A Study on Microfinance Sector in Karnataka

7/31/2019 A Study on Microfinance Sector in Karnataka

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CHAPTER-I


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1.1INTRODUCTIONThe Important finding of last three decades in the finance field is poor can save, can borrow andcertainly repay loans. This is world of microfinance.

A good definition of microfinance as provided by Robinson is, Microfinance refers to small-

scale financial services for both credits and deposits that are provided to people who farm or

fish or herd; operate small or micro enterprise where goods are produced, recycled, repaired, or

traded; provide services; work for wages or commissions; gain income from renting out small

amounts of land, vehicles, draft animals, or machinery and tools; and to other individual and

local groups is developing countries, in both rural and urban areas.

In the Indian context terms like small and marginal farmers, rural artisans and economically

weaker sections have been used to broadly define micro finance customers. The recent task

force on Micro Finance has defined it as provision of thrift, credit and other financial services

and products of very small amounts to the poor in rural, semi urban or urban areas, for enabling

them to raise their income levels and improve living standards. Microfinance services are

provided by formal institutions such as rural banks and Cooperative; semiformal institutions such

as non government organizations; and Informal sources such as moneylenders and

shopkeepers. Institutional microfinance is defined to include microfinance services provided by

both formal and semiformal institutions.

Microfinance links long term development targets and economic thinking. Financial tools

such as small loans, affordable savings accounts and low premium insurance policies help

poor households and small businesses that do not typically have access to financial services.

Microfinance institutions are defined as institutions whose business is the provision of

microfinance services. At present, a large part of micro finance activity is confined to credit only.

Women constitute a vast majority of users of microcredit and savings services.

Self-help group (SHG) is an association of people belonging to similar socioeconomic

characteristics, residing is the locality. The SHG concept is most appropriate and can succeed in


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our country only if and when a holistic approach is imbibed in the promotion of SHGs as self-

sustaining local organizations. However bank linkages of SHGs are at present driven more by

annual targets than as a system. A SHG has an average size of about 15 people form a

homogeneous class. They come together for addressing their common problems. They are

encouraged to make voluntary thrift on a regular basis. They use this pooled resources to make

small interest bearing loans to their members. The process helps them imbibe the essentials of

financial intermediation including prioritization of needs, setting terms and conditioning, and

accounts keeping.

Post nationalization in India, commercial banks have been participating actively implementation

of poverty alleviation programs of the government like the Integrated Rural Development

Program (IRDP), Small Farmers Development Agency (SFDA) for the marginal farmers and

agricultural labourers and the Drought Prone Area Program (DPAP). Experimenting with

subsidized credit for the poor through these programs has resulted in one unpleasant and tangible

outcomeincreased Non Performing Assets. Group based micro finance was introduced in the

country in the early 1970s, but has not picked up momentum until recent times. Banks, over time

have begun adopting models that have been tried and tested by Non Government Organizations

(NGOs) and Micro Finance Institutions (MFI). These institutions had the clear vision to disprove

the intuition of the formal bankers that banking with the poor was a risky affair. They have

proved beyond doubt that banking with the poor is most certainly a profitable business. They

have also popularized the concept of group lending through the formation and grooming of Self

Help Group (SHGs).

The objective of this research is to study the growth of microfinance sector in Karnataka. The

analysis has been based on the secondary data obtained From NABARD and other published

articles.

The interest in microfinance has burgeoned during the last two decades: multilateral lendingagencies, bilateral donor agencies, developing and developed country governments, and

nongovernment organizations (NGOs) all support the development of microfinance. A variety of

private banking institutions has also joined this group in recent years. As a result, microfinance

services have grown rapidly during the last decade, although from an initial low level, and have

come to the forefront of development discussions concerning poverty reduction. Despite this


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growth, as concluded in the recently completed Rural Asia Study, rural financial markets in

Asia are ill-prepared for the twenty-first century. 1 about 95 percent of some 180 million poor

households in the Asian and Pacific Region (the Region) still have little access to institutional

financial services. Development practitioners, policy makers, and multilateral and bilateral

lenders, however, recognize that providing efficient microfinance services for this segment of the

population is important for a variety of reasons.

