for the poor, which
together withhuman capital, addressed through education and training, and
social capital, achieved through localorganization building, enables people
to move out of poverty (1999). By providing material capital to a 10
poor person, their sense of dignity is strengthened and this can help to
empower the person toparticipate in the economy and society. The impact
of microfinance on poverty alleviation is a keenlydebated issue as we have
seen and it is generally accepted that it is not a silver bullet, it has not
livedup in general to its expectation (Hulmeand Mosley, 1996). However,
when implemented and managedcarefully, and when services are
designed to meet the needs of clients, microfinance has had
positiveimpacts, not just on clients, but on their families and on the wider
community.Cheston& Kuhn (2004)Has examined that in their study
concluded that micro-finance programmes have been very successfulin
reaching women. This gives micro-finance institutions an extraordinary
opportunity to actintentionally to empower poor women and to minimize the
potentially negative impacts some womenexperiences. We also found
increased respect from and better relationships with extended family andinlaws. While there have been some reports of increased domestic violence,
Hashemi and Schulerfound a reduced incidence of violence among women
who were members of credit organizations thanamong the general
population.Dr. JyotishPrakashBasu (2006)Has examined that the two basic
research questions. First, the paper tries to attempt to study how
awoman‟ s tendency to invest in safer investment projects can be linked to
her desire to raise herbargaining position in the households. Second, in
addition to the project choice, women empowermentis examined with
respect to control of savings, control of income, control over loans, control
overpurchasing capacity and family planning in some sample household in
Hooghly district of WestBengal. The empowerment depends on the choice
of investment of project. The choice of safe projectleads to more empower
of women than the choice of uncertain projects. The Commercial Banks

7. andRegional Rural banks played a crucial role in the formation of groups in
the SHGs -Bank LinkageProgram in Andhra Pradesh whiles the
Cooperative Banks in West Bengal.Chintamani Prasad Patnaik (March
2012)Has examined that microfinance seems to have generated a view
that microfinance development couldprovide an answer to the problems of
rural financial market development. While the development ofmicrofinance
is undoubtedly critical in improving access to finance for the unserved and
underservedpoor and low-income households and their enterprises, it is
inadequate to address issues of ruralfinancial market development. It is
envisaged that self-help groups will play a vital role in suchstrategy. But
there is a need for structural orientation of the groups to suit the
requirements of newbusiness. Microcredit movement has to be viewed
from a long-term perspective under SHG 11
framework, which underlines the need for a deliberate policy implication in
favour of assurance interms of technology back-up, product market and
human resource development.Hunt, J &Kasynathan (2002)Has examined
that poor women and men in the developing world need access to
microfinance anddonors should continue to facilitate this. Research
suggests that equity and efficiency arguments fortargeting credit to women
remain powerful: the whole family is more likely to benefit from
credittargeted to women, where they control income, than when it is
targeted to men. Microfinance mustalso be re-assessed in the light of
evidence that the poorest families and the poorest women are notable to
access credit. A range of microfinance packages is required to meet the
needs of the poorest,both women and men. Donors need to revisit
arguments about the sustainability of microfinanceprogrammes. Financial
sustainability must be balanced against the need to ensure that some
creditpackages are accessible to the poorest.R.Prabhavathy (2012)Has
examined that collective strategies beyond micro-credit to increase the
endowments of thepoor/women enhance their exchange outcomes the
family, markets, state and community, and socio-cultural and political
spaces are required for both poverty reduction and women empowerment.

8. Eventhough there were many benefits due to micro-finance towards
women empowerment and povertyalleviation, there are some concerns.
First, these are dependent on the programmatic and institutionalstrategies
adopted by the intermediaries, second, there are limits to how far microcredit interventionscan alone reach the ultra-poor, third the extent of
positive results varies across household headship,caste and religion and
fourth the regulation of both public and private infrastructure in the context
ofLPG to sustain the benefits of social service providers.Reginald Indon
(2007)Has examined that informal businesses represent a very large
cross-section of economic enterprisesoperating in the country. Informal
businesses may be classified as either the livelihood/ survival typeor the
entrepreneurial/ growth-oriented type. Livelihood enterprises are those
which show very limitedpotential for growth in both income and
employment generation. There are existing policies, programand services
that directly/ indirectly cover informal. Variety of support programs, services
andinformation are currently being offered by different institutions. These
programs and support servicesfail to reach or remain inaccessible to
informal business operators and owners. This is borne out of
andperpetuated by lopsided economic policies and poor governance that
inadvertently encumber informalbusinesses from accessing mainstream
resources and services. 12
Mallory A. Owen (2006)Has examined that microfinance has signaled a
paradigm shift in development ideology. Using myexperiences with
microfinance in a fishing village in Senegal, this study will address the
claims drivingthe microfinance movement, debate its pros and cons and
pose further questions about its validity andwidespread implementation.
Instead of lifting people out of poverty and empowering
women,microfinance may have regressive long term potential for
borrowers. How loans get used is a centraltheme of this essay. How
microfinance and the notion of the “entrepreneur” fit into the
rural,Senegalese cultural context is also addressed. Microfinance
programs should be implemented withcomplementary measures that

9. challenge the systematic causes of inequality examined in this article.The
microfinance model (group lending based on joint liability) uses the social
capital generated bygroup membership to ensure that loans get refinanced. If one woman fails to pay back her loan, sheputs her entire loan
group at jeopardy. As a result, “Women‟ s participation in microenterprise
does notshow any signs of creating the new forms of solidarity among
women that the advocates ofempowerment desire. Instead, women are
placed under enormous pressure to maintain existing modesof social
relationships, on which depends not only the high rates of loan repayments
but also thesurvival of families.”Jennifer Meehan (2004)Has examined that
it will need to do three things simultaneously. First, it will need to rapidly
scale up,in key markets, like India, home to high numbers of the world‟ s
poor. Second, in this process, clearpriority is needed for philanthropic,
quasi-commercial and commercial financing for the business plansof MFIs
targeting the poorest segments of the population, especially women. Third,
microfinance willneed to realize its possibility as a broad platform and
movement, more than simply an intervention andindustry. The pioneering
financings completed by leading, poverty-focused MFIs have shown
theindustry what is possible – large amounts of financing that allows for
rapid expansion of financialservices to new poor customers. The MFIs offer
a model to others that are interested in tapping thefinancial markets. If
leading MFIs continue on their present course and adopt some or all of
thesuggestions offered, financial market interest – or more specifically,
debt capital market interest – inleading, poverty-focused MFIs is expected
to grow.Jacob Levitsky and Leny van Oyen (1999)Has examined that
micro-businesses to large corporations, located in large urban centres, in
rural areasand in the formal and informal sectors. Financing needs are
therefore of varying nature. In describingexperiences, a link is made
between size of enterprises, financing schemes/instruments and
typicaldelivery channels. When referring to enterprises in this paper, focus
is predominantly on businesses, 13

10. both existing and potential, in the manufacturing sector and related
services. It is clear from this paperthat increasing the volume of finance
available and the delivery of such funds in various appropriateforms, to
support enterprises in Africa, is a difficult challenge. Central banks have to
be given moreindependence, strengthened with qualified, experienced
personnel, able to fulfil adequately the role ofsupervising and monitoring
the performance of commercial banks in the provision of loans to
thoseenterprises able to make effective use of them. Formal financial
institutions such as commercial banksand, in a few cases, development
banks, have to be encouraged and pressed to make appropriate loansto
those who have proved themselves by paying off a number of loans they
have received from NGOsor from formal financial institutions. The
minimalist credit approach has clear limitations, and forcredit schemes to
be effective and have impact, complementary services are
needed.Marguerite S. Robinson (1995)Has examined that HIIDs role in the
formulation of the initial hypotheses and HIIDs contributions inplanning and
coordinating the underlying research, advising on the policies and
implementationstrategies that put concept into practice, analysing the
results, and disseminating the findings. Drawingon work in Asia, Africa, and
Latin America, the paper analyses the paradigm shift in microfinancefrom
government and donor-funded subsidized credit to sustainable financial
intermediation. This shifthas occurred because of the work of many people
in many countries. This paper, however, is limited toHIIDs contribution. The
policy implications of the new microfinance for governments, donors,
banks,and NGOs are explored. HIID is advising BRI on its program for
international visitors. In addition,HIID is analysing and teaching - in
universities, financial institutions, donor agencies, banksuperintendence‟ s,
and NGOs - the principles and the results of the new microfinance
paradigm.Pillai (1995)Has examined that the emergence of liberalization
and globalization in early 1990s aggravated theproblem of women workers
in unorganized sectors from bad to worse as most of the women who
wereengaged in various self-employment activities have lost their
livelihood. Microfinance is emerging as apowerful instrument for poverty

