Chapter - III

MICROFINANCE
3.0

Introduction
Microfinance is the provision of loans and other financial services to the

poor. The microfinance has evolved due to the efforts of committed individuals and
financial agencies to promote self-employment and contribute to poverty alleviation and
provision of social security. India has been able to develop its own model of
microfinance organizations in the form of savings and credit groups known as the Self
Help Group (SHGs), which are bank-linked. These SHGs are mainly formed and
managed by women and this has become an instrument, which has led to women's
empowerment and social change. Most of the microfinance institutions in India attempt
to go beyond savings and credit groups to provide microfinance services in the form of
savings and insurance.
Microfinance provides financial services to those whose income is small
and unstable. These people are in need of credit facilities for several reasons (i) their
needs are small and arise suddenly (2) the institutional providers of finance namely the
banks demand collateral security which they cannot provide (3) most of the time, they are
in needs of funds to meet their consumption demands, for example, to meet expenses
related to education, illness, funerals, weddings for which it is difficult to obtain
institution finance (4) for purpose of investment in income generating activities.1
Concept of Self Help Group (SHGs) is the most exciting discovery in the
context of microfinance. The Indian microfinance scene is dominated by SHGs and their

linkage with Banks. Owing to the importance of microfinance and self help groups in the
eradication of poverty and in the empowerment of women.

3.1

The Concept of Microfinance

Microfinance is a concept that is helping the poor to avail of an create

opportunities for economic growth. In India, microfinance has fulled the efforts of rural
development, women empowerment and wealth generation by providing small scale
savings, credit, insurance and other financial services to poor and low income
households. Microfinance thus serves as a means to empower the poor and provides a
valuable tool to help the economic development process.
The concept of microfinancing and self-employment activities in rural areas
has developed considerably over the last two decades. It is working neither on
domain/charity nor on subsidy. It is basically rotational investment done to motivate the
poor to empower themselves and practice the dictum 'Save for the future and use those
resource during the time of need.' Theoretically, microfinance also known as microcredit
or microlending means making provision for smaller working capital loans to the selfemployed or self-employment seeking poor.
Microcredit has defined as the extension of small loans to be given in
multiple doses based on the absorption capacity of the needy beneficiaries, who are too
poor to qualify for formal bank loans, as they have no assets to offer as collateral security
against loans.2
'Microcredit' may be defined as the credit and repeated credit provided in
small measures to suit the recipient's requirements, with a comfortable pace of repayment
and at an appropriate rate of interest.3 Microcredit has been defined by the microcredit

summit held in Washington D.C. in February 1997 as "programmes that provide credit
for self employment, other financial and business services to very poor persons."
Microfinance can be interpreted in a broader context both as microcredit and
microsavings, even though microcredit and microfinance have come to used
interchangeably. However, when the term 'microfinance' is used it implies some other
services accompanying credit viz. facilities for saving and availability of services for
insurance of the assets acquired with microcredit. Microfinance has come to be referred
to as a small scale financial services and technical assistance provided to rural people
who operate small or micro-enterprises, provide services, work for wages or commission
and other individuals and group working at local levels.4
NABARD has defined microfinance as "provision of thrift, credit and
other financial services and products of very small amounts to the poor in rural, semiurban and urban provided to customers to meet their financial needs; with only
qualification that (1) transactions value is small and (2) customers are poor."5
In essence, therefore, microfinance could be referred to as an institutional
mechanism of providing credit support in small amount and usually linked with small
groups along with other complementary support such as training and other related
services to the people with poor resources and skills for enabling them to take up
economic activities. In the November 1995 Microcredit Summit, U.S. first lady Hillary
Clinton wrote; "Microenterprise is the heart of development because microenterprise
programmes work - they lift women and families out of poverty. It is called micro but its
impact on people is macro, we have seen that it takes just a few dollars, often as little it
takes as dollar 10, to help a woman gain self employment, lift her and her family out of
poverty. It is not a hand out; it is a helping hand."6

Let us begin by understanding some of the distinct characteristics of

microfinance. The term 'microfinance' is often confused with the related term
'microcredit', so much so, that the two are often treated as synonymous and used
interchangeably. While there are certain similarities between the two terms, there are also
certain differences, which require to be classified at the very start to avoid confusion of
time.
The term microcredit refers to a small size loan, to be repaid within a short
period of time, used mostly low income households and micro entrepreneurs for the
purpose of income generation and enterprise development. The mobilization of such
credit is restricted to external sources such as banks and moneylenders.
Microfinance on the hand, provides a greater menu of options whereby the
small loan can be garnered not just from the external sources but also through selfmobilization, by way of saving and sale of assets. Also, in case of microcredit, due to the
definite obligation to repay the loan, a physical collateral may sometimes be needed.
However, the biggest flexibility in the case of microfinance is the lack of any physical
collateral, even in case of loan from the bank. The options available with microfinance,
therefore, are much broader and flexible than the ones available with microcredit.
Table-1 brings out the distinct variations between microcredit and
microfinance with respect to their loan characteristics.

Table 3.1 : Difference between microfinance and microcredit

S.No. Characteristics of loan

Microfinance

Microcredit

1.

Size of loan

Small

Small

2.

Repayment of period

Short

Short

3.

Sources of mobilization Both external and External

internal

4.

Repayment

Obligation if source Definite obligation to

external
repay

5.

Collateral

Not needed

6.

Purpose of use

Flexible,
Mostly fixed, limited
consumption income scope for deviation
generation

7.

Scope of operation

Mostly group loans Usually

individual
trickling down to loans, though group
individuals
loans might be given

May or may not be

needed

Microfinance therefore, refers to the provision of small loans without

collateral security, to the poor and low-income households, whose access to the
commercial banks is limited. The institution that provide such services are microfinance
institutions.7 Microfinance is being viewed as a very powerful tool for uplifting the
economic conditions of the asset less poor through group approach that ensures active
participation and involvement of the beneficiaries in effective implementation of the
programme. In India, microfinance programme has a crucial role to play in uplifting more
than 30 crore people living below poverty line (NABARD, 2005). Poverty means denial
of access to the basic necessities i.e. food, shelter, health and education of human
existence. Poverty is characterized by lower standard of living. As per the poverty line
defined by the HRD i.e. earning of a person below $ 1 a day, the percentage of BPL

population in India comes around 34.9 percent and if it is extended to $ 2 a day, the
percentage of BPL in India comes to 79.9 percent (Human Development Report, 2004).
Microfinance has emerged as an needful programme to cater to the needs of
the most underprivileged people i.e. tribal, dalits and women. The major concerns today
is ever increasing poverty and there is urgent need of empowering enabling the most
neglected sections of the society through organized support to all poverty alleviation
programmes. Considering the paucity of funds with poor people, the need of the hour is
to provide adequate credit to the needy people to enable them to undertake
entrepreneurial activity, however, small with the help of NGOs and GOs. Microfinance is
expected to play a pivotal role in poverty eradication and employment generation.
Microfinancing is a new method to meet the credit requirement in rural
areas. Since the bank borrowing requires collateral and the deprived class does not have
any type of such collateral, the success of Bangladesh Grameen Banks attracted the
attention of Indian policy makers towards the microfinance and microcredit, which are
the new entrants in realm of present rural financing. Microcredit is based on 20 self help
groups which will be technically supported by NGOs and sponsor bank. In other words,
self help group is a small, economically homogeneous and cohesive group of rural poor
voluntarily coming together to save small amount regularly, agree mutually to contribute
to a common fund and have a collective decision making for providing collateral free
loans on terms and conditions decided by the group. The group will make a project,
which will be supervised and assisted by banks and NGOs. After evaluating the viability
of the groups, the banks further provide sufficient community participation in the
development process.8