a. Microfinance can be critical element of an effective poverty reduction strategy. Improvedaccess and efficient provision of savings, credit, and insurance facilities in particular can

enable the poor to smooth their consumption, manage their risks better, build their gradually,

and develop their microenterprises.

b. Microfinance services can also contribute to the improvement of resource allocation,promotion of markets, and adoption of better technology; thus, microfinance helps to

promote economic growth and development.

c. Without permanent access to institutional microfinance, most poor households continue torely on meager self-finance or informal sources of microfinance, 3 which limits their ability

to actively participate in and benefit from the development opportunities.

d. Microfinance can provide an effective way to assist and empower poor women, who make upa significant proportion of the poor and suffer disproportionately from poverty.

e. Microfinance can contribute to the development of the overall financial system throughintegration of financial markets.

Today, Microfinance is playing a vital role in development of the economy in any Country.

Moreover, microfinance has moved all beyond its roots in developing countries. Micro Finance

is emerging as a powerful instrument for poverty alleviation in the new economy. Micro Finance

for the poor and women has received extensive recognition as a strategy for poverty reduction

and for economic and women empowerment. Micro finance means helping people in providing

small financial assistance to poor families to strengthen their financial position and social status.


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Meaning of Microfinance:-

Microfinance refers to small savings, credit and insurance services extended to socially and

economically disadvantaged segments of society. Micro finance, a concept that is helping the

poor to avail of and create economic growth opportunities.

Microfinance is the provision offinancial services to low-income clients, including consumers

and the self-employed, who traditionally lack access to banking and related services.

Definition:-

The important definitions of microfinance are as follows:-

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

development approach that involves providing financial services through institutions to low

income clients.

In India, Microfinance has been defined by The National Microfinance Taskforce, 1999 asprovision of thrift, credit and other financial services and products of very small amounts to the

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

improve living standards.

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

History of the Microfinance Movement

In 1974, famine struck Bangladesh. At the time, Dr. Muhammad Yunus was a professor of

economics at the University of Chittagong. Disillusioned by the elegant theories of economics

that could not explain the thousands of poor people dying of starvation on the streets; he was

determined to find a practical way to help the poor. During a visit to the nearby village of Jorba,

he was astounded to find that a sum of $27 could radically change the lives of 42 people in the
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village. This was the sum of money they collectively needed to buy bamboo to make the stools

they sold to make a living. He took $27 from his pocket and made 42 loans to the stool makers in

this tiny village. They were able to pay him back with interest and take a step towards lifting

themselves out of poverty.

This simple idea that the poor could use credit to lift themselves out of poverty, led Dr. Yunus to

create The Grameen Rural Bank in 1983. Since its inception, it has made over $8.96 billion in

loans to over eight million borrowers. Its methodologies have become the cornerstone of the

microfinance industry. In 2006, The Grameen Bank and Dr. Yunus were awarded the Nobel

Peace Prize.

Explosive Growth

In the 1970s and 80s, inspired by Grameens success, social innovators and organizations around

the world began to experiment with different programs to bring financial services to the poor.

Microfinance institutions proved that it was actually possible to build viable businesses through

lending to the poor. The number of microfinance institutions increased rapidly.

The 2006 Microfinance Summit Campaign Report estimates that there are now more than 3,000

microfinance institutions, serving more than 100 million poor people in developing countries.

The total cash turnover of these institutions world-wide is estimated at $2.5 billion and thepotential for new growth is outstanding.

Micro FinanceGlobal Scenario

The concept of microfinance is not new. Savings and credit groups that have operated for

centuries include the "susus" of Ghana, "chit funds" in India, "tandas" in Mexico, "arisan" in

Indonesia, "cheetu" in Sri Lanka, "tontines" in West Africa, and "pasanaku" in Bolivia, as well as

numerous savings clubs and burial societies found all over the world.

Formal credit and savings institutions for the poor have also been around for decades, providing

customers who were traditionally neglected by commercial banks a way to obtain financial

services through cooperatives and development finance institutions. One of the earlier and

longer-lived micro credit organizations providing small loans to rural poor with no collateral was


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the Irish Loan Fund system, initiated in the early 1700s by the author and nationalist Jonathan

Swift. Swift's idea began slowly but by the 1840s had become a widespread institution of about

300 funds all over Ireland. Their principal purpose was making small loans with interest for short

periods. At their peak they were making loans to 20% of all Irish households annually.

