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8/11/2019 40 Himanshu Bhatnagar - Micro Finance- Financial Product for Bottom of Pyramid Market
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CONTEMPORARY ISSUE ON SEMINAR
Micro Finance- Financial Product for
Bottom of Pyramid Maret
Session: 200911
Pre!ented at
Submitted By: - Submitted To:-Himanshu R Bhatnagar Mr. Rajat MendirattaMBA II Sem.
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Ackn wl dg m nt
The beatitude, bliss & euhoria that a!!omany su!!ess"ul !omletion any tas#$ould not be !omleted $ithout the e%ression o" are!iation o" simle irtuesto the eole $ho made it ossible.
So, I ta#e my immense leasure in e%ressing a $hole hearted than#s to all the"a!ulty members $ho guided me all the $ay ma#ing this roje!t su!!ess"ul.
It is my riilege to e%ress a dee sense o" gratitude and than#s to Mr. RAJAT
MENDRATTA"or roiding us arious in"ormation dire!tly related to roje!t.
I e%tend my gratitude and than#"ulness to Ae% Institute o" Management &S!ien!e.
'ate:()-*+-(* Submitted By:la!e: aiur Himanshu R Bhatnagar
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!r "#c
The underlying aim o" the seminar on !ontemorary issue as an integral art o"MBA rogram is to roide the students $ith ra!ti!al ase!ts o" the organiation
/ $or#ing enironment.Su!h tye o" resentation hels a student to isualie and realie about the!ongruen!ies bet$een the theoreti!al learning in the remises o" !ollege anda!tual "ollo$ed by the organiation. It gies the #no$ledge o" ali!ation ase!to" the theories learnt in the !lassroom.
The seminar roje!t inMicro Finance- Financial Product forBottom of Pyramid Maret is a !omlete e%erien!e in itsel", $hi!hroide me $ith the understanding. This has be!ome as insirable o" my#no$ledge o" management being learned in MBA rogram.
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M I C R O F I N A N C E
Financial Product forBottom of Pyramid Maret
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Ta"le of Content! P#$ No$
1. Introduction
Elements of Microfinance
2. History of Microfinance in India
3. Need for Micro Financing
Who are client of microfinance?
Ho it hel!s the !oor !eo!le?
"ren#t !oor too !oor to sa$e?
When is microfinance N%& an a!!ro!riate tool
'. &y!es of %rgani(ations and )om!osition of the *ector
Formal sector
*emi Formal sector
Informal sector
What are MFIs and *H+s?
,. Why do MFIs charge high interest rates to !oor !eo!le?
-. )an Micro finance e !rofitale
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/. Im!act of microfinance o$er !o$erty
0. )urrent *cenario of Micro financing in India
Indian economy and microfinance
ecent trends in Micro finance
+o$t. role in su!!orting Microfinance
Microfinance and ca!ital reuirement
4 )hallenges in Indian conte5t
6. *tatus of microfinance in a7asthan
4 8ac9ground
4 )urrent situation of Micro finance : im!ortant issues
4 ;oluntary organi(ations in a7asthan
4 Ma7or issues
1
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1. Introduction
Micro financing is the provision of financial services to poor and low
income households without access to formal financial institutions.
As defined by the Asian Development Bank (ADB), it is A provision of
a broad range of financial services such as deposits, loans, payment
services, money transfers, and insurance to poor and lowincome
households and their microenterprises.
!o most, microfinance means providing very poor families with very
small loans to help them engage in productive activities or grow their
very small businesses. "ike us, many poor people need and use
financial services all the time. !hey save and borrow, invest in home
repairs and improvements and meet occasional and domestic e#penses
such as food and school fees. $owever, there are some %&& million low
income entrepreneurs in the world and about %' have access to
financial services. ndeed, the financial services available to the poor
often have serious limitations in terms of cost, risk and convenience.
As a result, over time, microfinance has come to include a broader
range of services (credit, savings, insurance, etc.) as the industry has
come to realie that the poor and the very poor that lack access to
traditional formal financial institutions re*uire a variety of financial
products.
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as pilot pro+ects with A--/and Muhammad 0unusin the mid123&s,
the 4nited /ationsdeclared 5&&%the nternational 0ear of Microcredit.
Microsa$ings are deposit services that allow one to store small
amounts of money for future use. ften without minimum balance
re*uirements, savings accounts allow households to save in order to
meet une#pected e#penses and plan for future investments.
emittances are transfers of funds from people in one place to people
in another, usually across borders to family and friends. -ompared
with other sources of capital that can fluctuate depending on the
political or economic climate, remittances are relatively steady source
of funds.
Microinsurance is a term increasingly used to refer to insurance
characteried by low premium and low caps or low coverage limits,
sold as part of atypical riskpooling and marketing arrangements, and
designed to service lowincome peoples. Microinsurance is insurance
with low premiums and low caps 6 coverage. n this definition, 7micro8
refers to the small financial transaction that each insurance policy
generates. !he Microinsurance 9egulations, issued in 5&&% by the
ndian nsurance 9egulatory and Development Authority(9DA).
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http://en.wikipedia.org/wiki/Accion_Internationalhttp://en.wikipedia.org/wiki/Muhammad_Yunushttp://en.wikipedia.org/wiki/United_Nationshttp://en.wikipedia.org/wiki/2005http://en.wikipedia.org/wiki/International_Year_of_Microcredithttp://en.wikipedia.org/wiki/Insurance_Regulatory_and_Development_Authorityhttp://en.wikipedia.org/wiki/Accion_Internationalhttp://en.wikipedia.org/wiki/Muhammad_Yunushttp://en.wikipedia.org/wiki/United_Nationshttp://en.wikipedia.org/wiki/2005http://en.wikipedia.org/wiki/International_Year_of_Microcredithttp://en.wikipedia.org/wiki/Insurance_Regulatory_and_Development_Authority8/11/2019 40 Himanshu Bhatnagar - Micro Finance- Financial Product for Bottom of Pyramid Market
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History of Microfinance in India
n ndia, institutional credit agencies (banks) made an entry in rural
areas initially to provide an alternative to the rural money lenders who
provided credit support, but not without e#ploiting the rural poor.