3.2

Trickle Up Approach of Microfinance

Most of the developed nations of the world started their growth path from
the development of the agriculture sector. For a long time, it was felt that the growth of
developing countries is dependent on the growth path developed countries, i.e. through
the trickle down strategy. This is the economy theory which advocates letting ultimately
trickle down to lower income individuals and the rest of the economy. In other words,
this is a theory of economic development that claims higher standards of living for the
poor will develop gradually with economic growth. The same applied on the macrolevel
in the individual countries, which started believing on the concept of laissez-faire policy.
However, there were countries like India and Israel; which did not believe in the free
market economy and continued with their public expenditure programmes. Along with it,
attention was made to make a self-sustained economy at least from the view point of the
agriculture sector. However, it took a long time to realize that if the gains of development
have to go to the poor, then some different strategy has to be adopted.
When the Grameen Bank of Bangladesh started its foray into microfinance
in the middle of 1970s, it was realized that it can definitely be a good way for the benefit
of the poor then it was the realized that it is not the trickle down approach but it is the
trickle up approach which should be adopted to upgrade the living of the poor. Trickle up
would therefore mean that the benefit should be directly provided to the poor so that they
can invest it accordingly for their own development and would try to improve their living
standard. The countries were providing direct finance earlier also, but since the late 1970s
it was realized that if one wants benefits to be passed to the poor ensuring its true use and
accountability, then microfinance is the best alternative.
In the development paradigm, microfinance has evolved as a credit based
policy and programmes to cater to the so far neglected target groups (women, poor, rural,

deprived etc.). Its evolution is based on the concern of all developing countries for
empowerment of the poor and alleviation of poverty. Development organization and
policy makers have included access to credit for poor people as a major aspect of many
povery alleviation programmes. Microfinance programmes have in the recent past
become one of the more promising ways to use scare development funds to achieve the
objectives of the poverty alleviation. The basic idea of microfinance is simple; if poor
people are provided access to financial services including credit, they may very well be
able to start or expand a microenterprise that will allow them to break out of poverty.9

3.3

The Important Features of Microfinance are

1.

Microfinance is a tool for the empowerment of poor women;

2.

Loans under microfinance programmes are very small;

3.

Microfinance targets the poor rural and urban households;

4.

Credit under microfinance follows thrift i.e. mobilize savings and lend the same;

5.

Low transaction cost due to group lendings;

6.

Transparencies in operation;

7.

Short repayment period;

8.

Simple procedure for reviewing, processing and approving loan applications and
delivery credit;

9.

Chances of misutilization are rare and there is assured repayment;

10.

Peer pressure act as the collateral security required for loans;

11.

Need based loan disbursement;

12.

Prompt repayment; and

13.

There is no ceiling from the RBI in respect of minimum and maximum amounts.
The following are the main features of microfinance services provided by

Rashtriya Mahila Kosh (RMK) (i) It is a tool for the empowerment of the poorest. (ii)
The higher the income and better the asset position of the borrower, the lower the
incremental benefit from further equal doses of micro-credit is likely to be. (iii) Delivery
is normally through Self Help Groups (SHGs). (iv) It is essentially for providing selfemployment. The opportunities of wage employment are limited in developing countries
- microfinance increases the productivity of self-employment in the informal sector of the
economy - generally used for (a) direct income generation (b) rearrangement of assets
and liabilities for the households to participate in future opportunities and (c)
consumption smoothing.11
Microfinance is not a financing system but a tool for social change,
especially for women. It does not spring from market forces along - it is potentially
welfare enchaining there is public interest in promoting the growth of microfinance - this
is what makes it acceptable as valid goal for public policy.

3.4

Profile of Microfinance in India

The profile of microfinance in India at present can be traced out in terms of

poverty. It is estimated that 350 million people live below poverty line. The following are
some components of microfinance :(a)

This translates to approximately 75 million households.

(b)

Annual credit demand by the poor in the country is estimated to be about Rs.
60,000 crores.

(c)

A cumulative disbursement under microfinance programmes is only about Rs.

5000 crores.

(d)

Total outstanding of all microfinance initiative in India estimated to be Rs. 1600

crores.

(e)

Only about 5% of rural poor have access to microfinance.

(f)

Though a cumulative of about 20 million families have accepted accessed.

(g)

While 10% lending to weaker sections is required for commercial banks; they
neither have the network for lending and supervision on a larger scale or
confidence to offer term loan to big microfinance institutions.

(h)

The non poor comprise of 29% of the outreach.

3.5

Need for Microfinance

Microfinance aims at assisting communities of the economically excluded

to achieve greater levels of asset creation and income security at the household and
community level. Access to financial services and the subsequent transfer of financial
resources to poor women enable them to become economic agents of change. Women
become economically self-reliant, contribute directly to the well being of their families,
play a more active role in decision making and are able to confront systematic gender
inequalities. Access to credit has been given considered a major poverty alleviation
strategy in India. Micro-credit has given women in India an opportunity to become agents
of change. Poor women, who are in the forefront micro-credit movement in the country
use small loans to jump start a long chain of economic activity.

Microfinance is accessing financial services in an informally formal route,

in a flexible, responsive and sensitive manner which otherwise would not have been
possible for the formal system for providing such services because of factors like high
transaction cost emanating from the low scale of operation, high turnover of clients;
frequency of transaction etc. Microfinance and self help group must be evolved to see
that SHGs do not charge high rates of interest from their clients and improve access to
those who cannot sign by their use through thumb impression.
The current literature on microfinance is also dominated by the positive
linkages between microfinance and achievement of millennium development goals
(MDGs). Micro-credit Summit Campaign's 2005 report argues that the campaign offers
much needed hope for achieving the millennium development goals especially relating to
poverty reduction. IFAD along with food and agriculture organization (FAO) and the
world food programme (WFP) declared that it will be possible to achieve the eight MDGs
by the establishing deadline of 2015 "if the developing and industrialized countries take
action immediately by implementing plans and projects, in which micro-credit could play
a major role."11\
Credit is vital to the poor for overcoming the inevitable and common
imbalance between income and expenditure. Credit is also crucial to the poor for income
generating activities, like investing in their marginal farms or other small scale selfemployment ventures. Their access to formal banking channels, however, is limited due
to their low resource bases as well as due to the nature of formal credit institutions. The
popularity of the microfinance, self help groups stems from widespread recognition that
formal banking channels are largely ineffective in catering to the credit needs of the poor.

Tiny savings and loans are generally an unattractive business proposition

for formal banking institutions. In addition to disincentives faced by the banks, there are
also problem faced by the poor in accessing loans from formal banking institutions. For
example, to minimize risks, banks demand, collateral security that the average micro
borrower does not possess. Banks also insist on complicated procedures that are too time
consuming and often too complicated for the poor and illiterate. Even in the
implementation of direct lending programmes formal institutions find it difficult to
overcome the problem of targeting. The experience is that the rich and powerful typically
manage to corner the scare loanable funds. Thus formal banking channels remain largely
inaccessible to the poor in India. As a result, the poor continue to be dependent on
informal sector lending, paying exorbitant rates or underselling the product and their
labour power to the creditor. It was in response to these limitations in formal banking
channels that micro credit mechanism were innovated.
A quite from the former U.N. Secretary General Kofi Annan's video
message on the launch of the international year of micro credit on 18th November 2004
also shows the significance of microfinance. "Microfinance has proved its value, in many
countries, as a weapon against poverty and hunger. It really can change people's lives for
the better - especially the lives of those who need it most . Let us be clear.
Microfinance is not charity. It is a way to extend the same rights and services to lowincome households that are available to everyone else. It is recognition that poor people
are the solution, not the problem. It is a way to build on their energy and vision. It is a
way to grow productive enterprise and so allow communities to prosper."12

3.6

Comparison of Microfinance and Financial Banking

Figure outlines the different features between for banking channels and
micro finance channels. In contract to formal banking, micro-credit is characterized by
small size, shorter loan duration, emphasis on thrift and the absence of collateral security
and informal procedures. In absence of collateral security and formal documents, there
can be little legal, however, has proven even more effective than loan repayment
mechanism in the formal banking system. While the banking system is a purely
commercial organization, the lower tiers in the micro finance system are social
organizations and motivated by non-economic objectives.

Comparison of Micro Finance and Formal Banking.