In the 1800s, various types of larger and more formal savings and credit institutions began to

emerge in Europe, organized primarily among the rural and urban poor. These institutions were

known as People's Banks, Credit Unions, and Savings and Credit Co-operatives.

The concept of the credit union was developed by Friedrich Wilhelm Raiffeisen and his

supporters. Their altruistic action was motivated by concern to assist the rural population to

break out of their dependence on moneylenders and to improve their welfare. From 1870, the

unions expanded rapidly over a large sector of the Rhine Province and other regions of the

German States. The cooperative movement quickly spread to other countries in Europe and

North America, and eventually, supported by the cooperative movement in developed countries

and donors, also to developing countries.

In Indonesia, the Indonesian People's Credit Banks (BPR) or The Bank Perkreditan Rakyat

opened in 1895. The BPR became the largest microfinance system in Indonesia with close to

9,000 units.

In the early 1900s, various adaptations of these models began to appear in parts of rural Latin

America. While the goal of such rural finance interventions was usually defined in terms of

modernizing the agricultural sector, they usually had two specific objectives: increased

commercialization of the rural sector, by mobilizing "idle" savings and increasing investment

through credit, and reducing oppressive feudal relations that were enforced through

indebtedness. In most cases, these new banks for the poor were not owned by the poor

themselves, as they had been in Europe, but by government agencies or private banks. Over the

years, these institutions became inefficient and at times, abusive.

Between the 1950s and 1970s, governments and donors focused on providing agricultural credit

to small and marginal farmers, in hopes of raising productivity and incomes. These efforts to

expand access to agricultural credit emphasized supply-led government interventions in the form

of targeted credit through state-owned development finance institutions, or farmers' cooperatives


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in some cases, that received concessional loans and on-lent to customers at below-market interest

rates. These subsidized schemes were rarely successful. Rural development banks suffered

massive erosion of their capital base due to subsidized lending rates and poor repayment

discipline and the funds did not always reach the poor, often ending up concentrated in the hands

of better- off farmers.

Meanwhile, starting in the 1970s, experimental programs in Bangladesh, Brazil, and a few other

countries extended tiny loans to groups of poor women to invest in micro-businesses. This type

of microenterprise credit was based on solidarity group lending in which every member of a

group guaranteed the repayment of all members. These "microenterprise lending" programs had

an almost exclusive focus on credit for income generating activities.

ACCION International, an early pioneer, was founded by a law student, Joseph Blatchford, to

address poverty in Latin America's cities. Begun as a student-run volunteer effort in the

shantytowns of Caracas with $90,000 raised from private companies, ACCION today is one of

the premier microfinance organizations in the world, with a network of lending partners that

spans Latin America, the United States and Africa.

SEWA Bank. In 1972 the Self Employed Women's Association (SEWA) was registered as a

trade union in Gujarat (India), with the main objective of "strengthening its members' bargaining

power to improve income, employment and access to social security." In 1973, to address their

lack of access to financial services, the members of SEWA decided to found "a bank of their

own". Four thousand women contributed share capital to establish the Mahila SEWA Co-

operative Bank. Since then it has been providing banking services to poor, illiterate, self-

employed women and has become a viable financial venture with today around 30,000 active

clients.

Grameen Bank. In Bangladesh, Professor Muhammad Yunus addressed the banking problem

faced by the poor through a programme of action-research. With his graduate students in

Chittagong University in 1976, he designed an experimental credit programme to serve them. It

spread rapidly to hundreds of villages. Through a special relationship with rural banks, he


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disbursed and recovered thousands of loans, but the bankers refused to take over the project at

the end of the pilot phase. They feared it was too expensive and risky in spite of his success.

Eventually, through the support of donors, the Grameen Bank was founded in 1983 and now

serves more than 4 million borrowers. The initial success of Grameen Bank also stimulated the

establishment of several other giant microfinance institutions like BRAC, ASA, Proshika, etc.