11. alleviation in the new economy. In India, Microfinance scene isdominated
by Self Help Group (SHGs)-Bank Linkage Programme as a cost effective
mechanism forproviding financial services to the "Unreached Poor" which
has been successful not only in meetingfinancial needs of the rural poor
women but also in strengthening collective self-help capacities of thepoor
leading to their empowerment. Micro finance is necessary to overcome
exploitation, createconfidence for economic self-reliance of the rural poor,
particularly among rural women who aremostly invisible in the social
structure. Micro finance can contribute to solving the problems
ofinadequate housing and urban services as an integral part of poverty
alleviation programmes. Thechallenge lies in finding the level of flexibility in
the credit instrument that could make it match the 14
multiple credit requirements of the low income borrower without imposing
unbearably high cost ofmonitoring its end use upon the lenders.Crabb, P.
(2008)Has examined that the relationship between the success of
microfinance institutions and the degree ofeconomic freedom in their host
countries. Many microfinance institutions are currently not self-sustaining
and research suggests that the economic environment in which the
institution operates is animportant factor in the ability of the institution to
reach this goal, furthering its mission of outreach tothe poor. The
sustainability of the micro lending institutions is analyzed here using a large
cross-section of institutions and countries. The results show that
microfinance institutions operate primarilyin countries with a relatively low
degree of overall economic freedom and that various economicpolicy
factors are important to sustainability.Fehr, D. and G. Hishigsuren.
(2006)Has examined that microfinance institutions (MFIs) provide financial
services to the pooresthouseholds. To date, funding of MFI activities has
come primarily from outright donor grants,government subsidies, and often
debt capital, including debt with non-market terms favorable to theMFI.
These traditional sources of MFI financing may not be sufficient to allow
MFIs to providemaximum services. There is a subset of the pool of
mainstream equity investors who would considerinvesting in MFI

12. opportunities, even knowing that they would not expect to earn the full
economic rateof return that such investments would otherwise require.
However, as part of their investmentevaluation process, these investors
would ask: What would the market determine required expectedrate of
return for my MFI investment be? What return on investment (ROI) do I
expect to earn on myMFI investment? Is the difference in the above two
returns acceptable given my level of socialmotivation? How will I
"monetize" my investment and when? The purpose of this article is to
employmodern corporate finance techniques to address these
questions.Demirguc-Kunt, A. and Martinez, P.M.S. (2005)Has examined
that this paper (i) presents new indicators of banking sector penetration
across 99countries, based on a survey of bank regulatory authorities, (ii)
shows that these indicators predicthousehold and firm use of banking
services, (iii) explores the association between the outreachindicators and
measures of financial, institutional, and infrastructure development across
countries, and(iv) relates these banking outreach indicators to measures of
firms „financing constraints. In particular,we find that greater outreach is
correlated with standard measures of financial development, as well aswith
economic activity. Controlling for these factors, we find that better
communication and transport 15
infrastructure, and better governance are also associated with greater
outreach. Government ownershipof financial institutions translates into
lower access, while more concentrated banking systems areassociated
with greater outreach. Finally, firms in countries with higher branch and
ATM penetrationand higher use of loan services report lower financing
obstacles, thus linking banking sector outreachto the alleviation of firms‟
financing constraints.Srinivasan, Sunderasan (2007)Has examined that
micro banking facilities have helped large numbers of developing country
nationalsby supporting the establishment and growth of microenterprises.
And yet, the microfinance movementhas grown on the back of passive
replication and needs to be revitalised with new product offeringsand
innovative service delivery. Renewable Energy systems viz., solar home

13. systems, biogas digesters,etc., serve to improve indoor air quality, provide
superior light and extend working and study hours.Such applications are
not inherently income generating and returns on such investments accrue
fromcost avoidance, but should qualify for micro funding, as such quality of
life investments, reflectborrower maturity and simultaneously contribute to
MFI sustainability.Basu, P., Srivastava (2005)Has examined that the
current level and pattern of access to finance for Indias rural poor and
examinessome of the key microfinance approaches in India, taking a close
look at the most dominant amongthese, the Self Help Group (SHG) Bank
Linkage initiative. It empirically analyzes the success withwhich SHG Bank
Linkage has been able to reach the poor, examines the reasons behind
this, and thelessons learned. The analysis in the paper draws heavily on a
recent rural access to finance survey of6,000 households in India,
undertaken by the authors. The main findings and implications of the
paperare as follows: Indias rural poor currently have very little access to
finance from formal sources.Microfinance approaches have tried to fill the
gap. Among these, the growth of SHG Bank Linkagehas been particularly
remarkable, but outreach remains modest in terms of the proportion of
poorhouseholds served. The paper recommends that, if SHG Bank
Linkage is to be scaled-up to offer massaccess to finance for the rural
poor, then much more attention will need to be paid towards: thepromotion
of high quality SHGs that are sustainable, clear targeting of clients, and
ensuring that bankslinked to SHGs price loans at cost-covering levels. At
the same time, the paper argues that, in aneconomy as vast and varied as
Indias, there is scope for diverse microfinance approaches to
coexist.Private sector micro financiers need to acquire greater
professionalism, and the government, too, canhelp by creating a flexible
architecture for microfinance innovations, including through a moreenabling
policy, legal and regulatory framework. Finally, the paper argues that, while
microfinancecan, at minimum, serve as a quick way to deliver finance to
the poor, the medium-term strategy toscale-up access to finance for the
poor should be to graduate microfinance clients to formal financial 16

14. institutions. The paper offers some suggestions on what it would take to
reform these institutions withan eye to improving access for the
poor.Robinson, M. (2001)Has examined that the timing of this book is
excellent it has few close substitutes in terms of itssweeping overview of
the terrain, and the revolution is now so advanced that the time is right for
ahistory, or at least a retrospective. As with any revolution, however, splits
have emerged within themovement. On one side are those who argue that
the way forward is to require microfinanceinstitutions to meet the test of
financial sustainability essentially, requiring these institutions to covertheir
costs, even if this means that the very poorest of the poor remain underserved. Against this, thepoverty lending approach emphasizes the
importance of outreach, especially to the very poorestborrowers, as a
poverty fighting approach.Gallardo, Joselito (1999)Has examined that the
Bank should maximize opportunities to expand the use of leasing as
anapproach to financial intermediation in Bank projects to promote the
development of small businessesand microenterprises. In most developing
countries, capital markets are relatively undeveloped andbanks are often
unable or unwilling to undertake term lending. Operations in
microenterprises andsmall businesses are cash-flow-oriented but rarely
have organized historical financial records or theassets needed for
collateral for conventional bank financing. Gallardo explores the potential of
leasingas an option to expand small businesses access to medium-term
financing for capital equipment andnew technology. In a lease-financing
contract, the lessor-financier retains ownership of the asset,
leasepayments can be tailored to fit the cash-flow generation patterns of
the lessee-borrowers business, andthe security deposit is smaller than the
equity stake required in conventional bank financing. Othersmall
businesses require medium-term financing to acquire the tools and
equipment needed to supportproduction growth and expansion. Gallardo
examines and compares the Banks experience: Leasefinancing was used
to promote the development of small businesses in Pakistan, as part of
amicroenterprise development loan project. For a Bank-supported
alternative-energy project inIndonesia, a variant of lease financing-the hire-

15. purchase contract-is being used in marketing anddistribution by private
distributors of photovoltaic solar home systems. Lease financing was used
byGrameen Trust in Bangladesh to finance the purchase of small tools and
equipment and in othercountries to promote the growth of alternative
energy systems. This paper-a product of theDevelopment Research
Group-is part of a larger effort in the group to identify appropriate policies
forenvironmental regulation in developing countries. The study was funded
by the Banks ResearchSupport Budget under the research project "The
Economics of Industrial Pollution Control inDeveloping Countries" 17
Muhammad Yunus (1998)Has examined that this approach to poverty
reduction at the macro-level is inadequate. The primarycauses of poverty
are not lack of human capital or lack of demand for labor. Lack of demand
for laboris only a symptom, not a cause, of poverty. Poverty is caused by
our inadequate understanding ofhuman capabilities and by our failure to
create enabling theoretical frameworks, concepts, institutionsand policies
to support those capabilities. My main argument is that economics as we
know it is notonly unhelpful in getting the poor out of poverty; it may even
be a hindrance. In this paper, I wouldlike to explore those institutions that
perpetuate poverty, share my experiences with an effectivepoverty
alleviation institution, and present my thoughts on the future of poverty
alleviation. Beforeaddressing these points, however, I would like to provide
a useful framework to define the concept of"the poor" more
concretely.Ashta, A. & De Selva, R. (2009)Hass examined that the
relationship between microfinance and religion, and provides future
researchdirections in this area. Religious institutions often play a crucial
role in establishing microfinancesystems, but interactions between
microfinance and religion have received little attention ofresearchers.
Some of the topics addressed by articles reviewed in this paper include the
impact of theGreat Irish Famine on Irish loan funds, indigenization within
support groups for chronically ill Haitianwomen, impact of religion on
borrowing patterns of Jordanian micro-entrepreneurs, Islamicmicrofinance
in Pakistan and Indonesia, spirituality as an asset in a Christian initiative