!here are 3 main factors that count to the bringing up of
Microfinance as a :olicy in ndia
1. !he first of these pivotal events was ndira ;andhi?@ in a 1%.5' increase in rural
bank branches in ndia between 123? and 12%. !oday, ndia has over
?5,&&& rural branches of commercial banks and regional rural banks,
1,&&& cooperative bank branches.
5. !he second national policy that has had a significant impact on the
evolution of ndia
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ndia was the liberaliation of ndia
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3. Need for Micro Financing
ince independence, various governments in ndia have e#perimented
with a large number of grant and subsidy based poverty alleviation
programs. !hese programs were based on grant6subsidy and the credit
linkage was through commercial banks only. As a result, these
programs became unsustainable, perpetuated a dependant status on
the beneficiaries and depended ultimately on the govt. employees for
delivery. !his not only led to misuse of both credit and subsidy but
banks never looked at it as a profitable and commercial activity as
well.
$ence was adopted the concept of microcredit in ndia. uccess
stories in neighboring countries, like ;rameen Bank in Bangladesh,
Bank 9akiat in ndonesia, -ommercial E ndustrial Bank in :hilippines
etc, gave further boost to the concept in ndia in the 12&s. ndia thus
adopted the similar model of e#tending credit to the poorest sector
and took a no. of steps to promote microfinancing in the country.
Who are the clients of microfinance?
!he typical microfinance clients are lowincome persons that do not
have access to formal financial institutions. Microfinance clients are
typically selfemployed, often householdbased entrepreneurs. In
rural areas, they are usually small farmers and others who are
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engaged in small income generating activities such as food processing
and petty trade. In uran areas, microfinance activities are more
diverse and include shopkeepers, service providers, artisans, street
vendors, etc. Microfinance clients are poor and vulnerable nonpoor
who have a relatively stable source of income.
Microfinance generally targets poor women because they have proven
to be reliable credit risks and when they have the financial means,
they invest that money back into their families, resulting in better
health and education, and stronger local economies. By providing
access to financial services loans and responsibility for repayment,
maintaining savings accounts, providing insurance microfinance
programs send a strong message to households and communities.
tudies have shown that women become more assertive and
confident, have increased mobility, are more visible in their
communities and play stronger roles in decision making.
For instance, micro credit might have a far more limited market scope
than, say, a more diversified range of financial services which includes
various types of savings products, payment and remittance services,
and various insurance products. For e#ample, many very poor farmers
may not really wish to borrow, but rather, would like a safer place to
save the proceeds from their harvest as these are consumed over
several months by the re*uirements of daily living.
For e#ample, many very poor farmers may not really wish to borrow,
but rather, would like a safer place to save the proceeds from their
harvest as these are consumed over several months by the
re*uirements of daily living.
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Ho does microfinance hel! the !oor?
Microfinance brings the power of credit to the grassroots by way of
loans to the poor, without re*uirement of collateral or previous credit
record. G#perience shows that microfinance can help the poor to
increase income, build viable businesses, and reduce their vulnerability
to e#ternal shocks.
:overty is multidimensional. By providing access to financial services,
microfinance plays an important role in the fight against the many
aspects of poverty. For instance, income generation from a business
helps not only the business activity e#pand but also contributes to
household income and its attendant benefits on food security,
childrenHs education, etc. Moreover, for women, who, in many
conte#ts, are secluded from public space, transacting with formal
institutions can also build confidence and empowerment.
9ecent research has revealed the e#tent to which individuals around
the poverty line are vulnerable to shocks such as illness of a wage
earner, weather, theft, or other such events. !hese shocks produce a
huge claim on the limited financial resources of the family unit, and,
absent effective financial services, can drive a family so much deeper
into poverty that it can take years to recover.
"ren>t the !oor too !oor to sa$e
!he poor already save in ways that we may not consider as
InormalI savings investing in assets, for e#ample, that can be
easily e#changed to cash in the future (gold +ewelry, domestic
animals, building materials, etc.). After all, they face the same
series of sudden demands for cash we all faceJ illness, school
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fees, need to e#pand the dwelling, burial, weddings.
!hese informal ways that people save are not without their
problems. t is hard to cut off one leg of a goat that represents a
familyHs savings mechanism when the sudden need for a small
amount of cash arises. r, if a poor woman has loaned her
IsavedI funds to a family member in order to keep them safe
from theft (since the alternative would be to keep the funds
stored under her mattress), these may not be readily available
when the woman needs them. !he poor need savings that are
both safe and liuid.!hey care less about the interest rates
that they can earn on the savings, since they are not used to
saving in financial instruments and they place such a high
premium on having savings readily available to meet emergency
needs and accumulate assets.
!hese savings services must be adapted to meet the :oor
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:assing of Mutually Aided -oop. Act in A: in 122%.
When is microfinance an a!!ro!riate tool?
t is hard to imagine that there would be any family in the world today
for which some type of formal financial service couldnHt be designed
and made useful. But the fact of the matter is that in most peopleHs
mind, ImicrofinanceI still refers to micro credit.
Micro credit is only useful in certain situations, and with certain types
of clients. As we are finding out, a great number of poor, and
especially e#tremely poor, clients e#clude themselves from micro credit
as it is currently designed. G#tremely poor people who do not have any
stable incomeKsuch as the very destitute and the homelessKshould
not be microfinance clients, as they will only be pushed further into
debt and poverty by loans that they cannot repay. As currently
designed, micro credit re*uires sustained, regular, and often significant
payments from poor families.
Micro credit serves best those who have identified an economic
opportunity and who are in a position to capitalie on that opportunity
if they are provided with a small amount of ready cash. !hus, those
poor who work in stable or growing economies, who have
demonstrated an ability to undertake the proposed activities in an
entrepreneurial manner, and who have demonstrated a commitment to
repay their debts (instead of feeling that the credit represents some
form of social revindication), are the best candidates for micro credit.