Characteristics

Micro-finance

Formal Banking

Size of loan

Small/tint size of
credit

Medium/large credit

Duration of loan

Short duration

Medium/large
duration

Thrift

Emphasis on thrift as
well as loan

Focus on loan only

Enforcement of
repayment

Group formation and

informal methods

Formal procedures

Peer pressure and

weekly repayment

Collateral and legal

pressure for
repayment

Nature of
organization

Social organization
form

Commercial
organization form

Motivation

Self-help motivated

Profit motivated

Outreach

Access to poor
without collateral (all

Access limited

members)

3.7

Evolution of Micro Finance

The idea of microfinance somewhat strictly rolls around the philosophy of

Muhammad Yunus of Bangladesh (Nobel laureate) who initiated organization poorest of

the poor into self-help groups namely Bangladesh Grameen Bank (BGB) in the year
1976, and make them realize the basic "theory of survival". It began in 1976, with
lending of $ 27 to 42 poor people in a village next to the university campus where he was
teaching economics. He had no intention of making a wave he was planning to create a
bank for the poor. He had a modest goal. He was trying to free 42 people from the
clutches of moneylenders by giving them the money, owed to the moneylenders, in order
to repay them and become free from exploitation,
He was teaching in the Chittagone University, while a famine raged in
Bangladesh in 1974. It was uncomfortable to teach elegant theories of economics when
people were dying of hunger. He felt totally irrelevant. He tried to make himself in some
way relevant by going out to the poor people living in the village next the university
campus. Initially he looked for any little thing that he could not do to make the life of a
poor individual slightly tolerable. One thing led to another. He kept seeing how people
suffered because they could not find tinny amounts of money to carry on with their
livelihood activities. To solve this problem, they went to moneylenders. Moneylenders
turned them in to slave labour with an believable loan conditions. He wanted to see how
many people there were in the village in this situation. He made a list. The list contained
42 names, the total amount they needed was $27. It was shock to the economic profession
who taught his students about the national five-year plan and the rational for investing

billions of dollars to overcome poverty. The professor did not know that people go
through misery because they did not have access to a few pennies. Let alone a whole
dollar. Even if the government invests those billions of dollars in big projects, this need
of poor will still not be addressed.
He tried to address this problem by way of a emotional response; he gave
the money from his pocket. He did not know that it would create emotional encounter
response from the people who got the money. They thought it was nothing less than a
miracle. He thought he could make so many people happy with a small amount of money,
why not do more of the same. He decided to link the poor people in the village with the
bank located in the campus, but the bank refused to get involved. They argued that the
poor are not creditworthy. He pleaded with them to give him a chance to try. They
refused. Ultimately when he offered to become the guarantor for these loans, they
reluctantly agreed. He started giving loans to poor people in Jobra and was pleasantly
surprised to see that it was working perfectly. He continued to expand the programme.
Several stages later, they converted the project in to a formal bank, named Grameen Bank
in 1983.
Gradually a new word, 'microcredit' was coined for these kinds of
collateral-free tiny loans for income generating activities of the poor. The Grameen idea
spread all over the world. Independent studies of micro-credit programmes show that
providing easy and affordable access to credit and other financial services to poor
families can have a host of positive impact on their livelihoods. A large number of impact
studies done on the Grameen bank have shown a significant impact on the lives of its
members across the wide range of economic and social indicators, including moving out
of poverty, improved nutrition, better housing and sanitation, lower birth rate, lower child

mortality, better access to education for the children, greater empowerment of women
and increased participation of women in social and political activities.13
However, the world wide awareness and importance of microfinance for the
upliftment of the poor has been growing over the years as different countries are
attempting to device ways and means to enhance the access of the poor to credit facilities.
As a result, an intense debate has erupted among the planners, bankers and officials of the
government and non-government organization as to how financial services can be
provided to the poor in an effective, efficient and sustainable manner. Finally the attempt
and the idea has been praised world wide and the interest reached a new peak with a
micro-credit summit held in February 1997 in Washington which was considered the first
step of a decade-long campaign that seeks to ensure delivery of credit for selfemployment by 2005 to hundred million of the world's poorest families especially
women of those families.
It was in such as environment that microfinance emerged as an innovation
the world over. It was evolving into an effective system for provision of financial
services to the poor households, more especially micro-enterprises. Internationally
several variants of microfinance technology have evolved in the last two decades as also
a wide range of institutions.

3.8

Participants in the Microfinance System

1)

National Bank for Agricultural and Rural Development (NABARD)

NABARD is an apex institution, accredited with all matters concerning

policy, planning and operation in the field of credit for agriculture and other economic
activities in rural area in India. NABARD was established in 1982 as a Development
Bank, in terms of the preamble of the Act, "for providing and regulating credit and other

facilities for the promotion and development of agriculture, small scale industries, cottage
and village industries, handicrafts and other rural crafts and other allied economic
activities in rural areas with a view of promoting integrated rural development and
securing prosperity of rural areas and for matters connected therewith or incidental
thereto." The corporate mission set by NABARD for making available microfinance
services to the very poor envisages coverage of the one-third of the rural poor through
one millions SHGs by the year 2006-07. The propose targets are given below in the
following table.
Table 3.2 : Target of SHG and Bank
Year

No. of new
Cumulative
SHG to be
No. of SHGs
linked during to be linked at
the year
the end of the
year

Bank loan
requirement
during the
year (Rs. in
million)

Cumulative
bank credit
involved at the
end of the
year (Rs. in
million)

2002-03

1,25,000

5,85,000

7,909

18,172

2003-04

1,10,000

6,95,000

14,172

32,884

2004-05

1,05,000

8,00,000

28,184

61,068

2005-06

1,00,000

9,00,000

41,256

1,02,234

2006-07

1,00,000

10,00,000

49,588

1,51,912

(Source : NABARD)

In November 1998, a high-powered task force on supportive policy and

regulatory framework for microfinance (henceforth referred to as the Task Force) was set
up by NABARD at the instance of RBI. The objective of the task force were among
others, to come up with suggestions for a regulatory framework that brings the operations

of the microfinance institutions into the mainstream, to access the possible role of selfregulatory organization and to explore the need for a separate legal framework for
microfinance.
(ii)

Reserve Bank of India (RBI)

The earliest reference to micro credit in a formal statement of monetary and

credit policy of RBI was in former RBI President Dr. Bimal Jalan's monetary and credit
policy statement of April 1999. The policy attached importance to the work of NABARD
and public sector banks in the area of micro-credit. The banks were urged to make all out
efforts for provision of microcredit, especially forging linkages with SHGs, either at their
own initiative or by enlisting support of Non Government Organization (NGOs). The
microcredit extended by the banks is reckoned as part of their priority sector lending, and
they are free to device appreciation loan and saving products in this regard.
In 1994, the RBI constituted a working group on SHGs. On the
recommendation of SHGs would be reckoned as part of their lending to weaker sections
and such lending should be reviewed by banks and also at the State Level Banker's
Committee (SLBC) level, at regular interval. Banks were also advised that SHGs,
registered or unregistered, which engaged in promoting the saving among their members,
would be eligible to open savings bank accounts with banks irrespective of their
availment of credit facilities from banks.
(iii)

Self Help Groups (SHGs) :

The origin of SHGs is from the brainchild of Grameen Bank of Bangladesh,

which was founded by Mohammed Yunus, SHG was started and formed in 1975. The
establishment of SHGs can be traced to the existence of one or more problem area around

which the consciousness of rural poor is built and the process of group formation
initiated. SHG are considered a new lease of life for the women in villages for their social
and economic empowerment. SHG is a suitable means for the empowerment of women.
Since SHGs have been able to mobilize savings from persons or groups who were not
normally expected to have any 'saving' and also to recycle effectively the pooled
resources amongst the members, their activities have attracted attention as a supportive
mechanism for meeting the credit-needs of the poor (NABARD 2004). The main
characteristics of SHG are as follows:a)

The ideal size of an SHG is 10 to 12 members (In a bigger group, numbers cannot
actively participate).

b)

The group need not be registered.

c)

From one family, only one member (More families can join SHGs this way).

d)

The group consist of either only men or of only women (Mixed groups are
generally not preferred).

e)

Women's groups are generally found to perform better.

f)

Members have the same social and financial background (Members interact more
freely this way).

g)

Compulsory attendance (Full attendance for larger participation).

Function of SHGs :
1)

The amount may be small, but savings have to be a regular and continuous habit
with all the members. 'Savings first - credit later' should be the motto of every
group member.

2)

The savings to be used as loans to members. The purpose, amount, rate of interest
etc. to be decided by the group itself. Enabling SHG members to attain loans from
banks, and repaying the same.

3)

Every meeting, the group will discuss and try to find solution to the problem faced
by the members of the group.

(iv)

Micro-finance Institutions (MFIs) :

A range of institutions in public sector as well as private sector offers the

microfinance services in India. Based on asset sizes, MFIs can be divided into following
categories:1)

5-6 Institutions which have attracted commercial capital and scaled up

dramatically when last five years. The MFIs which include SKS, SHARE and
Grameen style program but 2000, converted into for-profit, regulated entities
mostly Non-Banking Finance Companies (NBFCs).

2)

Around 10-15 institutions with high growth rate, including both news recently
form for-profit MFIs. Some of MFIs are Grameen Koota, Bandhan and ESAF.