16. role of religiousleaders in identifying entrepreneurial talent, microfinance
and charity in Thailand and the Philippines,and extensive socio-economic
studies in Bangladesh and India.Ernest Aryeetey (2005)Has examined that
informal finance and microfinance suitable for financing growing small to
mediumsize enterprises (SMEs) in Sub-Saharan Africa? First, I present the
characteristics of informal finance,focusing on size, structure, and scope of
activities. Informal finance has not been very attractive for theprivate
sector. Indeed, the informal sector has considerable experience and
knowledge about dealingwith small borrowers, but there are significant
limitations to what it can lend to growingmicrobusinesses. Second, I
discuss some recent trends in microfinance. While externally
drivenmicrofinance projects have surfaced in Africa, their performance
relative to small business finance hasnot been as positive as in Asia and
Latin America. Third, I introduce some possible steps toward a newreform
agenda that will make informal and microfinance relevant to private sector
development,including focusing on links among formal, semi-formal and
informal finance and how these links canbe developed. 18
Yunus (2003)Has examined that count 130 McMaster School for
Advancing Humanity on women to spread theword to their neighbors and
friends about the success of these loans. The testimony is expected
toconvince others to seek out Grameen for help. Yunus also encourages
members to save some of theirmoney in case they fall on hard times, such
as natural disasters, or to use this money for otheropportunities. In 1977,
Yunus founded Grameen Bank after working for six months to get a loan
fromthe Janata Bank. Yunus realized that having groups of people take out
a loan was a better plan forsuccess than giving loans to individuals. He
describes the process by which Grameen Bank lendsmoney. Loan
repayments are to be made in very small amounts, and in the first project,
Yunus chose avillager to be in charge of collecting the
repayments.Monique Cohen (2002)Has examined that the ideas presented
in this paper are designed to direct the arena of discoursetowards a more
holistic market driven or client focused microfinance agenda. Currently, the

17. debate onmarket-driven microfinance is primarily framed by the
„problems‟ of competition and dropouts amongestablished MFIs. The
solutions to the problems are defined in terms of more responsive
products, thecreation of new products, and the restructuring of existing
ones. Appropriate products will not onlybenefit the operations of an
institution they will also have a positive impact on the wellbeing of theclient,
reducing the risk of borrowing and the poor‟ s vulnerability. In presenting
current thinking on aclient-led agenda, this paper finds itself in a precarious
position in the midst of this debate. Client-ledmodels are still in their
infancy, and the fact that this topic is the theme of this special edition of
theJournal of Development Studies is itself an important milestone. When
this author began to focus onclients in microfinance six years ago, the
notion that clients deserved a voice in the design and deliveryof services
was dismissed out of hand.Shannon Doocy, Dan Norell, ShimelesTeffera,
and Gilbert Burnham (2005)Has examined that Management decision
making in MFIs is becoming increasingly tied to collectinginformation about
social performance. This paper examines the impact of participation in an
Ethiopianmicrofinance program on indicators of socioeconomic status
including wealth, income, and home orland ownership. A survey assessing
these outcomes was conducted in May 2003 in two predominantlyrural
sites in Southern Ethiopia and included 819 households. The article
discusses managementdecisions made as the result of survey findings
about socioeconomic status and food security toincrease retention rates
and to facilitate client savings. Additionally, the management was prompted
toincrease the number of female clients and raise the proportion of female
loan officers. This paperillustrates how data from routine monitoring and
evaluation can be linked to MFI management 19
decision making, which ultimately results in providing better microfinance
services. Household assetdata indicates that participation in the WISDOM
microfinance program did not result in increasedhousehold wealth.
Significant differences in household income were not observed between
participantgroups in either survey site and client status was not a

18. significant predictor of income in univariate ormultivariate regression
models.John A. Brett. (2006)Has examined that having borrowed money
from a microfinance organization to start a small business,many women in
El Alto, Bolivia are unable to generate sufficient income to repay their loans
and somust draw upon household resources. Working from the womens
experience and words, this articleexplores the range of factors that
condition and constrain their success as entrepreneurs. The centraltheme
is that while providing the poor access to credit is currently very popular in
development circles,the social and structural context within which some
women operate so strongly constrains theirproductive activity that they
realize a net income loss at the household level instead of the
promisedbenefits of entrepreneurship. This paper explores the social and
structural realities in which womenseek out and accept debt beyond their
capacity to repay from the proceeds of their business enterprise.By
examining some of the "hidden costs" of microfinance participation, this
paper argues for a shiftfrom evaluation on outcomes at the institutional
level to outcomes at the household level to identify theforces and factors
that condition womens success as micro-entrepreneurs. While there has
been muchdiscussion on the benefits of microcredit lending and increasing
critique of it on both ideological andsubstantive grounds, there have been
few ethnographically informed studies on consequences to
users.NidhiyaMenon (2006)Has examined that this paper studies the
benefits of participation in micro-finance programs, wherebenefits are
measured in terms of the ability to smooth the effect of seasonal shocks
that causeconsumption fluctuations. It is shown that although membership
in these programs is an effectiveinstrument in combating inter-seasonal
consumption differences, there is a threshold level of length ofparticipation
beyond which benefits begin to diminish. Returns from membership are
modelled usingan Euler equation approach. Fixed effects non-linear least
squares estimation of parameters using datafrom 24 villages of the
Grameen Bank suggests that returns to participation, as measured by the
abilityto smooth seasonal shocks, begin to decline after approximately two
years of membership. Thisimplies that membership alone no longer has a

19. mitigating marginal effect on seasonal shocks to percapita consumption
after four years of participation. Such patterns suggest that the ability to
smoothconsumption as a function of length of membership, need not
accrue indefinitely in a linear fashion.;Reprinted by permission of Frank
Cass & Co. Ltd. 20
CHAPTER 3INDUSTRY PROFILE 21
The Origin of MicrofinanceAlthough neither of the terms microcredit or
microfinance were used in the academic literature nor bydevelopment aid
practitioners before the 1980s or 1990s, respectively, the concept of
providingfinancial services to low income people is much older.While the
emergence of informal financial institutions in Nigeria dates back to the
15th century, theywere first established in Europe during the 18th century
as a response to the enormous increase inpoverty since the end of the
extended European wars (1618 – 1648). In 1720 the first loan
fundtargeting poor people was founded in Ireland by the author Jonathan
Swift. After a special law waspassed in 1823, which allowed charity
institutions to become formal financial intermediaries a loanfund board was
established in 1836 and a big boom was initiated. Their outreach peaked
just before thegovernment introduced a cap on interest rates in 1843. At
this time, they provided financial services toalmost 20% of Irish
households. The credit cooperatives created in Germany in 1847 by
FriedrichWilhelm Raiffeisen served 1.4 million people by 1910. He stated
that the main objectives of thesecooperatives “should be to control the use
made of money for economic improvements, and to improvethe moral and
physical values of people and also, their will to act by themselves.”In the
1880s the British controlled government of Madras in South India, tried to
use the Germanexperience to address poverty which resulted in more than
nine million poor Indians belonging tocredit cooperatives by 1946. During
this same time the Dutch colonial administrators constructed acooperative
rural banking system in Indonesia based on the Raiffeisen model which
eventually becameBank Rakyat Indonesia (BRI), now known as the largest
MFI in the world.EVOLUTION OF MICROFINANCE IN INDIA (1960 TO

20. TODAY)Microfinance in India emerged as an effort to reach out to the unbanked, lower income segments ofthe population 1960 to 1980 1990 2000
Phase 1: Social Banking Phase 2: Financial Systems Phase 3: Financial
Inclusion Approach1.Nationalization of private 1.Peer-pressure 1.NGOMFIs and SHGs gainingcommercial banks more legitimacy2.Expansion of
rural branch 2.Establishment of 2.MFIs emerging as strategicnetwork
MFIs,typically of non-profit partners to diverse entities origins interested in
thelow-income segments3.Extension of subsidized credit 3.Consumer
finance emerged 22
ashighgrowth area4.Establishment of Rural 4.Increased policy
regulationRegional Banks5.Establishment of apex 5.Increasing
commercializationinstitutionssuch as NationalBank for Agricultureand
RuralDevelopment and SmallIndu-stries Development Bank ofIndia Table
3.1Phase 1: In the 1960‟ s, the credit delivery system in rural India was
largely dominated by thecooperative segment. The period between 1960
and 1990, referred to as the “social banking” phase.This phase includes
nationalization of private commercial banks, expansion of rural branch
networks,extension of subsidized credit, establishment of Regional Rural
Banks (RRBs) and the establishmentof apex institutions such as the
National Bank for Agriculture and Rural Development (NABARD) andthe
Small scale Industries Development Board of India (SIDBI).Phase 2: After
1990, India witnessed the second phase “financial system approach” of
credit delivery.In this phase NABARD initiated the Self Help Group (SHG) Bank Linkage Bank Linkage program,which links informal womens groups
to formal banks. This concept held great appeal for non-government
organizations (NGOs) working with the poor, prompting many of them to
collaborate withNABARD in the program. This period also witnessed the
entry of Microfinance Institutions (MFIs),largely of non-profit origins, with
existing development programs.Phase 3: In 2000, the third phase in the
development of Indian microfinance began, marked by furtherchanges in
policies, operating formats, and stakeholder orientations in the financial
services space.This phase emphasizes on “inclusive growth” and “financial