Through the 1980s, the policy of targeted, subsidized rural credit came under a slow but

increasing attack as evidence mounted of the disappointing performance of directed credit

programs, especially poor loan recovery, high administrative costs, agricultural development

bank insolvency, and accrual of a disproportionate share of the benefits of subsidized credit to

larger farmers. The basic tenets underlying the traditional directed credit approach were

debunked and supplanted by a new school of thought called the "financial systems approach",

which viewed credit not as a productive input necessary for agricultural development but as just

one type of financial service that should be freely priced to guarantee its permanent supply and

eliminate rationing. The financial systems school held that the emphasis on interest rate ceilings

and credit subsidies retarded the development of financial intermediaries, discouraged

intermediation between savers and investors, and benefited larger scale producers more than

small scale, low-income producers.

Meanwhile, microcredit programs throughout the world improved upon the original

methodologies and defied conventional wisdom about financing the poor. First, they showed that

poor people, especially women, had excellent repayment rates among the better programs, rates

that were better than the formal financial sectors of most developing countries. Second, the poor

were willing and able to pay interest rates that allowed microfinance institutions (MFIs) to cover

their costs.

1990s These two features - high repayment and cost-recovery interest rates - permitted some

MFIs to achieve long-term sustainability.

Another flagship of the microfinance movement is the village banking unit system of the Bank

Rakyat Indonesia (BRI), the largest microfinance institution in developing countries. This state-

owned bank serves about 22 million microsavers with autonomously managed microbanks. The


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microbanks of BRI are the product of a successful transformation by the state of a state-owned

agricultural bank during the mid- 1980s

The 1990s saw growing enthusiasm for promoting microfinance as a strategy for poverty

alleviation. The microfinance sector blossomed in many countries, leading to multiple financialservices firms serving the needs of micro entrepreneurs and poor households. These gains,

however, tended to concentrate in urban and densely populated rural areas.

It was not until the mid-1990s that the term "microcredit" began to be replaced by a new term

that included not only credit, but also savings and other financial services. "Microfinance"

emerged as the term of choice to refer to a range of financial services to the poor, that included

not only credit, but also savings and other services such as insurance and money transfers.

ACCION helped found BancoSol in 1992, the first commercial bank in the world dedicated

solely to microfinance. Today, BancoSol offers its more than 70,000 clients an impressive range

of financial services including savings accounts, credit cards and housing loans - products that

just five years ago were only accessible to Bolivia's upper classes. BancoSol is no longer unique:

more than 15 ACCION-affiliated organizations are now regulated financial institutions.

Today, practitioners and donors are increasingly focusing on expanded financial services to the

poor in frontier markets and on the integration of microfinance in financial systems development.

The recent introduction by some donors of the financial systems approach in microfinance -

which emphasizes favorable policy environment and institution-building - has improved the

overall effectiveness of microfinance interventions. But numerous challenges remain, especially

in rural and agricultural finance and other frontier markets. Today, the microfinance industry and

the greater development community share the view that permanent poverty reduction requires

addressing the multiple dimensions of poverty. For the international community, this means

reaching specific Millennium Development Goals (MDGs) in education, women's

empowerment, and health, among others. For microfinance, this means viewing microfinance as

an essential element in any countrys financial system.


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Examples of Recent Innovations in Financial Services for the Poor:

1. CCACN (Central de Cooperativas de Ahorro y Crdito Financieras de Nicaragua) is

marketing its "Agriculture Salary" savings product to farmers. The goal of the product is to

smooth the flow of income from the proceeds of an annual or semi-annual harvest. Each credit

union works with its farmers to identify their individual expenses and determine a monthly

"salary" (portion of harvest proceeds on deposit combined with an above-market interest rate) to

be withdrawn from the credit union. In its infancy stage, the credit unions have noted an interest

from agriculture-based clients in such a savings management program.

2. Caja los Andes in Bolivia offers four loan repayment options that fit the cash flow of various

agricultural activities, including an end-of-term payment for both principal and interest that fits

single crop activities, and unequal payments at irregular intervals for farmers that have planted

several crops with different harvesting periods. Flexibility is also provided in loan

disbursements, and farmers can receive the sanctioned loan amount in as many as three

installments.