3)

The bulk of India's 100 MFIs are NGOs struggling to achieve significant growth.
Most continues to offer multiple developmental activities in addition to
microfinance and have difficulty accessing growth trends.
Private MFIs in India, barring a few exceptions, are still fledging efforts

and are therefore unregulated. They secure microfinance clients with varying quality and
using different operating models. Regulatory framework should be considered only after

the sustainability of MFIs model as a banking enterprise for the poor is clearly
established.
(v)

Non Government Organizations (NGOs) :

The Non Government Organizations involved in promoting SHGs and

linking them with the Formal Financial Agencies (FFAs) perform the following functions
: Organising the poor people into groups.
Training and helping them in the organizational, managerial and financial matters.
Helping them across micro credit and linkage with formal financial agencies.
Channelizing the group effort for various developmental activities.
Helping them in availing opportunities, widening the options available for
economic development.
Helping them in sustaining the group effort independently even after withdrawal
of the NGO.15

3.9

Models of Micro Finance Practices

The following are the variety of delivery models of microfinance in India.

a)

The SHG-Bank Linkage Model :The predominant model in the India microfinance context continues to be

the SHG linkage model that accounts for nearly 20 million clients. It started as an Action
Research Project in 1989. Under this model, self help promotion institution usually a

NGO, helps groups of 15-20 individuals through an incubation period after which time
they are linked to banks. The SHG had proved their efficacy overtime but they suffer
from a meager resource base which handicapped their capacity to expand the economic
activities of their members. The factors received by the SHG members were the lack of
information, time-consuming and expensive procedures for obtaining bank loans, rigid
lending policies of the banks in respect of unit costs, unit sizes and group guarantee for
loans. There are three linking model in the country.
Model - I : SHG formed and financed by banks :- In this model, the banks play dual
role of promotion of SHGs and also provider of credit to SHGs. Up to March 2005, 21%
of SHGs financed were from this category.
Model - II : SHGs formed by formal agencies other than banks (NGOs and other)
but directly financed by banks :- In this model, the NGOs and other agencies have
played the role of facilitator. Up to March 2005, 72% of SHGs financed were from this
category.
Model - III : SHGs financed by banks using NGOs and other agencies as financial
intermediaries :- In this model, the NGOs and other agencies play the role of financial
intermediation. Up to March 2005, only 7% SHGs financed were from this category. This
in 2006-07, the country witnesses a marked proliferation of SHGs to the extent of
24,76,492. In no less discouraging terms the bank loans also amounted to Rs. 13,511.86
crores as indicated in the table 3.3.

Table 3.3 : Progress of SHG bank linkage in India

Year

New SHGs financed by Banks

During
the year
No.

Bank loan (Rs. crores)

Growth Cumulative
(%)
No.

During
the year
Amount

Growth Cumulative
(%)
Amount

1992-99

32,995

--

32,995

57

--

57

1999-00

81,780

148

1,14,775

136

138

193

2000-01

1,49,050

82

2,63,825

288

112

481

2001-02

1,97,653

33

4,61,478

545

89

1026

2002-03

2,55,882

29

7,17,360

1022.34

87

2048.68

2003-04

3,61,731

41

10,79,091

1855.33

71

3904.21

2004-05

5,39,365

41

16,18,456

2994.25

62

6898.46

2005-06

6,20,109

15

22,38,565

4499.09

50

11397.55

2006-07

2,37,927

--

24,76,492

2114.31

--

13511.86

(Source : NABARD - 2007)

Table 3.4 : Agency-wise number of SHG financed

Agency

During 2004-05
SHGs
No.

Cumulative up to 31st March 2005

Bank loan
%

No.

SHGs
No.

Bank loan
%

No.

CBs

3,05,051

57

19,042

64

8,43,473

52

41,59,019

60

RRBs

1,57,848

29

8,213

27

5,63,846

35

20,995,47

30

76,466

14

2,687

2,11,137

13

6,39,894

10

5,39,365

100

29,942

100

16,18,456

100

68,94,860

100

COOPs
Total

(Source : NABARD - 2007)

b)

Grameen Model :Potential clients are asked by the MFO to organize themselves into 'groups'

of five members which are in turn organized into centers of around five to seven such
groups. The loans for productive purposes are provided by the MFO directly to the
members of small groups on the strength of group insurance. Grameen model is being
followed by India by Association for Sarva Seva Farms (ASSEFA), Activities for Social
Alternatives (ASA) and other financial and technical services limited.
c)

Cooperative Model :This has been initiated by Cooperative Development Forum, Hyderabad

which has relied upon a 'credit union' involving the saving first strategy. It has built up a
network of Women Thrift Groups (WTGs) and Men Thrift Groups (MTGs). They are
registered under Mutually Aided Cooperated Society Act (MACs) and mobilize savings
resources from the members and access outside/supplementary resources from the
individual system.
d)

Partnership Model :The partnership model pioneered by ICICI Bank attempted to address the

following key gaps :-

 To separate the risk of the MFI from the risk inherent in the microfinance
portfolio.
To provide a mechanism for banks to incentivize partner. MFIs continually,
especially in a scenario when the borrower entered into a contact directly with the
bank and role of the MFI was closer to that of an agent.
To deal with the inability of MFIs to provide risk capital in large amounts, this
limits the advances from banks, despite a greater ability of the later to provide
implicit capital.
In this model, the MFI collect a service charge from the borrowers to cover
its transaction costs and margins. The lower the defaults, the better the earnings of the
MFI as it will not incur any penalty charges vis-a-vis the guarantee it.

3.10 Region wise Penetration of SHGs

Andhra Pradesh is the leading state of India in the size of the SHG
movement, measuring more than three standard deviation above the mean, i.e. 279
households participating in SHGs for every 1000 households. Orissa, Pandicherry, Tamil
Nadu and Karnataka formed the second leading group, with more than one standard
deviation above the mean. Himachal Pradesh, Kerala, Assam, Rajasthan, West Bengal
and Maharashtra formed an intermedia group with ratios within standard deviation of the
mean with 94, 85, 82, 65, 51 and 56. The other states had one unit of standard deviation
below the mean. In Uttaranchal and Jharkhand, there were less than 32 households
participating in SHGs for every 1000.

In Jammu and Kashmir, Haryana, Punjab and Arunachal Pradesh, there

were less than ten households participating in SHGs for every 1000 of the total
households.

3.11 Rectifying Regional Skew

The SHG-Bank Linkage Programme (SBLP) expanded by 37 percent in 13
priority states which account for 67 percent of the rural poor. These states were identified
by NABARD in 2005 for special efforts and location-specific strategies. Growth was
particularly rapid in Maharashtra (72 percent). As a result, the western region
(Maharashtra and Gujrat) experienced the fastest growth (65%) of all the groups, and its
share in the total number of groups linked is now only 5 percent points behind its share of
the total number of poor, the region which have the most catching up to do are the centers
(Chhattisgarh - 33 percent, Madhya Pradesh - 24 percent, Uttar Pradesh - 23 percent) and
eastern (Bihar - 57 percent, Jharkhand - 21 percent, Orissa - 30 percent, West Bengal - 33
percent) regions, whose share of groups lag behind their share the poor by 21 and 11
percentage point respectively. Growth in the east region was 33 percent about the same as
overall national growth of 31 percent, and well below the previous year's growth of 48
percent, in the central region was only 24 percent. Despite relatively rapid growth in
priority states, the programme continues to remain heavily skewed in favour of south,
while the share of the south in linked groups came down marginally during the year.16
Asmitha :- Provides rural women access to financial resources in the form of collateral
free small loans for income generation and livelihood promotion. This enables them to
set-off small start up business as a result, low-income women become economic agents
intrinsic to development rather than simply homeworkers.