21. inclusion.” This period also saw manyNGO-MFIs transform into regulated
legal formats such as Non-Banking Finance Companies
(NBFCs).Commercial banks adopted innovative ways of partnering with
NGO-MFIs and other ruralorganizations to extend their reach into rural
markets. MFIs have emerged as strategic partners toindividuals and
entities interested in reaching out to Indias low income client segments. 23
Policy Attention to Microfinance After 20001999 --- Official definition of
microfinance by RBIAugust 2000 --- Micro Credit/Rural Credit included in
the list of permitted non-banking financialcompany (NBFC) activities
considered for Foreign Direct Investment (FDI)2005 --- MFIs acknowledged
for the first time in the Budget Speech by the Finance Minister“Government
intends to promote MFIs in a big way. The way forward, I believe, is to
identify MFIs,classify and rate such institutions, and empower them to
intermediate between the lending banks andthe beneficiaries.”January
2006 --- Announcement of the business correspondent modelFebruary
2006 --- Budget Speech by the Finance Minister promises a formal
statutory framework forthe promotion, development and regulation of the
microfinance sectorMarch 2006 --- Comprehensive guidelines by RBI on
loan securitizationJuly 2006 --- RBI master circular allows NGOs involved
in microfinance to access ExternalCommercial Borrowings (ECB) up to
USD 5 million (INR 20.25 crores) during a year.March 2007 --- Finance
Minister introduces the “Micro Finance Sector Development and
RegulationBill 2007” in LokSabhaEntities in Micro Finance:-Indian
Microfinance dominated by two operational approaches:
SHG Initiated
by NABARD through SHG Bank Linkage Program. Largest outreach to
microfinance clients in the world.
MFIs Emerged in the late 1990s to
harness social and commercial funds. Today the number of Indian MFIs
has increased and crossed 1000.SHGs and MFIs disbursement till 2007USD 3.7 billionsSHGs comprise twenty or fewer members, of whom the
majority are women from the poorest castesand tribes. Members save
small amounts of money, as little as a few rupees a month in a group

22. fund.Members may borrow from the group fund for a variety of purposes
ranging from household 24
emergencies to school fees. Banks typically lend up to four rupees for
every rupee in the group fund.Groups pay a reasonable 12-24% annual
rate of interest. Nearly 1.4 million SHGs comprisingapproximately 20
million women now borrow from banks, which makes the Indian SHGBankLinkage model the largest microfinance program in the world.MFI is
an organization that offers financial services to low income populations.
Almost all of theseoffer microcredit and only take back small amounts of
savings from their own borrowers, not from thegeneral public. Term refers
to a wide range of organizations - NGOs, credit unions,
cooperatives,private commercial banks and non-bank financial
institutions.Microfinance TodayIn the 1970s a paradigm shift started to take
place. The failure of subsidized government or donordriven institutions to
meet the demand for financial services in developing countries let to
several newapproaches. Some of the most prominent ones are presented
below.Bank Dagan Bali (BDB) was established in September 1970 to serve
low income people in Indonesiawithout any subsidies and is now “wellknown as the earliest bank to institute commercialmicrofinance”. While this
is not true with regard to the achievements made in Europe during the
19thcentury, it still can be seen as a turning point with an ever increasing
impact on the view of politiciansand development aid practitioners
throughout the world. In 1973 ACCION International, a UnitedStates of
America (USA) based non-governmental organization (NGO) disbursed its
first loan inBrazil and in 1974 Professor Muhammad Yunus started what
later became known as the GrameenBank by lending a total of $27 to 42
people in Bangladesh. One year later the Self-EmployedWomen‟ s
Association started to provide loans of about $1.5 to poor women in India.
Although thelatter examples still were subsidized projects, they used a
more business oriented approach and showedthe world that poor people
can be good credit risks with repayment rates exceeding 95%, even if
theinterest rate charged is higher than that of traditional banks. Another

23. milestone was the transformationof BRI starting in 1984. Once a loss
making institution channeling government subsidized credits toinhabitants
of rural Indonesia it is now the largest MFI in the world, being profitable
even during theAsian financial crisis of 1997 – 1998.In February 1997 more
than 2,900 policymakers, microfinance practitioners and representatives
ofvarious educational institutions and donor agencies from 137 different
countries gathered inWashington D.C. for the first Micro Credit Summit.
This was the start of a nine yearlong campaign toreach 100 million of the
world poorest households with credit for self-employment by
2005.According to the Microcredit Summit Campaign Report 67,606,080
clients have been reached through2527 MFIs by the end of 2002, with
41,594,778 of them being amongst the poorest before they tooktheir first
loan. Since the campaign started the average annual growth rate in
reaching clients has beenalmost 40 percent. If it has continued at that
speed more than 100 million people will have access to 25
microcredit by now and by the end of 2005 the goal of the microcredit
summit campaign would bereached. As the president of the World Bank
James Wolfensohn has pointed out, providing financialservices to 100
million of the poorest households means helping as many as 500 – 600
million poorpeople.Need for Micro-Finance: The gap between Demand and
SupplySince independence, various governments in India have
experimented with a large number of grantand subsidy based poverty
alleviation programmes. These programmes were based on
grant/subsidyand the credit linkage was through commercial banks
only.Hence was adopted the concept of micro-credit in India. Success
stories in neighboring countries, likeGrameen Bank in Bangladesh, Bank
Rakiat in Indonesia, Commercial & Industrial Bank in Philippinesetc, gave
further boost to the concept in India in the 1980s. India thus adopted the
similar model ofextending credit to the poorest sector and took a no. of
steps to promote micro-financing in thecountry. Since the 1950s, various
governments in India have experimented with a large number ofgrant and
subsidy based poverty alleviation programmes. Studies show that these

24. mandatory anddedicated subsidized financial programmes, implemented
through banking institutions, have not beenfully successful in meeting their
social and economic objectives:The common features of these
programmes were:- Target orientation Based on grant/subsidy, and Credit
linkage through commercial banks.These programmes:- Were often not
sustainable Perpetuated the dependent status of the beneficiaries
Depended ultimately on government employees for delivery Led to misuse
of both credit and subsidy and Were treated at best as poverty alleviation
interventions.Who are the clients of micro finance?The typical micro
finance clients are low-income persons that do not have access to formal
financialinstitutions. Micro finance clients are typically self-employed, often
household-based entrepreneurs. Inrural areas, they are usually small
farmers and others who are engaged in small income-generatingactivities
such as food processing and petty trade. In urban areas, micro finance
activities are more 26
diverse and include shopkeepers, service providers, artisans, street
vendors, etc. Micro finance clientsare poor and vulnerable non-poor who
have a relatively unstable source of income.Access to conventional formal
financial institutions, for many reasons, is inversely related to income:the
poorer you are the less likely that you have access. On the other hand, the
chances are that, thepoorer you are, the more expensive or onerous
informal financial arrangements. Moreover, informalarrangements may not
suitably meet certain financial service needs or may exclude you
anyway.Individuals in this excluded and under-served market segment are
the clients of micro finance.As we broaden the notion of the types of
services micro finance encompasses, the potential market ofmicro finance
clients also expands. It depends on local conditions and political climate,
activeness ofcooperatives, SHG & NGOs and support mechanism. For
instance, micro credit might have a far morelimited market scope than say
a more diversified range of financial services, which includes varioustypes
of savings products, payment and remittance services, and various
insurance products. Forexample, many very poor farmers may not really

25. wish to borrow, but rather, would like a safer place tosave the proceeds
from their harvest as these are consumed over several months by the
requirements ofdaily living. Central government in India has established a
strong & extensive link between NABARD(National Bank for Agriculture &
Rural Development), State Cooperative Bank, District CooperativeBanks,
Primary Agriculture & Marketing Societies at national, state, district and
village level.The Need in India:- India is said to be the home of one third of
the world‟ s poor; official estimates range from 26 to 50 percent of the
more than one billion population. About 87 percent of the poorest
households do not have access to credit. The demand for microcredit has
been estimated at up to $30 billion; the supply is less than $2.2 billion
combined by all involved in the sector.Due to the sheer size of the
population living in poverty, India is strategically significant in the
globalefforts to alleviate poverty and to achieve the Millennium
Development Goal of halving the world‟ spoverty by 2015. Microfinance
has been present in India in one form or another since the 1970s and
isnow widely accepted as an effective poverty alleviation strategy. Over the
last five years, themicrofinance industry has achieved significant growth in
part due to the participation of commercialbanks. Despite this growth, the
poverty situation in India continues to be challenging.Some principles that
summarize a century and a half of development practice were
encapsulated in2004 by Consultative Group to Assist the Poor (CGAP) and
endorsed by the Group of Eight leaders atthe G8 Summit on June 10,
2004: Poor people need not just loans but also savings, insurance and
money transfer services. 27
Microfinance must be useful to poor households: helping them raise
income, build up assets and/or cushion themselves against external
shocks. “Microfinance can pay for itself.”Subsidies from donors and
government are scarce and uncertain, and so to reach large numbers of
poor people, microfinance must pay for itself. Microfinance means building
permanent local institutions. Microfinance also means integrating the
financial needs of poor people into a country‟ s mainstream financial