!he universe of potential clients e#pands e#ponentially however, once
we take into account the broader concept of 7microfinance8.
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'.&y!es of %rgani(ations and )om!osition of
the *ector
Microfinance providers in ndia can be classified under three broad
categoriesJ formal, semiformal, and informal.
Formal *ector
!he formal sector comprises of the banks such as /ABA9D, DB and
other regional rural banks (99Bs).
!hey primarily provide credit for assistance in agriculture and micro
enterprise development and primarily target the poor. !heir deposits at
around 9s. ?%&billion and of that, around 9s. 5%&billion has been given
as advances. !hey charge an interest of 151?.%' but if we include
the transaction costs (number of visits to banks, compulsory savings
and costs incurred for payments to animators6staff6local leaders etc)they come out to be as high as 515'.
*emi formal *ector
!he ma+ority of institutional microfinance providers in ndia are semi
formal organiations broadly referred to as MFs and ;$s. 9egistered
under a variety of legal acts these organiations greatly differ in
philosophy, sie, and capacity. !here are over %&& nongovernment
organiations (/;s) registered as societies, public trusts, or non
profit companies.
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Informal *ector
n addition to friends and family, moneylenders, landlords, and traders
constitute the informal sector. Lhile estimates of their importance vary
significantly, it is undeniable that they continue to play a significant
role in the financial lives of the poor.
What are MFIs and *+Hs?
uite simply, a microfinance institution is an organiation that offersfinancial services to low income populations. Almost all of these offer
microcredit and only take back small amounts of savings from their
own borrowers, not from the general public. Lithin the microfinance
industry, the term microfinance institution has come to refer to a wide
range of organiations dedicated to providing these servicesJ /;s,
credit unions, cooperatives, private commercial banks and nonbank
financial institutions (some that have transformed from /;s intoregulated institutions) and parts of stateowned banks, for e#ample.
!he image most of us have when we refer to MFs is of a 7financial
/;8, an /; that is fully and virtually e#clusively dedicated to
offering financial services in most cases micro credit /;s are not
allowed to capture savings deposits from the general public. !hese
groups of a few hundred /;s have led the development ofmicrocredit, and subse*uently microfinance, the world over.
A great many /;s that offer microcredit, perhaps even a ma+ority, do
many other nonfinancial development activities and would bristle at
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the suggestion that they are essentially financial institutions. 0et, from
an industry perspective, since they are engaged in supplying financial
services to the poor, we call them MFs. !he same sort of situation
e#ists with a small number of commercial banks that offer
microfinance services. For our purposes, we refer to them as MFs,
even though only a small portion of their assets may actually be tied
up in financial services for the poor. n both cases, when people in the
industry refer to MFs, they are referring only to that part of the
institution that offers microfinance.
!here are other institutions, however, that consider themselves to be
in the business of microfinance and that will certainly play a role in a
reshaped and deepened financial sector. !hese are communitybased
financial intermediaries. ome are membership based such as credit
unions and cooperative housing societies. thers are owned and
managed by local entrepreneurs or municipalities. !hese institutions
tend to have a broader client base than the financial /;s and already
consider them to be part of the formal financial sector. t varies fromcountry to country, but many poor people do have some access to
these types of institutions, although they tend not to reach down
market as far as the financial /;s.
*E=F HE= +%@* (*H+A is group of rural poor who have
volunteered to organie themselves into a group for eradication of
poverty of the members. !hey agree to save regularly and convert
their savings into a -ommon Fund known as the ;roup corpus. !he
members of the group agree to use this common fund and such other
funds that they may receive as a group through a common
management. !he group formation will keep in view the following
broad guidelinesJ
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;enerally a selfhelp group may consist of 1& to 5& persons.
$owever, in difficult areas like deserts, hills and areas with scattered
and sparse population and in case of minor irrigation and disabled
persons, this number may be from %5&. ;enerally all members of the
group should belong to families below the poverty line. $owever, if
necessary, a ma#imum of 5&' and in e#ceptional cases , where
essentially re*uired, up to a ma#imum of ?&' of the members in a
group may be taken from families marginally above the poverty line
living contiguously with B:" families and if they are acceptable to the
B:" members of the group. !his will help the families of occupational
groups like agricultural laborers, marginal farmers and artisans
marginally above the poverty line, or who may have been e#cluded
from the B:" list to become members of the elf $elp ;roup.
$owever, the A:" members will not be eligible for the subsidy under
the scheme. !he group shall not consist of more than one member
from the same family. A person should not be a member of more than
one group. !he B:" families must actively participate in the
management and decision making, which should not ordinarily beentirely in the hands of A:" families. Further, A:" members of the elf
$elp ;roup shall not become office bearers (;roup "eader, Assistant
;roup "eader or !reasurer) of the ;roup.
!he group should devise a code of conduct (;roup management
norms) to bind itself. !his should be in the form of regular meetings
(weekly or fortnightly), functioning in a democratic manner, allowing
free e#change of views, participation by the members in the decision
making process.
!he group should be able to draw up an agenda for each meeting and
take up discussions as per the agenda.
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!he members should build their corpus through regular savings. !he
group should be able to collect the minimum voluntary saving amount
from all the members regularly in the group meetings. !he savings so
collected will be the group corpus fund.
!he group corpus fund should be used to advance loans to the
members. !he group should develop financial management norms
covering the loan sanction procedure, repayment schedule and interest
rates.
!he members in the group meetings should take all the loaning
decisions through a participatory decision making process.
!he group should maintain simple basic records such as Minutes book,
Attendance register, "oan ledger, ;eneral ledger, -ash book, Bank
passbook and individual passbooks. !he sample :erforma for
maintenance of above records by the group is in the Anne#ure for
guidance. !hese could be used with necessary changes6 modifications
wherever re*uired.
%&' of the groups formed in each block should be e#clusively for the
women. n the case of disabled persons, the groups formed should
ideally be disabilityspecific wherever possible, however, in case
sufficient number of people for formation of disabilityspecific groups
are not available, a group may comprise of persons with diverse
disabilities or a group may comprise of both disabled and nondisabled
persons below the poverty line.