Bandhan :- Bandhan was set up to address the dual objective of poverty alleviation and
women empowerment. The microfinance activities are carried on by Bandhan Financial
Services Pvt. Ltd. (BFSPL), incorporated under the companies Act, 1956 and also
registered as a Non-Banking Financial Company (NBFC) with the Reserve Bank of
India.
Cashor India :- The mission is to identify and motivate poor women in the rural area and
deliver financial services to them.
Hand in Hand :- It is a development organization whose objective is to eliminate
poverty by creating enterprises and jobs. Focussing on help self-help, we take a holistic
approach that combines microfinance and support for women to start enterprises with
work in four other areas that matter most to poor communities : education and child
labour elimination, health and sanitation, a sustainable local environment and information
technology access. With currently more than 4,50,000 members in Tamil Nadu,
Karnataka and Madhya Pradesh, who have collectively started more than 2,50,000 micro
enterprises, our goal is to create 1.3 million jobs by 2013. Supported by international
offices in the UK and Sweden, we are now taking our model to South Africa,
Afghanistan and Latin America.
Micro Credit India :Today MFIs works primarily with women. Through its field staff, MFI
helps them to form Self Help Groups (SHGs), trains them in good financial practice,
facilitates access to micro credit loans, equip them with business skill and facilities access
to new markets for their products.
MYRADA :- MYRADA is a non-governmental organization managing rural
development programmes in 3 states of South India and providing on-going support

including deputations of staff to programmes in 6 other states. It also promotes the self
help affinity strategy in Cambodia, Myanmar and Bangladesh.
Saadhana :- Saadhana is a non-profit organization established in the year 2001 to reach
out the urban and rural poor women with the specific mandate to catalyze the 'endeavour
of the poor for self-sufficiency'.
Samrudhi :- Samrudhi's mission is to empower the poor and underprivileged to become
economically self-reliant by providing cost effective and need based financial services in
a financially sustainable manner.
SKS India :- launched in 1998, SKS microfinances is one of the fastest growing
microfinance organizations in the world. SKS also offers interest-free loans for
emergencies as well as life insurance to its members. Its NGO using SKS foundation runs
the ultra poor program. SKS currently has microfinance branches in 19 states across
India. SKS aims to reach members 15 millions by 2012. In the last year alone, SKS
microfinance has achieved nearly 170% growth, with 99% on-time repayment rate.
Spandana :- Spandana is one of the largest and fastest growing microfinance
organizations in India, with 1.2 million active borrowers in March 2008, up from 520
borrowers in 1998-99, its first year of operation (Mix Market 2009). From its birth place
in Guntar, a dynamic city in Andhra Pradesh, and several others. The basic Spandana
product is the canonical group loan product, first introduced by the Grameen bank. A
group is comprised of 6 to 10 women and 25-45 groups form a center.17

3.12 Different Modes of Services Provides by MFIs

Microfinance sector has covered a long journey from micro-savings to

microcredit and than the microenterprises and now entered the field of micro insurance,
micro remittance, micro pension and micro livelihood.
Micro-savings :- These are deposit services that allow one to save small amounts of
money for future use. Often without minimum balance requirements, these savings
accounts allow households to save in order to meet unexpected expenses and plan for
future expenses.
Micro-credit :- Microcredit is the extension of micro loans to the unemployed, to poor
entrepreneurs and to other living in poverty that is not considered bankable. Microcredit
can be offered often without collateral, to an individual or through group lending.
Micro-insurance :- It is system by which people, business and other organizations
makes a payment to share risk, microinsurance products are mainly targeted at low
income groups in the unorganized sector, farmers and craftsmen. The amount of premium
these schemes ranges between Rs. 20.00 to Rs. 500.00. The finance minister recently
considered two schemes, 'Aam Admi Bima Yojana' to extend death and disability
insurance and 'Rashtriya Swasthya Bima Yojana' a health insurance schemes for below
poverty line families.
Remittances :- These are transfer of funds from people in one place to people in another,
usually across borders to family and friends. Compared with other sources of capital that
can fluctuate depending on the political or economic climate, remittances are a relatively
steady source of funds.18

3.13 Legal Framework of Microfinance Institution in India

Institutional microfinance is defined to include microfinance services

provided by both formal and semi-formal institutions. Microfinance institutions are
defined as institutions whose major business is the provision of microfinance services.
Actually microfinance represents more than microcredit as it refer to savings products, to
insurance, to pawns and remittances in sum to a much wider range of financial. Two
overlapping categories of microfinance initiatives are poverty lending and microbanking
poverty lending programmes and institution often offer savings and insurance services as
well. The objective of the poverty lending programmes is to give higher priority to social
outreach than financial sustainability, through an organization may strive for both. The
main focus of micro-banking on the other hand, is income promotion by MFI and a drive
for financial sustainability as a permanent financial intermediary. There are a host of
microfinance institution in India. They assume paramount importance in the context of
pension reform as they have the ability to mobilize large amount of savings from people
who are beyond the purview of formal sector mechanism.

There are four types of structure as follows :

Microfinance institution in India
Charitable
Institution

Co-operatives

Companies

Banking
Institutions

Societies, Trust
etc.

State and National

Cooperatives

NBFC

LAB

1)

Microfinance Institutions as Charitable Institutions :

These are societies registered under Societies Registration Act, 1860 and
trusts registered under Trust Act, 1882. They work on grants. They are not able to handle
funds of SHGs or acts as an intermediary beyond a level. They are not allowed to raise
equity and mobilize deposits. These structural restrictions limits the availability of capital
to these MFIs. Often these institutes are found to services on foreign grants.
2)

Micro-finance Institutions as Cooperatives :

Cooperatives have legal sanction to work as financial intermediaries. The

activities of state co-operatives are restricted in the state. Their activities are heavily
controlled by the controlling authority, Registrar of the cooperative societies and the state
government. National co-operatives need lesser government control than state
cooperatives for multi state operations. Cooperatives are allowed to raise share, to
mobilize deposits. No tax is charged on cooperatives. They can get foreign debt but are
not allowed to raise foreign equity. The New Generation Cooperative Act (for example,
Mutually Aided Co-operative Societies Act, 1995, in Andhra Pradesh) has become
landmark legislation. It has been used by other organizations and as well as by
associations like SHGs, Grameen Joint liability groups. According to this Act, there is
less government control on mutually aided cooperative societies but they can be
incorporated within a state only. Presently, cooperative societies in nine states (Andhra
Pradesh, Jharkhand, Bihar, Jammu & Kashmir, Madhya Pradesh, Chhattisgarh, Orissa,
Karnataka and Uttaranchal) are registered under this new Act. This Act reduces the role
of registrar, gives greater flexibility in savings mobilization and fund utilization and
allow the cooperatives to set up subsidiary organization.
3)

Microfinance Institution as Companies :

MFIs have to have Rs. 2 crore as its initial funds if these are operating as
Non Banking Financial Companies (NBFC). These MFIs are required to obtain a
registration certificate from RBI (under section 45-1A of the RBI Act) after satisfying the
initial conditions. They are allowed to mobilize deposits after satisfying conditions
stipulated by RBI. After two years of their operations, they have to obtain minimum
investment grade or other specified credit rating for fixed deposits from any one of the
RBI recognized credit rating agencies at least once a year. They are then required to
forward it to the RBI along with the annual returns. They are allowed to collect foreign
equity upto 51% of US $ 0.5 millions; more than 51% to 75% of US $ 5 million and
100% of US $ 50 million.
A NBFC is also exempted from RBI registration if it does not deliver credit
of more than Rs. 50,000 for a business enterprise and Rs. 25,000 for meeting the cost to
raise the level of income of a poor person. This NBFC is licenced under section 25 of the
Companies Act, 1956. It is not allowed to accept public deposits. Recently seven
categories of NBFCs are exempt from RBI registration Housing finance companies,
Mutual benefit financial companies (Nidhis), Insurance companies are important in these
exempted categories.
4)

Microfinance Institutions as Banking Institutions :

The MFIs who are operating as banks are registered under RBI but it is

very difficult to obtain this registration. These institutions are regulated by RBI on daily
affairs. To set up a MFI as a bank, it would require initial capital from Rs. 100 to 300
crore. For local area bank the amount is Rs. 5 crore. Local area banks are permitted to
operate on three contiguous districts in a state. These are also highly management and

technology intensive to achieve sustainability. These MFIs are permitted to deliver credit
to mobilize savings and to give insurances (under the registration of IRDA).19

3.14 Microfinance Delivery Models in India

There exist a wide range of microfinance in India. It can be said that India
hosts the maximum numbers of microfinance models. Each model has succeeded in their
respective fields. The main reason behind the existence of these models in India may be
due to geographical size of the country, a wide range of society and cultural groups, the
existence of different economic classes and a strong NGO movement.
Microfinance Institutions (NGO-MFIs, Mutual Benefit MFIs and For-profit
MFIs) in India have adopted various traditional as well as innovative approaches for
increasing the credit flow to the unorganized sector. They can categories into four broad
categories. (1) SHG Model (2) Federaled SHG Model (3) Grameen Bank Model (4) Cooperative Model
We discuss important features of these four micro-finance model. These
models vary in their legal form, in the channels and methods of delivery, in their
governance structure, in their approach to sustainability and also in their approach to
microfinance.
1)

Self-Help Group (SHG) Model :

SHG has emerged as the 'Indian model of microfinance'. It is so popular in

India that government programmes have SHG as the core of their strategy.
Dynamics of SHG Model :-

1)

The SHG model has evolved in the NGO sector, NGOs primarily have the
functions of enabling, educating and networking. This model has emerged as the
capacity building of community based institutions.