3. Prodem in Bolivia has introduced a combination of biometric fingerprint and Smart Cards todeliver financial services to its clients. Biometric technology measures an individual's unique

physical or behavioral characteristics, such as fingerprints, facial characteristics, voice pattern,

and gait, to recognize and confirm identity. Although the technology is still new, growing

awareness of the importance of data security is increasing adoption steadily. Prodem's fingerprint

verification has reduced fraud, error, and repudiation of transactions. Staff had not had to deal

with forgotten PIN numbers or unauthorized use of cards and accounts so they have more time to

provide personal service and advice to clients.

4. International Remittance Network (IRnet): In late 1999, WOCCU, in partnership with

Vigo, a money transfer firm, launched IRnet. As of June 2003, 173 credit unions in Central

America offer IRnet, expanding the possibilities for sending remittances through 800 US credit

union points of service. The Central American credit unions distribute remittances primarily to

rural clients. The distributing credit unions help to integrate remittance recipients into the formal


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financial sector through trained staff who cross-sell services. When a non-member enters a credit

union to pick up a remittance, a staff person encourages this person to become a credit union

member and save a portion of the remittance in an interest-bearing voluntary savings account.

5. Unibanka (Latvia): Prior to introducing credit scoring, Unibanka, a commercial bank,viewed microfinance loans as too costly to deliver. With the assistance of Bannock Consulting,

Unibanka instituted a credit-scoring system based on qualitative client data because sufficient

quantitative data was not available to develop a statistical model. Branch staff now uses

scorecards to evaluate microfinance loan applications quickly, which has reduced the cost of

review and made microfinance lending profitable for Unibanka.

6. Managed ASCAs: A number of local organizations in the Nyeri District of Kenya provide

management services to group-based loan funds. The groups operate as Accumulating Savings

and Credit Associations (ASCAs) and receive management services provided by ASCA

Management Agencies (AMAs). The AMA model serves a wider client base than the

mainstream donor funded MFIs who tend to focus their attention on micro and small

entrepreneurs. The clientele of AMAs are also drawn from other socio-economic strata,

including salaried workers such as nurses, teachers and civil servants as well as subsistence and

semi-commercial farmers. Hence their reach into the rural areas is much greater than the MFIs.

7. Microenterprise Access to Banking Services (MABS) in the Philippines nurtures the

expanded use of the credit bureau by rural banks, which was started in 2001 to minimize client

over indebtedness and defaults. MABS has helped to integrate the rural banks' microenterprise

loan clients into an existing national credit bureau, by creating an e-mail encryption program that

allows rural banks to share information electronically at a low cost.

8. Credit, life, and funeral insurance: A WOCCU study on savings and credit cooperatives

(SACCOs) in Kenya indicates that HIV/AIDS poses high levels of risk to rural finance

institution soundness. The Cooperative Insurance Company (CIC), a professional insurance

provider, insures over half of Kenya's more than one million credit union members who

subscribe to policies through their credit unions.


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9. The National Microfinance Bank in Tanzania (NMB) was created to retain the extensive

rural branch network of the National Bank of Commerce (NBC) when it was privatized in 1997.

The key to making it commercially viable has been rigorous control of costs through drastic

simplification of the business model and tight managerial oversight. Key initiatives have been

correct pricing of products, particularly payments and remittance services, which had

traditionally been cross-subsidized by other product lines, and the development of microfinance

products, mainly small (average US $400) individual loans.

10. ADOPEM (Dominican Republic) thoroughly evaluated its PDA (Personal Digital

Assistants) program and recorded dramatic improvements. Client retention improved

significantly, and the number of days between application and disbursement dropped from five

days to two days. Expenses for paperwork dropped by 60% and data entry expenses dropped by

50%. Loan officer caseloads and other productivity measures increased by about 35%.

11. The international NGO Technoserve has developed an inventory credit scheme in Ghana

that enables farmers' groups to obtain higher value for their crops by providing post-harvest

credit through linkage with a rural financial institution. Instead of selling all of their crop at

harvest - when prices are lowest - in order to meet cash needs, small-scale farmers in the scheme

store their crop in a cooperatively-managed warehouse and receive a loan of about 75-80% of the

value of the stored crop, which serves as collateral. This loan permits them to clear their

accumulated debts and satisfy immediate cash requirements. Then, when prices have risen in the

off-season, the farmers either sell the stored crop or redeem it for home consumption.