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,. Why do MFIs charge such high interest rates
to !oor !eo!le?
:roviding financial services to poor people is *uite e#pensive,
especially in relation to the sie of the transactions involved. !his is
one of the most important reasons why banks donHt make small loans.
A N1&& dollar loan, for e#ample, re*uires the same personnel and
resources as a N5,&&& one thus increasing per unit transaction costs.
"oan officers must visit the clientHs home or place of work, evaluate
creditworthiness on the basis of interviews with the clientHs family and
references, and in many cases, follow through with visits to reinforce
the repayment culture. t can easily cost 4N5% to make a micro loan.
Lhile that might not seem unreasonable in absolute terms, it might
represent 5%' of the value of the loan amount, and force the
institution to charge a 7high8 rate of interest to cover its cost of loan
administration.
Gvidence shows that clients willingly pay the higher interest rates
necessary to assure long term access to credit. !hey recognie that
their alternativesKeven higher interest rates in the informal finance
sector (moneylenders, etc.) or simply no access to creditKare much
less attractive for them. nterest rates in the informal sector can be as
high as 5& percent per day among some urban market vendors.
Moreover, the interest rate is only a small part of their overall
transaction cost of credit, and if microfinance institutions offer credit
on a more accessible basis, substantial costs in terms of time, travel,
paperwork, etc. can be reduced, thus benefiting the poor.
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-. )an microfinance e !rofitale?
0es it can. Data from the Micro Banking Bulletin reports that =? of the
worldHs top MFs had an average rate of return, after ad+usting for
inflation and after taking out subsidies programs might have received,
of about 5.%' of total assets. !his compares favorably with returns in
the commercial banking sector and gives credence to the hope of
many that microfinance can be sufficiently attractive to mainstream
into the retail banking sector. Many feel that once microfinance
becomes mainstreamed, massive growth in the numbers of clients can
be achieved.
thers worry that an e#cessive concern about profit in microfinance
will lead MFs upmarket, to serve better off clients who can absorb
larger loan amounts. !his is the 7crowding out8 effect. !his may
happen after all, there are a great number of very poor, poor, and
vulnerable nonpoor who are not reached by the banking sector.
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t is interesting to note that while the programs that reach out to the
poorest clients perform less well as a group than those who reach out
to a somewhat betteroff client segment, their performance is
improving rapidly and at the same pace as the programs serving a
broadbased client group did some years ago. More and more MF
managers have come to understand that sustainability is a precursor
to reaching e#ponentially greater numbers of clients. ;iven this,
managers of leading MFs are seeking ways to dramatically increase
operational efficiency. n short, we have every reason to e#pect that
programs that reach out to the very poorest micro clients can be
sustainable once they have matured, and if they commit to that path.
!he evidence supports this position.
/. Im!act of microfinance o$er !o$erty
!here is increasing emphasis on the significance of the wider impacts
of microfinance O those beyond the immediate financial and social
benefits for the individual. 0et, the wider impacts of microfinance are
notoriously difficult to identify or assess. ften, MFs< confident claims
to be having a wider impact and to be able to assess these impacts are
based on weak, circumstantial evidence. $ere we consider ways in
which building evidence of wider impacts may be approached, which
reflects processes of microfinance more faithfully, including the
intended and unintended conse*uences of microfinance operations.
Lider impacts may occur in the following waysJ
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through the laour mar9etB poor people taken on by e#panding
microfinance borrowers may as a conse*uence be taken upward
across the poverty line
through the ca!ital mar9etBthe intervention of a microfinanceinstitution may make e#isting lending institutions in the market,
such as private moneylenders, lower their interest rates to
compete, with beneficial effects on borrowers from institutions
other than the one being studied
through the mar9ets for goods consumed y !oor !eo!leB if
microfinance induces an increase in supply, and hence a
cheapening in the price, of goods consumed by poor people,households other than those of borrowers will benefit
through !roduction lin9agesB an e#pansion of livelihoods
(agricultural or otherwise) induced by microfinance will support the
formation of rural industries and services, and help to bring about
income changes among nonborrower households
6. )urrent *cenario of Micro financing in India
Indian Economy and Micro Microfinance
$ome to about 1.2 billion people as of 5&&, ndia constitutes
appro#imately one si#th of the world
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?&& million people or about =& million households are living below the
poverty line. t is further estimated that of these households, only
about 5& percent have access to credit from the formal sector.
Additionally, the segment of the rural population above the poverty line
but not rich enough to be of interest to the formal financial institutions
also does not have good access to the formal financial intermediary
services, including savings services.
A group of microfinance practitioners estimated the annualied credit
usage of all poor families (rural and urban) at over 9s %,&&& crores,
of which some & percent is met by informal sources. !his figure has
been e#trapolated using the numbers of rural and urban poor
households and their average annual credit usage (9s =&&& and 9s
2&&& pa respectively) assessed through various micro studies.
Gstimated that ?%& million people live Below :overty "ine
!his translates to appro#imately 3% million households.
Annual credit demand by the poor in the country is estimated to
be about 9s. =&,&&& crores.
-umulative disbursements under all microfinance programs is
only about 9s. %&&& crores.(Mar. &)
!otal outstanding of all microfinance initiatives in ndia estimated
to be 9s. 1=&& crores. (March &)
nly about % ' of rural poor have access to microfinance.
!hough a cumulative of about 5& million families have accessed
microfinance to the e#tent of 9s. %&&& crores, the total
outstanding is estimated to be only about 9s. 1=&& crores. !he
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active borrowers are estimated to have a per capita outstanding
of only 9s. 5%&&.
Lith 3% million poor households potentially re*uiring financial services,
the microfinance market in ndia is among the largest in the world.
Gstimates of household credit demand vary from a minimum of 9s.
5,&&& to 9s. =,&&& in rural areas and 9s. 2,&&& in urban settings.
;iven that & percent of poor households are located in rural areas,
total credit demand ranges between 9s. 5%% billion and 9s. %&& billion.
$owever, only 9s.1 billion of this amount has been generated so far.