26. system. “The job of government is to enable financial services, not to
provide them.” “Donor funds should complement private capital, not
compete with it.” “The key bottleneck is the shortage of strong institutions
and managers.” Donors should focus on capacity building. Interest rate
ceilings hurt poor people by preventing microfinance institutions from
covering their costs, which chokes off the supply of credit. Microfinance
institutions should measure and disclose their performance – both
financially and socially.Microfinance can also be distinguished from charity.
It is better to provide grants to families who aredestitute, or so poor they
are unlikely to be able to generate the cash flow required to repay a loan.
Thissituation can occur for example, in a war zone or after a natural
disaster.Financial needs and Financial services:-In developing economies
and particularly in the rural areas, many activities that would be classified
inthe developed world as financial are not monetized: that is, money is not
used to carry them out.Almost by definition, poor people have very little
money. But circumstances often arise in their livesin which they need
money or the things money can buy.In Stuart Rutherford‟ s recent book
The Poor and Their Money, he cites several types of needs: Lifecycle
Needs: such as weddings, funerals, childbirth, education, homebuilding,
widowhood, old age. Personal Emergencies: such as sickness, injury,
unemployment, theft, harassment or death. Disasters: such as fires, floods,
cyclones and man-made events like war or bulldozing of dwellings.
Investment Opportunities: expanding a business, buying land or
equipment, improving housing, securing a job (which often requires paying
a large bribe), etc. 28
Poor people find creative and often collaborative ways to meet these
needs, primarily through creatingand exchanging different forms of noncash value. Common substitutes for cash vary from country tocountry but
typically include livestock, grains, jewellery and precious metals.As
Marguerite Robinson describes in The Microfinance Revolution, the 1980s
demonstrated that“microfinance could provide large-scale outreach
profitably,” and in the 1990s, “microfinance beganto develop as an

27. industry”. In the 2000s, the microfinance industry‟ s objective is to satisfy
the unmetdemand on a much larger scale, and to play a role in reducing
poverty. While much progress has beenmade in developing a viable,
commercial microfinance sector in the last few decades, several
issuesremain that need to be addressed before the industry will be able to
satisfy massive worldwidedemand.The obstacles or challenges to building
a sound commercial microfinance industry include: Inappropriate donor
subsidies Poor regulation and supervision of deposit-taking MFIs Few MFIs
that mobilize savings Limited management capacity in MFIs Institutional
inefficiencies Need for more dissemination and adoption of rural,
agricultural microfinance methodologiesRole of Microfinance:-The micro
credit of microfinance progamme was first initiated in the year 1976 in
Bangladesh withpromise of providing credit to the poor without collateral ,
alleviating poverty and unleashing humancreativity and endeavor of the
poor people. Microfinance impact studies have demonstrated that 1.
Microfinance helps poor households meet basic needs and protects them
against risks. 2. The use of financial services by low-income households
leads to improvements in household economic welfare and enterprise
stability and growth. 3. By supporting women‟ s economic participation,
microfinance empowers women, thereby promoting gender-equity and
improving household well-being. 4. The level of impact relates to the length
of time clients have had access to financial services.1.1 Strategic Policy
InitiativesSome of the most recent strategic policy initiatives in the area of
Microfinance taken by thegovernment and regulatory bodies in India are:
Working group on credit to the poor through SHGs, NGOs, NABARD, 1995
The National Microfinance Taskforce, 1999 Working Group on Financial
Flows to the Informal Sector (set up by PMO), 2002 29
Microfinance Development and Equity Fund, NABARD, 2005 Working
group on Financing NBFCs by Banks- RBI1.2 Activities in
MicrofinanceMicrocredit: It is a small amount of money loaned to a client by
a bank or other institution.Microcredit can be offered, often without
collateral, to an individual or through group lending.Micro savings: These

28. are deposit services that allow one to save small amounts of money for
futureuse. Often without minimum balance requirements, these savings
accounts allow households to save inorder to meet unexpected expenses
and plan for future expenses.Micro insurance: It is a system by which
people, businesses and other organizations make a paymentto share risk.
Access to insurance enables entrepreneurs to concentrate more on
developing theirbusinesses while mitigating other risks affecting property,
health or the ability to work.Remittances: These are transfer of funds from
people in one place to people in another, usually acrossborders to family
and friends. Compared with other sources of capital that can fluctuate
depending onthe political or economic climate, remittances are a relatively
steady source of funds.1.3 Legal RegulationsBanks in India are regulated
and supervised by the Reserve Bank of India (RBI) under the RBI Act
of1934, Banking Regulation Act, Regional Rural Banks Act, and the
Cooperative Societies Acts of therespective state governments for
cooperative banks.NBFCs are registered under the Companies Act, 1956
and are governed under the RBI Act. There isno specific law catering to
NGOs although they can be registered under the Societies Registration
Act,1860, the Indian Trust Act, 1882, or the relevant state acts. There has
been a strong reliance on self-regulation for NGO MFIs and as this applies
to NGO MFIs mobilizing deposits from clients who alsoborrow. This
tendency is a concern due to enforcement problems that tend to arise with
self-regulatoryorganizations. In January 2000, the RBI essentially created a
new legal form for providingmicrofinance services for NBFCs registered
under the Companies Act so that they are not subject toany capital or
liquidity requirements if they do not go into the deposit taking business.
Absence ofliquidity requirements is concern to the safety of the sector. 30
Development Process through Micro FinanceDonors and Banks MicroFinance Governmentand Banks Implementing Organisations Individual
Awareness/Promotional Work Individual Promotion and Formation of SHGs
Micro Enterprise Consolidation of SHGs Micro Enterprise
SavingsConsumption Needs Credit Delivery Production Needs Recovery

29. Follow-up Monitoring Income Generation Farm Related (Sustainable &
Growth Non-Farm Related Oriented) Self-Sustainability of SHGs Economic
Empowerment through use of Micro-Credit as an entry point for overall
Empowerment Figure 3.1 31
Micro-finance interventions through different organisations National
Government Funded Donors/Bilateral Financial Banks Programmes
Projects Institutions Implementing OrganisationsResource/Support
Indirectly Organisations engaged in Directly engaged in Micro-Finance
Micro-Finance Individuals SHGs Members Figure 3.2 32
Microfinance in IndiaAt present lending to the economically active poor
both rural and urban is pegged at around Rs.7000crores in the Indian
banks‟ credit outstanding. As against this, according to even the most
conservativeestimates, the total demand for credit requirements for this
part of Indian society is somewhere aroundRs.2,00,000
crores.Microfinance changing the face of poor IndiaMicro-Finance is
emerging as a powerful instrument for poverty alleviation in the new
economy. InIndia, micro-Finance scene is dominated by Self Help Groups
(SHGs) - Banks linkage Programme,aimed at providing a cost effective
mechanism for providing financial services to the unreached poor.In the
Indian context terms like "small and marginal farmers", " rural artisans" and
"economicallyweaker sections" have been used to broadly define microfinance customers. Research across the globehas shown that, over time,
microfinance clients increase their income and assets, increase the
numberof years of schooling their children receive, and improve the health
and nutrition of their families.A more refined model of micro-credit delivery
has evolved lately, which emphasizes the combineddelivery of financial
services along with technical assistance, and agricultural business
developmentservices. When compared to the wider SHG bank linkage
movement in India, private MFIs have hadlimited outreach. However, we
have seen a recent trend of larger microfinance institutionstransforming
into Non-Bank Financial Institutions (NBFCs). This changing face of
microfinance inIndia appears to be positive in terms of the ability of

30. microfinance to attract more funds and thereforeincrease outreach. In
terms of demand for micro-credit or micro-finance, there are three
segments, which demandfunds. They are: At the very bottom in terms of
income and assets, are those who are landless and engaged in agricultural
work on a seasonal basis, and manual labourers in forestry, mining,
household industries, construction and transport. This segment requires,
first and foremost, consumption credit during those months when they do
not get labour work, and for contingencies such as illness. They also need
credit for acquiring small productive assets, such as livestock, using which
they can generate additional income. The next market segment is small
and marginal farmers and rural artisans, weavers and those self-employed
in the urban informal sector as hawkers, vendors, and workers in
household micro-enterprises. This segment mainly needs credit for working
capital, a small part of which also serves consumption needs. This
segment also needs term credit for acquiring additional productive assets,
such as irrigation pumpsets, borewells and livestock in case of farmers,
and equipment (looms, machinery) and worksheds in case of non-farm
workers. 33
The third market segment is of small and medium farmers who have gone
in for commercial crops such as surplus paddy and wheat, cotton,
groundnut, and others engaged in dairying, poultry, fishery, etc. Among
non-farm activities, this segment includes those in villages and slums,
engaged in processing or manufacturing activity, running provision stores,
repair workshops, tea shops, and various service enterprises. These
persons are not always poor, though they live barely above the poverty line
and also suffer from inadequate access to formal credit.Well these are the
people who require money and with Microfinance it is possible. Right now
theproblem is that, it is SHGs which are doing this and efforts should be
made so that the big financialinstitutions also turn up and start supplying
funds to these people. This will lead to a better India andwill definitely fulfill
the dream of our late Prime Minister, Mrs. Indira Gandhi, i.e. Poverty.One
of the statements is really appropriate here, which is as:“Money, says the