2)

SHGs are small and informal groups (strength of members :- 10 to 20). Group
members are socio-economically homogeneous.

3)

Groups are composed either by male only or by female. In India 90 percent of the
SHGs are composed of female only.

4)

Group members are self-selected act as a facilitating agency to build processes and
systems that makes the SHGs viable and sustainable institutions.

5)

The group members meet regularly at an appointed time and place for carrying out
their savings and credit activities and other issues of development.

6)

The group mobilizes savings among the members and issues need based loans to
the members (only) of the common funds created.

7)

The rules and norms are determined by members themselves and the NGO does
not interfere in this matter.

8)

After the SHG has been put on the path to sustainability, organizationally and
financially, the NGO may decide to withdraw from supporting the SHG and move
on to new groups.

9)

The main motto of the SHGs is to empower poor socio-economically and their
livelihood pattern.

2)

Federated Self Help Group Model :

Federation of SHGs bring together several SHGs. In India, FSHGs includes

those promoted by the Dhan Foundations, PRADAN, Chaitanya and SEWA are famous
in India.
Dynamics of Federated SHG Model :1)

Federations usually come under the Societies Registration Act. They have between
1000-3000 members.

2)

There is a distinct three-tier structure in federations - the SHG is the basic unit, the
cluster is the intermediate unit and an apex body or a federation, represents the
entire membership.

3)

Each SHG participates directly in the representative body at the cluster level. Two
members from each SHG attend the monthly cluster meetings. Information from
the groups to the apex body and vice-a-versa is channeled through the cluster level
representative body.

4)

The cluster leaders are a highly effective part for group monitoring and
strengthening, so the operations of the apex body are decentralized through the
clusters.

5)

The executive body at the apex level is consists of 9 to 15 members.

6)

Three common financial activities of federations are :(a)

Acting as an agent and managers of external credit funds.

(b)

Assisting SHGs with loan recovery in difficult cases.

(c)

Strengthening weak SHGs, so that they are able to carry out their savings
and credit functions smoothly.

7)

Other financial services provided by the federations are :(a)

Additional options for members to save : federations often offering

additional savings schemes to the group members, which is apart from
group savings. So the members have savings with the group and in
addition, with the federations.

(b)

Satisfactory returns on savings to members.

(c)

Credit giving patterns also vary. Generally federations have credit activities
at the group level, although, federations provide credit to the members,
these loans are disbursed from member's savings that may be deposited
with the federation and from the external funds that it is able to access
independently, federations are able to increase the amount of credit
available to members. Federations even provide bridge loans.

(d)

Federations provide insurance and housing finance, and also support

services to facilitate productive use of credit. One federation in India
(Chaitanya) started to provide insurance services to its members. It has
become an agent of the insurance company.

3)

Grameen Bank Model :The Grameen Bank model of Bangladesh, developed by Muhammad

Yunus, its former chairman was considered as the pioneer microfinance institution. It has
been highly successful in its banking service to the poor as well as in its poverty
alleviation programmes. With its well-recognized success, many organizations in India,
like SHARE Microfin Ltd., Activities for Social Alternative (ASA) and CASHPOR,
Financial and Technical Services Ltd. have adopted this methodology with little
variations.

Dynamics of Grameen Bank Model :1.

Homogenous groups of five members are formed at the village level.

2.

The field worker of the Grameen Bank facilities the process of group formations.

3.

All the group members undergo a 7 days compulsory training of 1-2 hours per
day. Some groups undergo the Group Recognition Test (GRT). It is a screening
test that can distinguish between serious and non-serious groups.

4.

Once the preliminary groups have passed GRT, and then the women become
members of Grameen Bank by paying a one-time member fee.

5.

Eight join liable groups affiliate together to form a center. Every week center
meets at a defined time. Bank Assistants attends the meetings and it is mandatory
for the members to attend the weekly meeting and all the loan applications have to
be approved by other group members as well as center members. The loan is
disbursed from the bank fund and it is not linked with the group savings. Loan is
given to the individual not to the group or the center.
The loan disbursement is always done in the center. The housing loans are

disbursed at the Branch to maintain documentation.

Various loans are provided by the Grameen Bank such as general loans,
supplementary loans, special loans, sanitations and housing loans etc. The size of loan
ranges from Rs. 4,000 to Rs. 10,000 for general yearly loans. The first loan is Rs. 4,000
and there is an annual increase of Rs. 1,000 in loan size in each year thereafter.
Every member save Tk. 10 per weak and it is compulsory. This saving is
deposited with Bank. The Bank funds their consumptions with this deposit. This strategy

overcomes the problem of default as it is proved that nobody is likely to default on his or
her own money.
All loans are repayable within a year in 52 equal installments (over 52
weeks). Bank charges 5 per cent tax on all productive loans to a member. In this way
group fund is increasing.
The group leader collects the loan repayments and savings prior to the
meeting and hands its over to the center leader who gives it to the field worker during the
meeting. This collected amount is deposited in the branch on the same day. No new loan
is issued from this collected amount. It discouraged all possible leakages in monetary
transactions.
Peer pressure replaces the collateral. Member-borrowers who repaid the
loan in time are allowed to get repeated loans and conditions access to increasing credit
from bank. The most significant aspect of the Grameen Bank model has been its high
loan recovery rate (98% and above).
4)

The Cooperative Model :

The leading organizations that has been successful in using the cooperative

form in rural microfinance in India has been the Cooperative Development Forum (CDF),
Hyderabad. It has built up a network of financial co-operatives based upon women's and
men's thrift groups. It has registered under the New Generation Co-operative Act, 1995.
Dynamics of Co-operative Model :1.

The primary entities of CDF's microfinance co-operative are the women's/men's

thrift cooperative (W/MTC). Each consist of 300 members. Generally these
members reside in the same village.

2.

CDF has started to promoted much smaller units and now it has encouraged these
units to extend into large unit.

3.

4.

The important factors behind the running of a successful co-operative venture are :
(a)

to justify human resources (staffs)

(b)

to meet statutory administrative requirements such as audit.

The WTC or MTC are divided into small groups (10 to 15 members) to facilitate
better monitoring of thrift and repayment of loans.

5.

The group member nominate a group leader and the leader enjoyed the confidence
of the group.
CDF encouraged members to identify more strongly to identify more

strongly with their WTC/MTC rather than with the groups, as WTC/MTC are the primary
legal entities and viable units of operation.

Most of the WTC/MTCs decided to register themselves under the New Generation
Cooperative Act, which allows for greater flexibility and autonomy in operations.

The General Body constitutes of all the members of primary cooperatives. It

adopts a uniform set of bylaws. The General Body meets once in a year to select
the directors, review and discuss the other issues. The Board of Directors consists
of 12 directors who are elected by the members.

Each director is elected for three year term. The retired directors are eligible for
re-election.

The directors elect a chairperson and appoint a Managing Director (MD) among
themselves. The chairperson and MD have a one year term. They are also eligible
for re-election.

The chairperson presides the board meetings. He/She represents the cooperatives
in other organizations (Forums) and ensures that they function in accordance with
the cooperative principles and bylaws.

The MD is responsible for ensuring that the operations of cooperatives are

properly conducted and that the resolutions of the boards are implemented.

A set of geographically continuous cooperatives forms an association of

WTC/MTC. The chairperson and MD of each participating cooperatives are
members of the general body of the associations.

General Body elects a chairperson and MD to oversee the affairs.