!he reason for this is that ma+or portion for rural crediting has been
from the informal sector and this is at a very high interest rate, thus
reducing the volumes of such credits, and by far has been for
investment purposes (1?') and more for family emergencies (52')
and social e#penditures (12').
!here are a number of factors why rural crediting by the formal sector
has not taken pace so far.
$igh fiscal deficits have meant that ;overnment is appropriating
a large share of financial savings for itself.
:ersisting interest rate restrictions reduce the attractiveness of
lending, particularly to small, rural clients.
n the other hand, informal credits have been attractive although high
interest rates due toJ
Fle#ible repayment options
-onvenience and fre*uency with which such loans can be
accessed
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!he dependency of poor for credit on their family is ?2' while only
5' out of total creditor is taken through $;s. Moneylenderspercentage in total credit is ?3' which show the dependency onmoneylender. Merely 5' share in total credit show the need toconcern about it.
ecent trends in micro finance
!he scenario of microfinance sector facing drastically changes recently.!he initial trademark of -9 (-orporate ocial 9esponsibility) is nowchanges to profit earning sector. Many big corporate giant are mullingtowards the microfinance sector.
1. etailers in micro finance
/ow it is clear that microfinance is a large untapped market. !oday
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foray for 9eliance -apital in this area.9eliance -apital plans to fund microfinance institutions initially in;u+arat and Maharashtra, before spreading out on a national scale.
MA Financial ervices, with =1 branches across ;u+arat, caters to
over 5,%&,&&& customers in the urban, semiurban and rural markets.Pardan !rust offers microfinance to farmers, small shopkeepers,artisans, small enterprise workers and individuals engaged in animalhusbandry. ndian microfinance space is getting hotter with MFs likeQ.
2. Money transfer
A new concept comes in micro finance is CDhan thanantran
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0G Bank, also launching its microfinance division 0G Microfinancendia today, has signed an Mo4 for technical collaboration with Bostonbased Accion nternational, a microfinance institution. 0G Bank hasset apart 9s 1& crore for the ne#t two years for the microfinancedivision. !he division will offer credit, savings, insurance and
remittances in phases to the urban and rural poor.
nternational bank AB/ AM9 also targeting to reaches 1& lachousehold by 5&&2 with maintaining a Cnil< non performing assetsportfolio.
'. Indi$idual in$estor
/ow microfinance is not merely social services, individual investor canearn money through investing money in micro finance sector. Manyorganiations like -alvert Foundation, 9M offering the investment inmicrofinance sector.
Terms o" inestment
nterest rate 5.& per yearMaturity 15 monthecurity issuer -alvert Foundation, 9M etc.
!his security is not a mutual fund not FD- or :- and has certainrisk.
,. 8iometric "&M ac9ed microfinance initiati$eFor long, bankshave been lenders to their rural customers. /ow theyhave announced some rather uni*ue ways in micro financing to getthem to deposit savings,-itibankhas launched the :ragati saving account for its micro finance
customers. !his account is similar to a no frills account and does notre*uire any minimum balance.
!he bank will provide services through a biometric A!M that will alsospeak to customers in $indi, Marathi, !amil and !elugu.
IAs the customers start saving, there will be ability to sweep thismoney into deposits so that they earn better interest than the
( 33 )
http://news.moneycontrol.com/india/news/business/microfinancingatm/citibanksbiometricatmbackedmicrofinanceinitiative/20/44/article/254162http://news.moneycontrol.com/india/news/business/microfinancingatm/citibanksbiometricatmbackedmicrofinanceinitiative/20/44/article/254162http://news.moneycontrol.com/india/news/business/microfinancingatm/citibanksbiometricatmbackedmicrofinanceinitiative/20/44/article/254162http://news.moneycontrol.com/india/news/business/microfinancingatm/citibanksbiometricatmbackedmicrofinanceinitiative/20/44/article/2541628/11/2019 40 Himanshu Bhatnagar - Micro Finance- Financial Product for Bottom of Pyramid Market
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conventional saving account. As we start getting imprints of customersin terms of deposit behaviour we may be able to set them overdraftfacilities as opposed to convention loan,I says : Ray Qumar, BusinessManager ;lobal -onsumer ;roup, -itigroup ndia.
ncidentally, -- Bank also has a micro saving product in rissa forfarmers. ther banks like Andhra Bank and Bank of ndia also offerbiometric A!M facility to their micro finance customers. n fact bankssee this untapped segment not as philanthropy but as sound business,at a time when cheap deposits are hard to come by.
What is the go$ernment#s role in su!!orting
microfinance?
;overnments have a complicated role when it comes to microfinance.
4ntil recently, governments generally felt that it was their
responsibility to generate development financeH, including credit
programs for the disadvantaged. !wenty years of insightful criti*ue of
rural credit programs revealed that governments do a very bad +ob of
lending to the poor. hort term political gain is +ust too tempting for
politically controlled lending organiations they disburse too *uickly
(and thoughtlessly) and they collect too infre*uently (unwillingness to
be tough on defaulters). n urban areas, governments never really got
into the act, and subsidied micro enterprise credit is still relatively
rare when compare to its rural counterpart.
/ow that microfinance has become *uite popular, governments are
tempted to use savings banks, development banks, postal savings
banks, and agricultural banks to move microcredit. !his is not
generally a good idea, unless the government has a clear acceptance
( 34 )
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of the need to avoid the pitfalls of the past and a clear means to do so.
Many governments have set up ape# facilities that channel funds from
multilateral agencies to MFs. Ape# facilities can be *uite complicated
and there are few successful e#amples in microfinance. uccessful
ape# organiations in microfinance tend to be built on the backs of
successful MFs, not the other way around. Finally, governments can
also get involved in microfinance by concerning themselves with the
regulatory framework that impinges on the ability of a wide range of
financial actors to offer financial services to the very poor. !his topic is
treated below.