12. Savings-based, Agriculture-oriented Rural Credit Unions - SICREDI - Brazil specializes

in agricultural lending, primarily for the production of rice, wheat, beef, fodder, fish, vegetables

and for agricultural equipment. Loan approvals are based upon the members' savings history and

credit record, with the size limited to 50 percent of production costs and dependent upon the

potential return of crop sale at harvest as well as household income and debt obligations. Theborrower makes monthly interest payments and then a balloon payment of the principal at

harvest time. In addition, SICREDI participates in the PROAGRO national crop insurance, for

which a premium is added on the loan rate. PROAGRO pays 100% of the loan loss if the crop

fails


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13. Producer Associations as Clients of a Financial Institution: GAPI and CLUSA in

Mozambique: GAPI offers investment and working capital loans to fora (federations of

associations) of small farmers and small and micro-enterprises. GAPI collaborates with CLUSA

to set-up and register these fora. Loans are secured through a solidarity group-like guarantee

between the participating fora. Each forum on-lends to its member associations, who collect the

produce from their individual members and other area farmers and deliver it to the forum in

return for the loan. About 80% of the profits from the sale of produce are handed back to the

associations - the remaining 20% of the profits are kept by the forum as interest payments.

14. In South Africa, a network of 8,000 armored trucks equipped with thumbprint recognition

and smart-card technology deliver pension payments of about $60 each month to 4.5 million

South Africans. The potential of this vast infrastructure to offer pensioners other kinds of

financial services is tremendous.

15. Banco Postal in Brazil, a joint venture between the Post Office and the largest private bank

(Bradesco) has offered banking (and payment) services through its network of postal branches in

remote and poor areas of the country since March 2002.

16.Tanzania Posts Corporation mini-buses offer passenger service along domestic regional

routes. Postal outlets have become one-stop service centers that provide photocopying, telephone

and money transfer services. They also sell stationery and newspaper and act as agents for others

by accepting newspaper advertisements, selling lottery tickets, revenue stamps for radio stations,

and tickets for boats between Dar es Salaam and Zanzibar

17. Equity Building Society (EBS) in Kenya has emerged as one of Kenya's leading

microfinance institutions, with over 155,000 savings clients and 41,000 borrowers. Once

insolvent, EBS transformed itself into a profitable financial-service provider by rigorously

focusing on the needs of its clients - in particular, by developing a wide range of market-based

financial products and services, including a mobile banking service.


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Indian scenario in Micro Finance

Traditionally, banks in India have not provided financial services, such as loans, to clients with

little or no cash income. Banks incur substantial cost to manage a client account, regardless of

how small the sums of money involved. The fixed cost of processing loans of any size is

considerable as assessment of potential borrowers, their repayment prospects and security,

administration of outstanding loans, collecting from delinquent borrowers, etc., has to be done in

all cases. There is a breakeven point in providing loans or deposits below which banks lose

money on each transaction they make. Poor people usually fall below that breakeven point. A

similar equation resists efforts to deliver other financial services to poor people.

It is then, the concept of micro finance institutions came into the picture. This has gained

considerable importance in Indian Scenario. Approximately 665 million client accounts are

maintained with over 3,000 institutions that are serving people who are poorer than those served

by the commercial banks. Of these accounts, 120 million were with institutions normally

understood to practice microfinance like the postal saving banks, development banks,

cooperatives and credit unions and specialized rural banks.

In India, Micro finance has fueled the efforts at rural development, woman empowerment andwealth generation by providing small scale savings, credit, insurance and any other financial

services to poor and low-income households.

Microfinance sector has traversed a long journey from micro savings to micro credit and then to

micro enterprises and now entered the field of micro insurance, micro remittance and micro

pension. This gradual and evolutionary growth process has given a great opportunity to the rural

poor in India to attain reasonable economic, social and cultural empowerment, leading to better

living standard and quality of life for participating households. Financial institutions in the

country continued to play a leading role in the microfinance programme for nearly two decades

now. They have joined hands proactively with informal delivery channels to give microfinance

sector the necessary momentum. During the current year too, microfinance has registered an

impressive expansion at the grass root level.


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Self Help Promoting Institutions (SHPIs), Revolving Fund Assistance (RFA) to MFIs, equity/

capital support to MFIs to supplement their financial resources and provision of 100 per cent

refinance against bank loans provided by various banks for microfinance activities.