31. proverb makes money. When you have got a little, it is often easy to get
more. Thegreat difficulty is to get that little.”Adams Smith.Today India is
facing major problem in reducing poverty. About 25 million people in India
are underbelow poverty line. With low per capita income, heavy population
pressure, prevalence of massiveunemployment and underemployment, low
rate of capital formation, misdistribution of wealth andassets , prevalence
of low technology and poor economics organization and instability of output
ofagriculture production and related sectors have made India one of the
poor countries of the world.Present Scenario of India:India falls under low
income class according to World Bank. It is second populated country in
theworld and around 70 % of its population lives in rural area. 60% of
people depend on agriculture, as aresult there is chronic underemployment
and per capita income is only $ 3262. This is not enough toprovide food to
more than one individual. The obvious result is abject poverty, low rate of
education,low sex ratio, exploitation. The major factor account for high
incidence of rural poverty is the lowasset base. According to Reserve Bank
of India, about 51 % of people house possess only 10% of thetotal asset of
India .This has resulted low production capacity both in agriculture (which
contributearound 22-25% of GDP) and Manufacturing sector. Rural people
have very low access toinstitutionalized credit (from commercial
bank).Poverty alleviation programmes and conceptualization of
Microfinance:There has been a continuous effort of planners of India in
addressing the poverty. They have come upwith development programmes
like Integrated Rural Development progamme (IRDP), National
RuralEmployment Programme (NREP), Rural Labour Employment
Guarantee Programme (RLEGP) etc. 34
But these progamme have not been able to create massive impact in
poverty alleviation. Theproduction oriented approach of planning without
altering the mode of production could not but resultof the gains of
development by owners of instrument of production. The mode of
production doesremain same as the owners of the instrument have low
access to credit which is the major factor ofproduction. Thus in Nineties

32. National bank for agriculture and rural development(NABARD)
launchespilot projects of Microfinance to bridge the gap between demand
and supply of funds in the lowerrungs of rural economy. Microfinance the
buzzing word of this decade was meant to cure the illness ofrural economy.
With this concept of Self Reliance, Self Sufficiency and Self Help gained
momentum.The Indian microfinance is dominated by Self Help Groups
(SHGs) and their linkage to Banks.Deprived of the basic banking facilities,
the rural and semi urban Indian masses are still relying oninformal
financing intermediaries like money lenders, family members, friends
etc.Distribution of Indebted Rural Households: Agency wiseCredit Agency
Percentage of Rural HouseholdsGovernment 6.1Cooperative Societies
21.6Commercial banks and RRBs 33.7Insurance 0.3Provident Fund
0.7Other Institutional Sources 1.6All Institutional Agencies 64.0Landlord
4.0Agricultural Moneylenders 7.0Professional Moneylenders 10.5Relatives
and Friends 5.5Others 9.0All Non Institutional Agencies 36.0All Agencies
100.0 Table 3.2Self Help Groups (SHGs)Self- help groups (SHGs) play
today a major role in poverty alleviation in rural India. A growingnumber of
poor people (mostly women) in various parts of India are members of
SHGs and activelyengage in savings and credit (S/C), as well as in other
activities (income generation, natural resourcesmanagement, literacy, child
care and nutrition, etc.). The S/C focus in the SHG is the most prominent
35
element and offers a chance to create some control over capital, albeit in
very small amounts. TheSHG system has proven to be very relevant and
effective in offering women the possibility to breakgradually away from
exploitation and isolation.How self-help groups workNABARD (1997)
defines SHGs as "small, economically homogenous affinity groups of rural
poor,voluntarily formed to save and mutually contribute to a common fund
to be lent to its members as perthe group members decision".Most SHGs
in India have 10 to 25 members, who can be either only men, or only
women, or onlyyouth, or a mix of these. As womens SHGs or sangha have
been promoted by a wide range ofgovernment and non- governmental

33. agencies, they now make up 90% of all SHGs.The rules and regulations of
SHGs vary according to the preferences of the members and
thosefacilitating their formation. A common characteristic of the groups is
that they meet regularly(typically once per week or once per fortnight) to
collect the savings from members, decide to whichmember to give a loan,
discuss joint activities (such as training, running of a communal business,
etc.),and to mitigate any conflicts that might arise. Most SHGs have an
elected chairperson, a deputy, atreasurer, and sometimes other office
holders.Most SHGs start without any external financial capital by saving
regular contributions by themembers. These contributions can be very
small (e.g. Rs.10 per week). After a period of consistentsavings (e.g. 6
months to one year) the SHGs start to give loans from savings in the form
of smallinternal loans for micro enterprise activities and consumption. Only
those SHGs that have utilized theirown funds well are assisted with
external funds through linkages with banks and other
financialintermediaries.Micro Finance Models 1. Micro Finance Institutions
(MFIs): MFIs are an extremely heterogeneous group comprising NBFCs,
societies, trusts and cooperatives. They are provided financial support from
external donors and apex institutions including the RashtriyaMahilaKosh
(RMK), SIDBI Foundation for micro-credit and NABARD and employ a
variety of ways for credit delivery. Since 2000, commercial banks including
Regional Rural Banks have been providing funds to MFIs for on lending to
poor clients. Though initially, only a handful of NGOs were “into” financial
intermediation using a variety of delivery methods, their numbers have
increased considerably today. While there is no published data on private
MFIs operating in the country, the number of MFIs is estimated to be
around 800. 36
Legal Forms of MFIs in India Types of MFIs Estimated Legal Acts under
which Registered Number* 1. Not for Profit MFIs 400 to 500 Societies
Registration Act, 1860 or similar Provincial Acts a.) NGO - MFIs Indian
Trust Act, 1882 b.) Non-profit Companies 10 Section 25 of the Companies
Act, 1956 2. Mutual Benefit MFIs 200 to 250 Mutually Aided Cooperative

34. Societies a.) Mutually Aided Cooperative Act enacted by State Government
Societies (MACS) and similarly set up institutions 3. For Profit MFIs 6
Indian Companies Act, 1956 a.) Non-Banking Financial Reserve Bank of
India Act, 1934 Companies (NBFCs) Total 700 – 800 Table 3.32. Bank
Partnership Model This model is an innovative way of financing MFIs. The
bank is the lender and the MFI acts as an agent for handling items of work
relating to credit monitoring, supervision and recovery. In other words, the
MFI acts as an agent and takes care of all relationships with the client,
from first contact to final repayment. The model has the potential to
significantly increase the amount of funding that MFIs can leverage on a
relatively small equity base. A sub - variation of this model is where the
MFI, as an NBFC, holds the individual loans on its books for a while before
securitizing them and selling them to the bank. Such refinancing through
securitization enables the MFI enlarged funding access. If the MFI fulfills
the “true sale” criteria, the exposure of the bank is treated as being to the
individual borrower and the prudential exposure norms do not then inhibit
such funding of MFIs by commercial banks through the securitization
structure.3. Banking Correspondents The proposal of “banking
correspondents” could take this model a step further extending it to
savings. It would allow MFIs to collect savings deposits from the poor on
behalf of the bank. It would use the ability of the MFI to get close to poor
clients while relying on the financial strength of the bank to safeguard the
deposits. This regulation evolved at a time when there were 37
genuine fears that fly-by-night agents purporting to act on behalf of banks
in which the people have confidence could mobilize savings of gullible
public and then vanish with them. It remains to be seen whether the
mechanics of such relationships can be worked out in a way that minimizes
the risk of misuse. 4. Service Company Model Under this model, the bank
forms its own MFI, perhaps as an NBFC, and then works hand in hand with
that MFI to extend loans and other services. On paper, the model is similar
to the partnership model: the MFI originates the loans and the bank books
them. But in fact, this model has two very different and interesting