Microfinance and )a!ital euirement
!he demand situation in the microfinance market can be gauged from
the !ableJ
At a Glance: Scale of Indian Microfinance
oulation o" India 0estimate - une *12 (,13* million
Mi!ro"inan!e Seri!es - otential !lient outrea!h 4** million
Mi!ro"inan!e Seri!es - !urrent !lient outrea!h 0Mar. *12 4* million
Annual gro$th in Mi!ro"inan!e Seri!es - +*5
Mi!ro"inan!e loan ort"olio 0Mar. *12 6S' 7+ billion
"inan!ing needs - 8 year estimate 0Set. *12 6S' 7+* billion
Ta"le %& 'emand for micro-lendin# in Indian
Source: Microfinance India (MFI) 2008
;iven these figures there is need for broad basing the reach of
financial services to the people falling in the low income category, help
them invest in and benefit from their skill sets and tide over the impact
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of adverse shocks in the process. !he intentions might sound *uite
philanthropic however microfinance is turning out to be a profitable
market for commercial banks which is *uite evident from their
presence in this area. !he new commercial banks do not have the
infrastructure to ensure the last mile connectivity and have to rely
heavily of microfinance institutions (MF).
)hallenges in the Indian conte5t
!raditionally bankhave usually not provided financial services to clients
with little or no cash income. Banks must incur substantial co! to
managing a client account, regardless of how small the sums of money
involved. For e#ample, the total revenue from delivering one hundred
loans worth N1,&&& each will not differ greatly from the revenue that
results from delivering one loan of N1&&,&&&. But it takes nearly a
hundred times as much work and cost to manage a hundred loans as it
does to manage one. A similar e*uation resists efforts to deliver other
financial services to poor people. !here is a break"e#en $oin!in loan and
deposit sies below which banks lose money on each transaction they
make. :oor people usually fall below it.
n addition, most poor people have few assets that can be secured by
a bank as co%%a!era%. As documented e#tensively by &ernando de So!oand
others, even if they happen to own land in the developing world, they
may not have effective !i!%eto it. !his means that the bank will have
little recourse against defau%!in'borrowers.
een from a broader perspective, it has long been accepted that the
development of a healthy national financia% !eis an important goal
( 36 )
http://en.wikipedia.org/wiki/Bankshttp://en.wikipedia.org/wiki/Costhttp://en.wikipedia.org/wiki/Breakevenhttp://en.wikipedia.org/wiki/Collateralhttp://en.wikipedia.org/wiki/Hernando_de_Soto_(economist)http://en.wikipedia.org/wiki/Titlehttp://en.wikipedia.org/wiki/Defaulthttp://en.wikipedia.org/wiki/Financial_systemhttp://en.wikipedia.org/wiki/Bankshttp://en.wikipedia.org/wiki/Costhttp://en.wikipedia.org/wiki/Breakevenhttp://en.wikipedia.org/wiki/Collateralhttp://en.wikipedia.org/wiki/Hernando_de_Soto_(economist)http://en.wikipedia.org/wiki/Titlehttp://en.wikipedia.org/wiki/Defaulthttp://en.wikipedia.org/wiki/Financial_system8/11/2019 40 Himanshu Bhatnagar - Micro Finance- Financial Product for Bottom of Pyramid Market
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and catalyst for the broader goal of national econoic de#e%o$en!.
$owever, national planners and e#perts focus their attention mainly on
developing a coercia% bankin' ec!ordealing in highvalue transactions,
and often neglect the delivery of services to households of limited
means, even though these households comprise the large ma+ority of
their populations.
Because of these difficulties, when poor people borrow they often visit
their relatives or the ubi*uitous local one%ender. Moneylenders often
charge over 1&' a month, or even a few percentage points Ha dayH for
their money. Lhile they often demonied and accused of uur, their
services are convenient and fast, and they can be very fle#ible when
borrowers run into problems. $opes of *uickly putting them out of
business have proven unrealistic, even in places where microfinance
institutions are very active.
n nations with lower population densities, meeting the operating costs
of a retail branch by serving nearby customers has proven
considerably more challenging.
Although much progress has been made, the problem has not been
solved yet, and the overwhelming ma+ority of people who earn less
than N1 a day, especially in the rural areas, continue to have no
practical aspects to formal sector.
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1
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)urrent *ituation of Microfinance and im!ortant issues
n 9a+asthan, microfinance is almost synonymous with elf $elp
;roups. !here is no other model of mF in the state. !here are
appro#imately 1.% lakh self help groups of women. Department of
women and child development has promoted about %&' of these
groups. ther government departments under developmental schemes
like ;0, Latershed Development etc, have organied another 5&5%' group. /;s have promoted remaining 5%?&' groups.
!he elf $elp Movement started more as Csocial mobiliation< of women
for their better place in family and society rather than Cmicrofinance
movement< in 9a+asthan. Many voluntary organiations had been
working with poor organiing them in Cvillage development
committees
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sewing, dari, galicha, candle, chalk, agarbatti, achar, bidi, papad,
handicrafts, etc.
But due to lack of proper marketing networks and many other reasons,
there was mi#ed e#perience. G#cept some success stories at highly
micro level, no significant impact is seen. t is probably a case of
CDouble Fault< First pushing poor to become entrepreneur and that too
in a collective way.
Cearly !rogress in *H+8an9 lin9ageDN"8"A
9ear o. o" SH;s!redit lin#ed
Annual loanamount in la!
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B!ADA in Alwar,
AGFA / Baran and Banswara,
49M4" in Bikaner,
ewa Mandir in 4daipur,
/avyuvak Mandal in Bhoruka etc.
Need of financial ser$icesB
t has been well researched and documented that poor have temporary
surpluses and they are in need of services to keep their savings safe. A
poor family may get the payment for their labour or they sell their
small assets or crops etc. !he money received from such transactionswould have small temporary surplus, which they would use over ne#t
few days6 months. f they do not have access to a place where they
can save that safely, it might result in to e#penses on less critical
items or even on things like drinking etc. t has been noticed that due
to lack of access to banks or $;s, they keep the money in cash and it
does not earn any interest.
Financial needs and financial ser$ices.
n developing economies and particularly in the rural areas, many
activities that would be classified in the developed world as financial
are not monetiedJ that is, money is not used to carry them out.