The Associations provides training, management of the loan insurance fund and
inter-lending. It also plays a support role by helping the member cooperative in
handling accounting, auditing and other administrative matters.20

3.15 Case Study

1)

SEWA (Self Employed Women Association) :

SEWA supports 1600 SHGs with 38,000 members in rural Gujrat. It is

observed that urban members of SEWA were saving 4.1 percent of their income and rural
member 1.9 percent (Awano, 1996). At the end of 2001, SEWA bank had over Rs. 30
crore in 1,20,000 deposit accounts. SEWA credit is current credit-deposit ratio is 31 (in
other words Rs. 10 crore are lent out to members of the 30 crore deposit). The research
revealed that savings are unlikely to be significant to cover all uncertain consumption

needs. They need emergency loans and insurance services. SEWA started insurance
services in 1992 and provided against premiums paid annually by members. About 25000
women have invested in fixed deposits that earn interest to cover the yearly insurance
premiums needed. About 33,000 women had outstanding loans, 33 percent of these loans
were taken as working capital, 17 percent for personal, 10 percent for investment and 40
percent for housing loans.
2)

SHG-Bank Linkage Programme :

NABARD (National Bank for Agriculture and Rural Development) had

circulated guidelines to banks for financing SHGs in 1992 under a pilot project that
aimed at financing 500 SHGs across the country through banking system. Different banks
financed about 600 SHGs by March 1993. This encouraged the RBI in 1996 to include
financial SHGs as a mainstream activity of banks under their priority sector lending. At
the end of March 2002 (NABARD and microfinance, 2001-2002), banks financed about
461,478 SHGs. About 7.8 million poor households access credit through 17,085 branches
of formal banking system under this programme. It is the largest microfinance
programme in term of outreach. Banks have disbursed Rs. 4530 millions as loan to new
SHGs and Rs. 924 millions to the existing SHGs in 1992. This programme has covered
488 districts in different states and union territories of India. Almost all members
developed savings habit in the post-SHG situation as against only 23 percent of
households ho had this habit in pre-SHG situation. About 70 percent loans were taken for
income generation activities in post-SHG situations.
3)

BASIX :BASIX is the second largest MFI in India in terms of outreach and

development in integrating micro-credit and livelihood promotion. It has financial

operations in 2200 villages in 18 districts across four states (Andhra Pradesh,

Maharashtra, Karnataka and Orissa) and works in a further five stated (Assam,
Jharkhand, Madhya Pradesh, Rajasthan and Tamil Nadu) in assisting other MFIs. Upto
2001, BASIX disbursed more than 60 crore in 58,000 loans, outstanding loans stood at
Rs. 20 crore among 21,000 active borrowers. The repayment rate is 91 percent. BASIX
has been highly successful in attracting loans and equity from both national and
international sources. It has secured Rs. 26.3 crore of total loans from Ford Foundations,
the Swiss Agency for Development and Cooperation (SDC), (Shorebank Corporation
USA), Cordaid (Netherlands), Development International Desjardins (Canada) and Rs. 12
crore from Global Trust Bank, ICICI, HDFC and SIDBI in India. It has raised Rs. 11.9
crore in equity from IFC, World Bank affiliate, Shore Bank Corporation and HivosTriodas Fund (the Netherlands), ICICI Bank and HDFC. BASIX has provided two types
of loans (a) Direct loans for extended directly to rural producers by BASIX and (b)
Indirect loans are extended through intermediaries. These intermediaries includes SHGs,
other community-based financial organizations and market agent (such as input dealers,
wholesale merchants etc.). BASIX has been able to disburse 80 percent of total loans
indirectly. About 40 percent of lending was to non-farm sector, 20 percent to dairy and
other livestock and 30 percent to agriculture. About 10 percent of loans were lent to
women's SHG (classified as general purpose loans). BASIX has supported over 40,000
livelihoods (250 persons days of employment are equivalent to a full time livelihood).

4)

Cooperative Development Foundation (CDF) :

Cooperative Development Foundations in Andhra Pradesh has worked with

the mainstream cooperative structure throughout its existence. It has a membership of

6000 (with more than half being small and marginal farmers) and has a total turnover of
Rs. 32 crore in trading and Rs. 9 crore outstanding in loans to members. Within a decade,
these cooperatives in two backward districts of Andhra Pradesh has grown to 350 in
member, with more than 1,00,000 members and with Rs. 12.5 crore in savings. It is
comparable to any large MFI in India. In CDF, members made interest rate deposits
under the Death Relief Assurance Scheme. These deposits are in turn invested in other
securities and the earned income is set aside for contingencies.
5)

SHARE Microfin Limited :The prime objective of SHARE Microfin Limited is to provided financial

and support services to the poor women living below the poverty line. It enables these
women to take income generating activities. It is registered as a public limited company
under section 25 of the Companies Act and it is also registered with the RBI under
section (45/1A) as a NBFC. It has an authorized capital of Rs. 15 crore and an amount of
Rs. 5.09 crore has been paid up by 26,034 poor women. The company is owned and
managed by the poor women. It is operating in 2990 villages in the three states in India.
This MFI has disbursed Rs. 3,662,707,780 as a loan among which

Rs.

2,843,277,300 is recovered and Rs. 819,430,480 is outstanding at the end of March 2004.
The repayment rate is 100 percent.21

3.16 Micro-Enterprises
Since independence out success in the development sectors are only
moderate. Unemployment and poverty still pose major challenges for us, especially in
rural areas. It all happened irrespective of the high opportunities of employment

generation lies in agriculture sector and rural non-farm sectors (RNFS). Microenterprises
can play an important role in improving the quality of life and poverty alleviation.
Microenterprises, whether in the informal or organized sectors, provide opportunities for
gainful employment while preserving the social structure. Microfinance can play an
important role to meet credit needs of rural poor. According to Singh (2002), "In India,
the need for microfinance is higher as the demand for credit to start micro-enterprises by
the poor people could not be met by the institutional initiatives of rural finances up to
large scale. Due to the failure of percolation theory of social development, poor people
are highly dependent on the institutional source of credit. Growth of microfinance in
India has been in response to the failure of institutional initiatives of rural credit and
exploitation attached with informal system of credit." NGOs in India acted very promptly
for the growth of microfinance sector as it provides spaces to the poor people to use their
on savings for credit linkages and finally starting the viable enterprises.
The term 'micro-enterprise' refers to a very small-scale, informally
organized business activity undertaken by poor people.
3.16.1 Need and Importance of Micro-Enterprise :Micro-enterprise is a proven way to strengthen viable small businesses
resulting increased households income and savings and this the alleviating economic
poverty.
Mentioning the importance of micro and small enterprises (MSEs) in India,
"Micro and small enterprises (MSEs) constitute an important segment of the Indian
economy. Besides providing employment to nearly 25 million persons, mostly belonging
to the lower rung of socio-economic strata in the society, the sectors helps the process of
economic diversification, utilization of otherwise dormant resources, balanced regional

development, production of and demand for wage goods, equitable distribution of

income, and widening the base of entrepreneurial supply."
Promotion of micro-enterprises is a viable and effective strategy for
achieving significant gains in income and assets for poor and marginalized people. The
microenterprise programs helps people to build human, financial and social capital for the
development of micro-businesses that will improve people well being. NGOs are playing
important role as catalyst in helping the rural unemployed persons to acquire training
through MEDPs (Micro-Enterprise Development Programmes) so that they can become
self employed by starting their enterprise in RNFS. Moreover, they can also become job
providers instead of job seeker. Thus institutionalization of MEDPs through NGOs can
be an alternative approach of rural development in India.
Entrepreneurship Development Programme (EDP) means a programme of
entrepreneurship development designed to help a person in strengthening her/his
entrepreneurial motive and in acquiring skill and capabilities necessary for playing
his/her entrepreneurial role effectively. To make EDP successful and effective, the role of
the NGOs has significant important in terms of identification of place or location,
promotional activities, selection of potential entrepreneurs, entrepreneurial training,
monitoring and follow up mechanism.
Micro entrepreneurship through microfinance has become a modern
economic weapon for the poor to fight against poverty and employment. But it has long
way to become successful. Many programmes from IRDP to SGSY were started by the
government enthusiastically but they were not able to achieve their objectives. The
reason behind this is poor follow up, lack of management and participation from the

government as well as people. No programme can never ever get its ultimate result unless
and until there is coordination and cooperation between government and beneficiaries.22
3.16.2 Case Studies - Empowering client through micro-enterprise :
The story of Dipa Pise illustrated the direct links between innovative
entrepreneurship by rural women and their ability to obtain credit from cooperative
banks. Dipa Pise was running a poultry business, but was continually losing money i.e.
she was in loss. She has decided to start a business of making the paper cups, which are
used for giving 'prasad', and with a Rs. 15,000 loan from State Bank of India, she was
able to buy the machine and begin marketing of her cups. Today she has expanded her
business into a dealership where she provides these machines and marketing services to
numerous women, and is running a successful and growing micro-enterprise business.
Dipa's story shows that the loans required by micro-entrepreneurs are quite small, and
since their economic enterprises are small, they should also be expected to repay their
loan in small doses. Mann Deshi has employed this method, and has been able to recover
98 percent of this loans, by maintaining realistic expectations from our clients and
providing them with the services they require. One of those services is providing access
to markets, through savings and loans suited to their ambition. Dipa's story is only one
example of the way in which cooperative bank can motivate the micro-enterprises of
women and promote the economy of semi-urban centers. When women get the additional
income, they want to invest in health of the family and the education of the children.
Women are ready to buy the health insurance but it is pathetic that in spite of so many
companies, health insurance is still a luxury for the urban people and the workers from
the organized sector. 20 Percent of the population is not insured in rural areas. 90 Percent

of the population cannot even dream as there is no availability. Mann Deshi Mahila Bank
and the association are trying hard to workout the product with the partners.