Table :1.1

Participating Banks in providing Micro finance

Participating Banks Number

Public sector commercial Banks 27

Private sector commercial Banks 19

Regional Rural Banks 81

Co-Operative Banks 318

Small Industries Development Bank of India 1

DIFFERENT MODEL OF MICRO FINANCE:-

1. SHG- Bank linkage model: This model involves the SHGs financed directly by the banksviz., Commercial Banks (Public sector and private sector), Regional Rural Banks and Co-

operative Banks.

2. Micro Finance Institutions Bank linkage model: This model covers financing of MFIsby banking agencies for on lending to SHGs.


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SHGs- Meaning

SHG is a small, homogenous affinity group of rural poor agriculture labourers, marginal andsmall farmers and micro-enterprises which is voluntarily formed. It can be formal or informal.

SHGs are formed by the members, of the members and for the members.

They are encouraged to practice voluntary thrift on a regular basis. The SHG generally a

minimum of 5 members and not exceeding 20 members. Members save and contribute to

common fund from which small loans are met to needy member as per the decisions of the

group.

There are four stages in SHG formation:-

Forming = 0-2 months Storming = 2-3 months Norming = 4-6 months Functioning = 6-12 monthsObjective of SHGs

To evolve a supplementary credit strategy for reaching the rural poor. To build mutual trust and confidence between banks and rural poor To encourage banking activities both thrift as well as credit in way to SELF HELP.Methodology adopted

Direct or Indirect finance Maximum 4 times of Deposit Minimum 6 months of functioning


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100% NABARD Refinance on outstanding To open a SB account with Bank

Notable figures of Micro finance in India

Table 1.2

SHGs Savings linked with banks

Total No.of SHGs Savings linked with banks Rs.69.53 lakh

Out of Total (of which) exclusive Women SHGs Rs.53.10 lakh

Total savings amount of SHGs with banks as on 31-3-10 Rs.6198.71 crore

Out of total savings of exclusive women SHGs Rs.4498.66 crore

Estimated number of families covered upto 31-3-2010 Rs.97 million

Source:-www.nabard.org

Table 1.3

SHGs Credit linked with banks in the year 2009- 10

Total No.of SHGs credit linked during the year 2009-10 Rs.15.87 lakh

Out of Total (of which) exclusive Women SHGs credit

linked

Rs.12.94 lakh

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Table 1.4

Loan amount disbursed and loan outstanding in the year 2009- 10

Total amount of loan disbursed to SHGs Rs.14453.30 crore

Out of Total loan disbursed exclusive to Women SHGs Rs.12429.37

crore

Total amount of loans outstanding against SHGs Rs.28038.28 crore

Out of total loans outstanding against women SHGs Rs.23030.36 crore

Average loan amount outstanding per SHG as on

March 2010

Rs. 57,795

Average loan amount outstanding per member as on

31-3-10

Rs. 4,128


Microfinance Institutions (MFIs):-

Microfinance Institutions are seen as key players in delivering financial services to the poor

people. They are increasingly seen as a solution to the ever increasing problem of poverty and

an indispensable toot to provide poor but entrepreneurial people with necessary finances to start

their own businesses.

These institutions play a key role in providing a whole range of financial services to the poor

rural households that have been ignored till now by the mainstream financial institutions because

of their inability to provide collateral. This article discusses the unique characteristics of the

microfinance institutions and the challenges they have to face in order to survive and thrive in

the future.
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A microfinance institution is generally defined as as an institution that provides financial

services to the poor. These institutions play a crucial role in the economic empowerment of the

poor people especially in the rural areas. These institutions generally include credit unions, co-

operatives and financial NGOs. MFIs provide microfinance services to those people who are

inability to produce guarantees that are required to gain credit from formal financial institutions.

Microfinance Institutions in India

Microfinance institutions (MFIs) have emerged over the past three decades to address this

market failure and provide financial services to low-income clients. Most of the early pioneer

organizations in the modern microfinance movement operated as non-profit, socially motivated

non-governmental organizations (NGOs). They developed new credit techniques: instead of

requiring collateral, they reduced risk through group guarantees, appraisal of household cash

flow, and small initial loans to test clients. Experience since then has shown that the poor repay

uncollateralized loans reliably and are willing to pay the full cost of providing them: access is

more important to them than cost.