Almost by definition, poor people have very little money. But
circumstances often arise in their lives in which they need money or
the things money can buy.
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n tuart 9utherford
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Migrants 9s5&&&6
:oor mall andMarginal
Farmers,!raditonal servicestrades
Food, health,marriage and
other socialobligations,e*uipments
-onsumption
andproductiveloans up to9s1&&&&6
Moneylenders,
$;s,friends,relatives
Average Medium farmers,shopkeepers
Lorkingcapital, agriinputs, andsmall assets
:roductiveloans up to9s5%&&&6
$;, :A-Banks,moneylenders
Better
off
"arge farmer,
permanent6semiprmanent +obholders,traders
Big assets
vehicle to payold loans,toadvance loans
More than
9s5%,&&&
loans,may be upto9s.5,&&,&&&
-ommercial
banks, coopbanks
&he ma7or issues that need to e addressed ar eB
1. Access of poor to formal financial institutions.
5. uality of the e#isting elf $elp ;roups only ?&' $;s have
been Able to take "oan from Banks.
?. pread of the movementJ About &' of $;s are located in?&' of !he districts.
. utreachJ "arge number of poor is still beyond the reach of
$;s and Formal financial institutions.
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%.Microfinance is limited to micro savings and credit.
=.$uman resource challengeJ :erspective and capacities of mf
promoters is very "imited, /umbers of skilled persons in
microfinance is very less.
3.Most mf products and services offered are pre determined and
they are not based n the needs of the clients.
. !here is double reporting (same group being reported by
different $; :romoters), !here are also cases where one person is
member of many groups.
2. "argely the $;s are promoted to meet pro+ect re*uirements6
targets
1&. till there are many operational problems in $;Bank linkage
11. nade*uate financial support so far on $; formation, it needs
at least ? years, and about 9s.1&, &&&6 per $; for promoting a
good *uality $;.
11 Women and micro finance
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Although men, as well as women, face difficulties in establishing an
additional enterprise, women have barriers to overcome. Among them
are negative sociocultural attitudes, legal barriers, practical e#ternal
barriers, lack of education and personal difficulties.
n spite of this, for women and especially for poor women,
microentreprise ownership has emerged as a strategy for economical
survival. ne of the most essential factors contributing to success in
microentrepreneurship is access to capital and financial services. For
various reasons, women have had less access to these services than
men.
n this conte#t, credit for microentreprise development has been a
crucial issue over the past two decades. 9esearch has shown that
investing in women offers the most effective means to improve health,
nutrition, hygiene, and educational standards for families and
conse*uently for the whole of society. !hus, a special support for
women in both financial and nonfinancial services is necessary.
9egarding limitedaccess to financial services, women depend largely
on their own limited cash resources or, in some cases, loans from
e#tended family members for investment capital. maller amounts of
investment capital effectively limit women to a narrow range of low
return activities which re*uire minimal capital outlays, few tools and
e*uipment and rely on farm produce or ine#pensive raw materials.
n general, women need access to small loans (especially for working
capital), innovative forms of collateral, fre*uent repayment schedules
more appropriate to the cash flows of their enterprises, simpler
application procedures and improved access to saving accounts.
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urveys have shown that many elements contribute to make it more
difficult for women in small businesses to make a profit. !hese
elements areJ
o "ack of knowledge of the market and potential profitability,
thus making the choice of business difficult.
o nade*uate bookkeeping.
o Gmployment of too many relatives which increases social
pressure to share benefits.
o etting prices arbitrarily.
o "ack of capital.
o $igh interest rates.
o nventory and inflation accounting is never undertaken.
o -redit policies that can gradually run their business (many
customers cannot pay cash on the other hand, suppliers
are very harsh towards women).
Women can ma9e microcredit succeed in IndiaB
Hndia has to understand that microfinance is workable and
sustainable anywhere where there is poverty. And to make it
successful, it needs to emphasie and mobilie the role of women in
each rural and poor household,H the chief architect of BangladeshHs
;rameen Bank told a conference organied by the Federation of ndian
-hambers of -ommerce and ndustry (F--). Hndia and Bangladesh
have no ma+or difference in poverty. f microfinance or microcredit is
successful in Bangladesh, it can be successful in ndia as well,H 0unus
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emphasied. H!he ;rameen Bank and the work that we do is not
something e#traordinary and neither is it a model. t is a rather simple
way of solving the comple# problems of poverty,H the ==yearold
economist said.
HBangladesh is very close to achieving the 4/ millennium development
goal of eradicating poverty. And we have been able to successfully
reach & percent poor households.< ndia has a long way to go, but it
can come out with e#cellent results only if it catches the pace,H he
reiterated.
Ho to increase and su!!ort omen>s !artici!ation in
microfinance acti$ities?
Both governments and donors should e#plore ways of developing
innovative credit programs using intermediary channels or institutions
closer to the target groups such as cooperatives, womenHs groupassociations and other grassroots organiations. avings and credit
programs should be designed in a way not to e#clude women from
participating.
Additionally, there is a need to e#amine the impact of structural
ad+ustment policies on men and women at the family level as well as
within various subsectors of the labour market and within the small
enterprise sector itself.
n general terms, in order to facilitate the participation of women in
micro and small enterprise, donors shouldJ
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S Gncourage micro enterprise programs to develop specific strategies
for recruiting women as clients, from within their e#isting target
groups.
S Gncourage micro enterprise programs to e#pand their target groups
to include the sies and types of enterprise activities in which women
engage and6or e#periment with assistance strategies, business and
technical assistance needs of these types of enterprises.
S -onsider e#panding support to a broader range of organiations,
especially povertyfocused organiations active in rural areas. upport
for these organiations should include technical assistance and training
in programs planning, management and in developing teams of female
staff to assist clients in business planning and management.
ural Finance for ural Women
:overty hits hardest at the female half of humankind. f woman living
in a rural area of a developing country, they are likely to be poorer
than a man, more vulnerable, own no land, be less educated and in
poorer health. And you are unlikely to live as long. truggling to
combine a Hdouble dayH of lowpaid work with care for the home, rural
women often have to cope with fre*uent pregnancies and child
mortality. For women, perhaps the cruelest reality of all is that they
have less chance than men to escape from poverty. A rural woman is
likely to have little or no say in the way the family spends its income.
