Synopsis For Analysis of Microfinance in India: BY Jose T George 092103104

SYNOPSIS FOR ANALYSIS OF MICROFINANCE
IN INDIA
BY
JOSE T GEORGE
092103104
MAULANA AZAD NATIONAL INSTITUTE OF TECHNOLOGY

BHOPAL (M.P)
Year-2009 - 2011
Introduction:
Microfinance is an economic development tool whose objective is to
assist the poor to work their way out of poverty. It covers a range of
services which include, in addition to the provision of credit, many other
services such as savings, insurance,money transfers, counseling, etc.
The provision of credit to the Microfinance sector is based on the

following postulates:
• It addresses the concerns of poverty alleviation by enabling the
poor to work their way out of poverty.
• It provides credit to that section of society that is unable to obtain
credit at reasonable rates from traditional sources.
• It enables women’s empowerment by routing credit directly to
women, thereby enhancing their status within their families, the
community and society at large.
• Easy access to credit is more important for the poor than cheaper
credit which might involve lengthy bureaucratic procedures and
delays.
• The poor are often not in a position to offer collateral to secure the
credit.
• Given the imperfect market in which the sector operates and the
small size of individual loans, high transaction costs are
unavoidable. However, when communities set up their own
institutions, such as SHG federations and cooperatives the
transaction costs are lower.
• Transaction costs, can be reduced through economies of scale.
However increases in scale cannot be achieved, both for individual
operations and of the sector as a whole in the absence of cost
recovery and profit incentive.
The players in the Indian Microfinance sector can be classified as

falling into three main groups
a) The SHG-Bank linkage Model accounting for about 58% of the

outstanding loan portfolio
b) Non-Banking Finance Companies accounting for about 34% of the
outstanding loan portfolio
c) Others including trusts, societies, etc, accounting for the balance 8% of
the outstanding loan portfolio. Primary Agricultural Co-operative
Societies numbering 95,663, covering every village in the country, with a
combined membership of over 13 crores and loans outstanding of over
`64, 044 crores as on 31.03.09 have a much longer history and are under a
different regulatory framework. Thrift and credit co-operatives are
scattered across the country and there is no centralized information
available about them.
The Grameen system
The Grameen system dominates the market in Bangladesh, where it has

been widely imitated by a number of large and small MFI. The system
was pioneered by Professor Yunus in 1976, and has grown very rapidly
since.
In this system the potential clients are asked by the MFI to organise
themselves into ‘Groups’ of five members which are in turn organised
into ‘Centres’ of around five to seven such Groups. The members make
regular savings with the MFI, according to a fixed compulsory schedule,
and they also take regular loans. They each have individual savings and
loan accounts with the MFI, and the main function of the Groups and
Centres are to facilitate the financial intermediation process
The SHG system
The members form a group of around twenty members. The group

formation process may be facilitated by an NGO or by the MFI or bank
itself, or it may evolve from a traditional rotating savings and credit
group (ROSCA) or other locally initiated grouping.
The SHG-Bank Linkage Model was pioneered by NABARD in 1992.
Under this model, women in a village are encouraged to form a Self help
Group (SHG) and members of the Group regularly contribute small
savings to the Group. These savings which form an ever growing nucleus
are lent by the group to members, and are later supplemented by loans
provided by banks for income-generating activities and other purposes for
sustainable livelihood promotion. The Group has weekly/ monthly
meetings at which new savings come in, and recoveries are made from
members towards their loans from the SHGs, their federations, and banks.
NABARD provides grants, training and capacity building assistance to
Self Help Promoting Institutions (SHPI), which in turn act as facilitators/
intermediaries for the formation and credit linkage of the SHGs.
NBFC-JLG system
Under the NBFC model, NBFCs encourage villagers to form Joint
Liability Groups (JLG) and give loans to the individual members of the
JLG. The individual loans are jointly and severally guaranteed by the
other members of the Group. Many of the NBFCs operating this model
started off as non-profit entities providing micro-credit and other services
to the poor. However, as they found themselves unable to raise
adequate resources for a rapid growth of the activity, they converted
themselves into for-profit NBFCs. Others entered the field directly as for-
profit NBFCs seeing this as a viable business proposition. Significant
amounts of private equity funds have consequently been attracted to this
sector.
Significance and Scope of the study

The scope of this study is limited to :
• Introduction to Microfinance and the sector in India
• The provision of credit to microfinance sector
• Key players in Indian Microfinance sector
• Various models for microfinance in India and there
comparisons
• Grameen System
• SHG system
• NBFC-JLG linkage model
• Commercialisation of MFI’s in India
• Brief study of need for regulation of MFI’s in India
• Conclusions & Suggestions
OBJECTIVE: The objective of this project is

• to study the performance of microfinance in India
• to study the ill effects of commercialisation of
microfinance in India
• to study the need for regulation of MFI’s in India
Sources of Data:
This study is based on secondary data. For further details refer
to References/Bibliography
Chapter Scheme:
Ch 1: Introduction to Microfinance and the sector in India
• Provision for credit in Microfinance sector
• Key players in Indian Microfinance sector
Ch 2: Various models for microfinance in India and there
comparisons
• Grameen System
• SHG System
• NBFC-JLG linkage model
• Pros and Cons of each system with respect to other
Ch 3: Commercialisation of MFI’s in India
Ch 4: Regulatory issues
Ch 5: Conclusions and Suggestions
References/Bibliography:
Websites
http://www.rbi.org.in
http://www.nabard.org/
http://www.mixmarket.org/
Journals
Malegam committee Report on Issues of Microfinance in India
Journal of Microfinance Volume 6 Number 2
Status of Micro Finance 2009-10 published by NABARD
CRISIL ratings of India’s-top-50-mfis

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SYNOPSIS FOR ANALYSIS OF MICROFINANCE

MAULANA AZAD NATIONAL INSTITUTE OF TECHNOLOGY

The provision of credit to the Microfinance sector is based on the

The players in the Indian Microfinance sector can be classified as

a) The SHG-Bank linkage Model accounting for about 58% of the

The Grameen system

The Grameen system dominates the market in Bangladesh, where it has

The SHG system

The members form a group of around twenty members. The group

Significance and Scope of the study

OBJECTIVE: The objective of this project is

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