35. operational features: The MFI uses the branch network of the bank as its
outlets to reach clients. This allows the client to be reached at lower cost
than in the case of a stand–alone MFI. In case of banks which have large
branch networks, it also allows rapid scale up. In the partnership model,
MFIs may contract with many banks in an arm‟ s length relationship. In the
service company model, the MFI works specifically for the bank and
develops an intensive operational cooperation between them to their
mutual advantage. The Partnership model uses both the financial and
infrastructure strength of the bank to create lower cost and faster growth.
The Service Company Model has the potential to take the burden of
overseeing microfinance operations off the management of the bank and
put it in the hands of MFI managers who are focused on microfinance to
introduce additional products, such as individual loans for SHG graduates,
remittances and so on without disrupting bank operations and provide a
more advantageous cost structure for microfinance.Bank Led ModelThe
bank led model was derived from the SHG-Bank linkage program of
NABARD. Through thisprogram, banks financed Self Help Groups (SHGs)
which had been promoted by NGOs andgovernment agencies.ICICI Bank
drew up aggressive plans to penetrate rural areas through its SHG
program. However,rather than spending time in developing rural
infrastructure of its own, in 2000, ICICI Bank announcedmerger of Bank of
Madura (BoM), which had significant presence in the rural areas of South
India,especially Tamil Nadu, with a customer base of 1.9 million and 87
branches. Bank of Maduras SHGdevelopment program was initiated in
1995. Through this program, it had formed, trained and initiatedsmall
groups of women to undertake financial activities like banking, saving and
lending. By 2000, ithad created around 1200 SHGs across Tamil Nadu and
provided credit to them. 38
Partnership ModelsA model of microfinance has emerged in recent years
in which a microfinance institution (MFI)borrows from banks and on-lends
to clients; few MFIs have been able to grow beyond a certain point.Under
this model, MFIs are unable to provide risk capital in large quantities, which

36. limits the advancesfrom banks. In addition, the risk is being entirely borne
by the MFI, which limits its risk-taking.This model aimed at synergizing the
comparative advantages and financial strength of the bank withsocial
intermediation, mobilization power and infrastructure of MFIs and NGOs.
Through this model,ICICI Bank could save on the initial costs of developing
rural infrastructure and micro creditdistribution channels and could take
advantage of the expertise of these institutions in rural areas.Initially, ICICI
Bank started off by lending to MFIs and NGOs in order to provide the
necessaryfinancial support to their activities. Later, ICICI Bank came up
with a plan where the NGO/MFIcontinued to promote their microfinance
schemes, while the bank met the financial requirements of
theborrowers.TYPES OF ORGANIZATIONThese organizations are
classified in the following categories to indicate the functional aspects
coveredby them within the micro finance framework. The aim, however, is
not to "typecast" an organization,as these have many other activities within
their scope:Microfinance providers in India can be classified under three
broad categories: formal, semiformal,and informal. Formal Sector The
formal sector comprises of the bankssuch as NABARD, SIDBI and other
regional rural banks (RRBs). They primarily provide credit for assistance in
agriculture and micro-enterprise development and primarily target the poor.
Their deposit at around Rs.350 billion and of that, around Rs.250 billion
has been given as advances. They charge an interest of 12-13.5% but if
we include the transaction costs (number of visits to banks, compulsory
savings and costs incurred for payments to animators/staff/local leaders
etc.) they come out to be as high as 21- 24%. Semi - formal Sector The
majority of institutional microfinance providers in India are semi-formal
organizations broadly referred to as MFIs. Registered under a variety of
legal acts, these organizations greatly differ in philosophy, size, and
capacity. There are over 500 non-government organizations 39
(NGOs) registered as societies, public trusts, or non-profit companies.
Organizations implementing micro-finance activities can be categorized
into three basic groups. I. Organizations which directly lend to specific

37. target groups and are carrying out all related activities like recovery,
monitoring, follow-up etc. II. Organizations who only promote and provide
linkages to SHGs and are not directly involved in micro lending operations.
III. Organizations which are dealing with SHGs and plan to start microfinance related activities. Informal Sector In addition to friends and family,
moneylenders, landlords, and traders constitute the informal sector. While
estimates of their importance vary significantly, it is undeniable that they
continue to play a significant role in the financial lives of the poor. These
are the organizations that provide support to implementing organizations.
The support may be in terms of resources or training for capacity building,
counseling, networking, etc. They operate at state/regional or national
level. They may or may not be directly involved in micro-finance activities
adopted by the associations/collectives to support implementing
Organizations.Grameen BankThe Grameen Model which was pioneered by
Prof MuhammedYunus of Grameen Bank is perhaps themost well-known,
admired and practiced model in the world. The model involves the
followingelements. Homogeneous affinity group of five Eight groups form a
Centre Centre meets every week Regular savings by all members Loan
proposals approved at Centre meeting Loan disbursed directly to
individuals All loans repaid in 50 installmentsThe Grameen model follows a
fairly regimented routine. It is very cost intensive as it involves
buildingcapacity of the groups and the customers passing a test before the
lending could start. The groupmembers tend to be selected or at least
strongly vetted by the bank. One of the reasons for the highcost is that staff
members can conduct only two meetings a day and thus are occupied for
only a few 40
hours, usually early morning or late in the evening. They were used
additionally for accounting work,but that can now be done more cost
effectively using computers. The model is also rather meetingintensive
which is fine as long as the members have no alternative use for their time
but can be aproblem as members go up the income ladder.The greatness
of the Grameen model is in the simplicity of design of products and

38. delivery. Theprocess of delivery is scalable and the model could be
replicated widely. The focus on the poorest,which is a value attribute of
Grameen, has also made the model a favourite among the
donorcommunity.However, the Grameen model works only under certain
assumptions. As all the loans are only forenterprise promotion, it assumes
that all the poor want to be self-employed. The repayment of loansstarts
the week after the loan is disbursed – the inherent assumption being that
the borrowers canservice their loan from the ex-ante income.SKS
Microfinance(CEO-VikramAkula)Many companies say they protect the
interests of their customers. Very few actually sit in dirt withthem, using
stones, flowers, sticks, and chalk powder to figure out if they will be able to
repay a $20loan at $1 a month. With this approach, this company has
created its own loyal gang of over 2 millioncustomers.Its borrowers include
agricultural laborers, mom-and-pop entrepreneurs, street vendors, home
basedartisans, and small scale producers, each living on less than $2 a
day. It works on a model that wouldallow micro-finance institutions to scale
up quickly so that they would never have to turn poor personaway.Its
model is based on 3 principles- 1. Adopt a profit-oriented approach in order
to access commercial capital- Starting with the pitch that there is a high
entrepreneurial spirit amongst the poor to raise the funds, SKS converted
itself to for-profit status as soon as it got break even and got philanthropist
Ravi Reddy to be a founding investor. Then it secured money from parties
such as Unitus, a Seattle based NGO that helps promote micro-finance;
SIDBI; and technology entrepreneur VinodKhosla. Later, it was able to
attract multimillion dollar lines of credit from Citibank, ABN Amro, and
others. 2. Standardize products, training, and other processes in order to
boost capacity- They collect standard repayments in round numbers of 25
or 30 rupees. Internally, they have factory style training models. They enroll
about 500 loan officers every month. They participate in theory classes on
Saturdays and practice what they have learned in the field during the week.
They 41

39. have shortened the training time for a loan officer to 2 months though the
average time taken by other industry players is 4-6 months. 3. Use
Technology to reduce costs and limit errors- It could not find the software
that suited its requirements, so it they built their own simple and user
friendly applications that a computer- illiterate loan officer with a 12th grade
education can easily understand. The system is also internet enabled.
Given that electricity is unreliable in many areas they have installed car
batteries or gas powered generators as back-ups in many areas.Scaling up
Customer LoyaltyInstead of asking illiterate villagers to describe their
seasonal pattern of cash flows, they encouragethem to use colored chalk
powder and flowers to map out the village on the ground and tell where
thepoorest people lived, what kind of financial products they needed, which
areas were lorded over bywhich loan sharks, etc. They set people‟ s tiny
weekly repayments as low as $1 per week and healthand whole life
insurance premiums to be $10 a year and 25 cents per week respectively.
They alsooffer interest free emergency loans. The salaries of loan officers
are not tied to repayment rates andthey journey on mopeds to borrowers‟
villages and schedule loan meetings as early as 7.00 A.M. Deepcustomer
loyalty ultimately results in a repayment rate of 99.5%.Leveraging the SKS
brandIts payoff comes from high volumes. They are growing at 200%
annually, adding 50 branches and1,60,000 new customers a month. They
are also using their deep distribution channels for selling soap,clothes,
consumer electronics and other packaged goods.Marketing of Microfinance
Products:- 1. Contract Farming and Credit Bundling Banks and financial
institutions have been partners in contract farming schemes, set up to
enhance credit. Basically, this is a doable model. Under such an
arrangement, crop loans can be extended under tie-up arrangements with
corporate for production of high quality produce with stable marketing
arrangements provided – and only, provided – the price setting mechanism
for the farmer is appropriate and fair. 2. Agri Service Centre – Rabo India
Rabo India Finance Pvt. Ltd. has established agri-service centres in rural
areas in cooperation with a number of agri-input and farm services
companies. The services provided are similar to those in contract farming,