3.17 Micro-Insurance
Microinsurance can boost resources for the rural poor, governments, and
private sector. The entire economy gains as the insurance industry matures further, as
well. There is robust need for microinsurance in India's poverty reduction strategy. With
insurance, the vulnerable can prepare for an adverse event before it occurs, instead of
being paralysed by shocks afterwards. Microinsurance also increase the livelihood that
the poor eat well, have health access, and send their children to school, since they would
not have to save as much for emergencies. Potential clients would typically earn around $
2 a day or even less.
Six key areas, which need to be addressed to propel micro-insurance is 1) Demand and supply

2) Product design

3) Pricing

4) Distribution and outreach

5) Procedure

6) Regulation.23

3.17.1 Provision of Micro-insurance for SHG Member :Presently there is a death of micro-insurance product in the market, which
can take care of the needs of the SHG member, as they require composite insurance
product, which take care of their health, assets and life risk. Hence it is desirable to
evolve a suitable insurance product/s. However, a few insurance companies both in the
public and private domain are involved in evolving suitable model of insurance package
which can suit the needs of poor as well as its financial viability and sustainability.
It is widely recognized that microfinance has been a successful
methodology for providing much needed financial services to the poor on a sustainable

basis. This access of financial services has enabled a large number of poor throughout the
developing world to make significant progress in their own efforts to challenge poverty
through the existence of options. It is generally agreed that the impact of microfinance on
poverty reduction has been significant. Versions vary depending upon the sample site and
sample size. Some of the empirical findings are that microfinance has reduced the
incidence of poverty through increase in income; building assets and thereby reducing
vulnerability. The reports are that the households having access to microfinance spend
more on education than non-client households. They send their children to school and
there is reduction in the drop-out rate in the higher primary grades. The housing
conditions generally improved from kutcha to pucca housing; the share of consumption
loans declined from 50 percent to 25 percent; employment increased by 18 percent. The
involvement in the group significantly contributed in improving the self confidence of the
members. The feeling of self-worth and communication with others improved after
association with SHGs. The members were relatively more assertive in confronting social
evils and problem situation. As a result there was a fall in the incidence of family
violence.24
Micro-insurance plays a vital role as part of social society. The rural
women are deprived from the services of insuring themselves. Considering the crying
need for vulnerability reduction, we provide insurance service at the doorsteps of the
rural women. Group insurance for accident benefit for Rs. 25,000/- is provided through
Rajrajeshwari Mahila Kalyan Vima Yojana at a premium of Rs. 15 per head and life
insurance of Rs. 5,000/- at a premium of Rs. 50 per women is provided. Cattle insurance
and insurance for assets are the other areas here insurances are provided.

Recently, a lady viz. Sunita a member of an SHG was insured under

Rajrajeshwari Mahila Kalyan Vima Yojana. Unfortunately she died by the accident
leaving behind a one year child Swapnil. The insured amount of Rs. 25,000/- was handed
over to the son in the forms of National Savings Certificate which will be useful for his
future studies.
Distribution to low-income populations is critical. Some examples of
distribution for better outreach in rural area exist, generally using intermediataries like
non-governmental organizations (NGOs) or Micro-Finance Institutions (MFI) already
working among the target population. Their financial viability seems to depend on
availability of soft funds for initial market penetration and development of distribution
channel. Innovations in delivery channels should not be ruled out, meanwhile.25

Table 3.5 : Details some possible delivery channels within India for the Industry
S.N.

Possible delivery channels in India for

microfinance

Amount (Rs.)

1.

Self Help Groups linked to banks

2.

Non-governmental organization as development

facilitor (approx.)

3.

Non-governmental
microfinance

4.

Rural and semi-urban commercial bank branches

33,388

5.

Regional rural bank branches

14,446

6.

Private fertilizer dealers

192,000

organization

1,618,476

involved

in

200,000
3,024

7.

Primary agricultural cooperative societies

105,735

8.

Post offices in rural areas

138,756

(Source : NABARD and RBI, Annual Report, 2006)

REFERENCES

1.

Sangita Kamdar, "Microfinance, self-employment and poverty alleviation",

Humalaya Publishing House, 2007, p. 15-16.

2.

K.K. Tripathy, "Microcredit intention and poverty alleviation", Kurukshetra, 54,

No. 11, September 2006, p.

3.

Sampath Guha and Gautam Gupta, "Micro-credit for income generation, Role of
ROSCA", Economical and Political Weekly, XI, No. 14, April 2-8, 2005, p. 1470.

4.

Rajaram Dasgupta, "Microfinance in India, Empirical Evidence Models and Policy

Imperatives", Economical and Political Weekly, XI, No. 2, March 2005, p. 1239.

5.

Lekshmi R., Kulshreshta and Archana Gupta, "A study of microfinance in India Delivery system and impact analysis with special emphasis to women upliftment",
Sajosps, 3, No. 1, December 2002, p. 105.

6.

Building sustainable microfinance system : A growth catalyst for the poor,

LOGOTRI Research Study, Society for Development Studies, February 2006, p.

7.

Jothi V.N., "Socio-economic impact : Microfinancing of self help groups", SGMS

Journal of India Management, January-March 2010, p. 91-92.

8.

Lekshmi R., Kulshreshta and Archana Gupta, "A study of microfinance in India Delivery system and impact analysis with special emphasis to women upliftment",
Sajosps, 3, No. 1, December 2002, p. 105.

9.

Ruby,

J.A.,

"Microfinance

and

Women

Empowerments,

Study

of

Kudumbashree project in Kerla", Mahatma Gandhi University, Kottayam, July

2008, p. 57-58
10.

Archana Singh, "Microfinance for women's empowerment, A perspective",

Kurukshetra, 52, No. 6, April 2004, p. 32.

11.

N. Tejmani Singh, "Microfinance practices in India : An overview", International

Review of Business Research Paper, vol. 5, p. 134-135.

12.

Ruby,

J.A.,

"Microfinance

and

Women

Empowerments,

Study

of

Kudumbashree project in Kerla", Mahatma Gandhi University, Kottayam, July

2008, p. 60-61.
13.

Mohammad Yunus, "Grameen Bank, microcredit and millennium development

goals", Economical and Political Weekly, XXXIV, No. 36, September 4-10, 2004,
p. 4077.

14.

P. Satish, "Mainstreaming of microfinance", Economical and Political Weekly, XI,

No. 7, April 23-29, 2005, p. 1731.

15.

N. Tejmani Singh, "Microfinance practices in India : An overview", International

Review of Business Research Paper, vol. 5, p. 135-138.

16.

Ibid, p. 140-142.

17.

Reeta Raufela, Gaurao Pant and others, "Microfinance - A new mantra for rural
development", International Journal of Science, Technology and Management,
December 2010, p. 3-4.

18.

Ibid, p. 2-3.

19.

Sampati Guha, "Salient features of microfinance institutions in India", IRPF

Working Paper Series No. 01/04, p. 1-5.

20.

Ibid, p. 6-13.

21.

Ibid, p. 14-18.

22.

Tiyas Biswas and P.P. Sengupta, "Role of microfinance in promoting microentrepreneurship : The Indian experience", International Journal of College
Science in India, vol. 3, 2 July 2009, p. 75.

23.

Anuruddha Rajivan, "Micro-insurance in India", Yojana, January 2008, p. 17.

24.

Aniruddha Mirikar, "Reducing poverty, creating livelihood, opportunities through

environmental regeneration, microcredit and micro-enterprise development", in
Sangita Kamdar (ed), Microfinance, Self-employment and poverty alleviation,
Himalaya Publishing House, 2007, p. 187.

25.

Anuruddha Rajivan, "Micro-insurance in India", Yojana, January 2008, p. 25.