Discrimination in education is the start of the vicious spiral of poverty.
A girl may be deprived of schooling and literacy for no other reason
than that she is female. eventy per cent of poor women in ndia
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cannot read or write. lliteracy often e#cludes people from written
knowledge and decisionmaking. ome rural women have been
affected by trade liberaliation they are unable to participate in the
marketing of e#port crops as they lack land rights and access to
essential farm inputs. n the other hand, some women have gained by
securing +obs in new e#port activities. nvestment in rural women pays
off.
S ndian population is .1' women and %1.2' men
S Female illiteracy is =5' whereas the male illiteracy rate is ?'
S !he labour force participation rate of women is 55.3', less than half
of the menHs rate of %1.='
S n rural ndia, agriculture and allied industrial sectors employ as
much as 2.%' of the total female labour
S Lomen have e#tensive work loads with dual responsibility for farm
and household production
S LomenHs work is getting harder and more timeconsuming due to
ecological degradation and changing agricultural technologies and
practices
S Lomen have an active role and e#tensive involvement in livestock
production, forest resource use and fishery processing
S Lomen contribute considerably to household income through farm
and non farm activities as well as through work as landless agricultural
labourers
S LomenHs work as family labour is underestimated
S !here are high degrees of interstate and intrastate variations in
gender roles in agriculture, environment and rural production.
ural Women at a glance
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9ural women comprise more than one *uarter of the total world
population. %&& million women live below the poverty line in rural
areas... Lomen perform ?& per cent of the agricultural work in
industrialied countries8. 9ural women the world over are an integral
and vital force in the development processes that are the key to socio
economic progress. 9ural women from the backbone of the agricultural
labour force across much of the developing world and produce ?%%'
of ;ross Domestic :roduct and well over %&' of the developing
worldHs food. 0et, half a billion rural women are poor and lack access to
resources and markets.I
Need credit to rural omen
9ural women play a fundamental role in daily management of
agricultural activities and of the family unit. !hey are however often
confronted with numerous obstacles when applying for credit.
-onse*uently, they try to optimie their possibilities of accessing creditfrom the various e#isting rural finance servicesJ
!he IunofficialI system (an alternative established by community
members)
!he IofficialI system (banks and other official financial institutions),
and
FarmersH organiations which give loans to their members
9ural women fulfill multiple functions on a daily basisJ they are
mothers providing for their familyHs wellbeing, farmers producing food
for the family, shopkeepers supplying indispensable additional income.
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!hey are also in charge of natural resources management which
ensures future food security for their families.
Although rural women represent a fundamental pillar for survival and
management of the family unit, they are confronted with real
difficulties in accessing additional resources such as credit. Parious
barriers arise when they try to undertake or develop any income
generating production activities.
=oans facilitates to rural omen
"oans play an important role in the economic, social and political
improvement of the situation of women throughout the world.
mproving rural womenHs access to finance gives them a chance to
become autonomous. !his can contribute to increase agricultural
productivity, development of incomegenerating activities alongside
their production activities, better control of production methods, and
improved natural resource management. As a result they will be able
to ensure food security for the future of which they are the guarantors.
Additional sources of finance can help in developing necessary
commercial agriculture within the national and international conte#t,
whilst retaining subsistence farming for the communityHs daily needs.
By increasing their economic power, they will be able to organie
themselves more efficiently, to affirm their position as rural women
farmers, to participate in decision making processes and to draw up
policies which concern them as well as defending their own interests
with public authorities and other relevant institutions.
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Microfinance operation. First of all, the poor repay their loans and are
willing to pay for higher interest rates than commercial banks provided
!hat access to credit is provided. !he solidarity group pressure and
se*uential lending provide strong repayment motivation and produce
e#tremely low default rates. econdly, the poor save and hence
microfinance should provide both savings and loan facilities. !hese two
findings imply that banking on the poor can be a profitable business.
$owever, attaining financial viability and sustainability is the ma+or
institutional challenge. Deposit mobiliation is the ma+or means for
Microfinance institutions to e#pand outreach by leveraging e*uity. n
order to be sustainable, microfinance lending should be grounded on
market principles because large scale lending cannot be accomplished
through subsidies.
A main conclusion of this paper is that microfinance can contribute to
solving the problem of inade*uate housing and urban services as an
integral part of poverty alleviation programs. !he challenge lies in
finding the level of fle#ibility in the credit instrument that could make it
match the multiple credit re*uirements of the low income borrowers
without imposing unbearably high cost of monitoring its enduse upon
the lenders. A promising solution is to provide multipurpose loans orcomposite credit for income generation, housing improvement and
consumption support. -onsumption loan is found to be especially
important during the gestation period between commencing a new
economic activity and deriving positive income. -areful research on
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demand for financing and savings behavior of the potential borrowers
and their participation in determining the mi# of multipurpose loans
are essential in making the concept work.
Gventually it would be ideal to enhance the creditworthiness of the
poor and to make them more IbankableI to financial institutions and
enable them to *ualify for longterm credit from the formal sector.
Microfinance institutions have a lot to contribute to this by building
financial discipline and educating borrowers about repayment
re*uirements.
13. 8iliogra!hyB
LGB!G
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1. www.microfinancegateway.org5. www.coolavenues.com?. www.wikipedia.com. www.wikianswers.com%. www.indianmba.com
=. www.wikipedia.org3. www.thehindubusinessline.com. www.hindu.com2. www.littleindia.com
R49/A" A/D MA;AT/G
1. -entre for microfinance, Raipur5. -entre of /ABA9D, Raipur?. Magaine Micro finance world.(RanMarch &2)
. Business ndia.(may ?, 5&&2)%. Rournal management trends (march&) vol.% no. 1 E 5=. +ournal Dimensions (March&) vol.11 no.
(DM ins. f mgmt. dev. Mysore)