40. but with additional flexibility and a wider range of products including
inventory finance. Besides providing storage facilities, each centre rents
out farm 42
machinery, provides agricultural inputs and information to farmers,
arranges credit, sells other services and provides a forum for farmers to
market their products. 3. Non Traditional Markets Similarly, Mother Dairy
Foods Processing, a wholly owned subsidiary of National Dairy
Development Board (NDDB) has established auction markets for
horticulture producers in Bangalore. The operations and maintenance of
the market is done by NDDB. The project, with an outlay of Rs.15 lakh,
covers 200 horticultural farmers associations with 50,000 grower members
for wholesale marketing. Their produce is planned with production and
supply assurance and provides both growers and buyers a common
platform to negotiate better rates. 4. ApniMandi Another innovation is that
of The Punjab Mandi Board, which has experimented with a „farmers‟
market‟ to provide small farmers located in proximity to urban areas,
direct access to consumers by elimination of middlemen. This experiment
known as "ApniMandi" belongs to both farmers and consumers, who
mutually help each other. Under this arrangement a sum of Rs.5.2 lakh is
spent for providing plastic crates to 1000 farmers. Each farmer gets 5
crates at a subsidized rate. At the mandi site, the Board provides basic
infrastructure facilities. At the farm level, extension services of different
agencies are pooled in. These include inputs subsidies, better quality
seeds and loans from Banks. ApniMandi scheme provides selfemployment to producers and has eliminated social inhibitions among
them regarding the retail sale of their produce.Commercial banksas
Microfinance VehiclesCommercial banks recently have stepped into the
realm of microfinance. They have taken tentative butvery important steps
toward distributing Microfinance loans to the poor. One advantage of
theseinstitutions is that they bring in the risks management practices that
they regularly use in theircommercial operations risk management
practices that they regularly use in their commercialoperations. The other

41. important aspect they bring in is the professional credit appraisal practices
thatare used in their normal operations. These important features
combined with a mission to provide thepoor entrepreneurs will enhance the
social lives and they can run their business effectively with properaccess to
credit. In some cases, successful microfinance NGOs have transformed
themselves into forprofit commercial banks (BancoSol of Bolivia is a prime
example of a microfinance NGO that hassuccessfully transformed itself into
a for-profit commercial bank). This transformation from a not-for-profit
institution into for-profit organization has increased the focus of these
organizations on financialself-sufficiency. This transformation has been
possible because commercial banks have entered thisarena bringing in key
concepts like self-sufficiency, proper credit appraisal and risk
managementpractices. But there are some issues that have to be dealt
with by the banks before embarking on theMicrofinance journey. 43
They are: 1. Banks Outreach 2. Clarity in objectivesBanks outreach is one
of the most crucial aspects that must be critically examined by them
beforeentering into microfinance sector. One reason for it is that most of
the commercial banks have little orno rural presence with rate exceptions
such as India, where rural banking was a priority and there is asignificant
presence of commercial banks in the rural areas. They have to decide
whether to start theirown branches in rural areas if they do not have any or
partner with other banks or other microfinanceinstitutions in order to get a
foothold in the rural finance sector. The other issue that has to be
resolvedis the clarity in the bank in dealing with its microfinance operations.
They have to decide whether itwill be completely independent operation or
it will be part of their existing rural banking framework.For example, ICICI
bank‟ s microfinance operation is a completely independent operation and
it doesnot have any link with its commercial banking operation. Once these
major issues are sorted outcommercial banks will have enough leverage to
approach the microfinance sector with confidence.MICROFINANCE
INSTITUTIONSMicrofinance institutions are perhaps one of the most
important vehicles to reach the rural poor. Theseinstitutions can act as very

42. important tool to provide the rural entrepreneurs with micro-loans, whichwill
help them to start their own businesses and sustain them. One advantage
that these institutionshave over other financial services delivery vehicles is
the focus. While NGOs have to straddle withvarious non-financial and
financial services activities and commercial bank with other
operations.MFIs can solely focus on providing the financial service to the
poor since the very objective of startingthis kind of institution is to provide
financial services in the rural areas. There are many examples ofMFIs that
has done some stellar work in this area such as ACCION International,
BancoSol andGrameen Bank. These institutions have helped many people
in enhancing their lives and achieving adecent social status in the societies
that they are living in. The key advantages that they have over theother
forms of microfinance are: Focus is solely on providing financial services. It
can provide whole gamut of services from loans to insurance.However, it
has also some advantages like sustainability of these institutions. Most of
the MFIsincluding Grameen bank are still donor supported organization
and many of them still depend onoutside funds for their survival. Only
some have like BancoSol have made successful transition fromdonor
supported financially self-sustained organization. 44
Apart from these there are several other important mechanisms through
while microfinance is providedlike mutual community groups, regional
woman group like Development of Women and Child inRural Area
(DWCRA) and other local organizations. However, they have not played a
significant rolein the microfinance movement till now and they can play a
major role in providing rural financialservices in the long run.ICICI Bank
launches new initiative in micro-finance
ICICI Bank has taken a stake of
under 20 per cent in Financial Information Network and Operations Private
Ltd (FINO), which was launched on Thursday, July 13, 2001.
FINO
would provide technological solutions as well as services to finance
providers to reach the underserved in the country. ICICI Bank is the lead
facilitator.
According to Mr. NachiketMor, Deputy Managing Director,
ICICI Bank, FINO is an independent entity. "We would reduce our stake in

43. the company when required," he said.
ICICI Bank expects to target 200
micro-finance institutions (MFIs) by March 2007, he said, speaking on the
sidelines of the press conference to launch FINO. At present, the bank has
tie- ups with 100 MFIs.
FINO is an initiative in the micro-finance sector. It
would target 300-400 million people who do not have access to basic
financial services, said Mr. Manish Khera, CEO, FINO. The company has
an authorized capital of Rs.50 crore. MFIs, NBFCs, RRBs, co-operative
banks, etc. would directly or indirectly tie up with FINO to use its services,
he said. FINO would charge Rs.25-30 per account every year.Core
banking productsFINO has partnered with IBM and i-flex to offer core
banking products. It would also provide creditbureau services, which
includes individual customer credit rating and analytics based on
transactionhistory. It also launched biometric cards for customers, which
would be a proof of identity and givecollateral to them. The card would also
offer multiple products including savings, loans, insurance,recurring
deposits, fixed deposits and remittances. The company would also build-up
customerdatabase, thus bringing them into mainstream banking."There
was a need for automated structured data system like FINO," said Mr. Mor.
"Essential pieces ofinfrastructure are missing in India. We lack credittracking mechanism; therefore there was a need foran intervention like
FINO."The company expects to reach 25 million customers in five years
and two million customers by theend of 2007. 45
FINO aims bringing scale to "micro" business leading to lowering of costs
for the local financialinstitutions (LFIs) and act as an internal technology
department for the LFIs, said Mr. Khera.The company is working on
providing technological solutions in insurance, especially the
healthinsurance sector to the under-privileged," he said. It is interacting
with Nabard, SIDBI and other banksto give shape to what FINO does, said
Mr. Khera.ICICI Banks thrust on micro-financeCHENNAI, MARCH 9. ICICI
Bank has entered into partnerships with various microfinanceinstitutions
(MFI) and non-Government organizations (NGOs) to scale up its micro
lending business.Addressing presspersons here, today, NachiketMor,

44. Executive Director, ICICI Bank, said, thepartnership model would provide
assured source of funding to NGOs and MFIs. The bank hadextended
advances to the tune of Rs.150 crores as on February 29, this year, under
this scheme, Mr.Mor said.The bank had acquired a network of self-help
groups (SHGs) developed by the erstwhile Bank ofMadura after its merger
with ICICI Bank. Since then the SHG programme had grown substantially
and10,175 groups had been promoted reaching out to 2.03 lakh women
spread across 2,398 villages, theExecutive Director said.One of the micro
finance institutions, `Microcredit Foundation of India, established by K.
M.Thiagarajan, former Chairman of Bank of Madura in 2002, had initiated a
programme for microcreditthrough self-help groups.ICICI Bank has entered
into a memorandum of understanding with Microcredit Foundation
tooutsource SHG development, maintenance of groups, credit linkage and
recovery of loans.Financial Institutions and banksMicrofinance has been
attractive to the lending agencies because of demonstrated sustainability
and oflow costs of operation. Institutions like SIDBI and NABARD are hardnosed bankers and would notwork with the idea if they did not see a long
term engagement – which only comes out of sustainability(that is economic
attractiveness).On the supply side, it is also true that it has all the trappings
of a business enterprise, its output istangible and it is easily understood by
the mainstream. This also seems to sound nice to thegovernment, which in
the post liberalization era is trying to explain the logic of every rupee
spent.That is the reason why microfinance has attracted mainstream
institutions like no other developmentalproject. 46
Perhaps the most important factor that got banks involved is what one
might call the policy push.Giventhat most of our banks are in the public
sector, public policy does have some influence on what theywill or will not
do. In this case, policy was followed by diligent, if meandering, promotional
work byNABARD. The policy change about a decade ago by RBI to allow
banks to lend to SHGs was initiallyfollowed by a seven-page memo by
NABARD to all bank chairmen, and later by sensitization andtraining
programmes for bank staff across the country. Several hundred such