More than 10,000 micro-lending organizations are today providing loans to 25 million poor

people throughout the world, most of them women. The number of these organizations grew

dramatically during the 1990s, spurred by the notion of Self help and a faith in the

creditworthiness and entrepreneurial potential of the poor. Microfinance for the poor has

emerged as an idea that appeals to several sections of people. In principle, even the worlds

poorest people can acquire savings and investment if they have access to capital.

The size and types of implementing NGOs range from very small to moderately big

organizations involved in savings and/or credit activities for individuals and group. These NGOs

adopt a variety of approaches, and tend to operate within a limited geographical range. A few

like PRADAN, ICECD, MYRADA, SEWA operate on a larger scale and have been successful in

replicating their experiences in other parts of the country, they also act as resource organizations.

While a few lending organizations do lend directly to borrowers, most rely on SHGs to provide

the linkage the borrowers.


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Table 1.5

Support from NABARD

Capacity building of partner institutions in the year 2009- 10

Number of programme conducted during 2009-10 6804

No, of Participants covered during 2009-10 Rs.2.54 lakh

Cumulative no. of participants trained upto March 2010 Rs.24.55 lakh

Grant support during the year 2009-10 Rs.9.92 crore

Cumulative fund support upto March 2010 Rs.45.02 crore


Table 1.6

Refinance Support from NABARD

Refinance to banks during 2009-10 Rs.3173.56 crore

Cumulative refinance released upto 31-3-10 Rs.12861.65 crore


Micro Finance: Strategy adopted by NABARD

The National Bank for Agriculture and Rural Development (NABARD) have played a

significant role in promoting micro finance. NABARD has been instrumental in facilitatingvarious activities under microfinance sector, involving all possible partners at the ground level in

the field. NABARD has been encouraging voluntary agencies, bankers, socially spirited

individuals, other formal and informal entities and also government functionaries to promote and

nurture SHGs. The focus in this direction has been on training and capacity building of partners,

promotional grant assistance to Self Help Promoting With a view to developing a supplementary
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credit delivery mechanism to reach the poor in cost- effective and sustainable manner, the

NABARD introduced in 1992 a pilot project for linking 500 SHGs.

NABARD is adopted the following strategies to spread the outreach of SHG-

Bank Linkage programme:-

Widening spatial distribution and intensity of the Programme with district oriented planningand strategy.

Evolving district- wise plan of action/ strategy in consultation with existing stakeholdersaiming at promotion and linkage of a minimum of 500 SHGs per district every year.

Training and exposure programmes for the staff of the stakeholders. Providing promotional assistance to partners for promoting and nurturing the SHGs generally

on a add-on basis.

Widening the range of SHG promoting agencies. Involving banks at their corporate level, organizing training programmes for the regional/

zonal managers of commercial banks in association with their central offices.

Establishing the financing of SHGs as a business proposition for banks. Increasing the participation of the co-operative banks by encouraging them to finance SHGs

as Financing cooperatives within the co-operative.

Associating village communities, peoples institutions, rural volunteers and individuals toparticipate in the programme as SHG promoters.

Increasing the quality of the exisiting SHGs by propagating Self- rating tools. Large- scale dissemination of the concept and approach among the rural masses. Encouraging NGOs to play an important role in correcting the regional imbalance in spread

of SHG-Bank linkage programme.


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Supportive policies of RBI for linkage programmes

The SHGBank linkage was further extended to Regional Rural Banks (RRBs) and cooperativebanks in 1993 and is now permitted by the RBI as a component of priority sector lending. RBI

extends full support to NABARDs initiatives in introducing and implementing the linkage

programme. The supportive policies of RBI are:-

Interest rates of banks to the micro-credit institutions or by the micro-credit institution toSHGs or their members deregulated.

Complete freedom to banks to choose their models. Freedom in designing, lending and savings products. Maximum flexibility provided in lending norms. Making micro finance an integral part of banks corporate credit plans. Mobilisation of savings.

Micro finance has been hailed as the best method of creating additional employment and for

removing poverty. NABARD has been playing a catalytic role in terms of promotional support to

NGOs and also in nurturing quality SHGs. Credit sanctioned by the Micro financial institutions

have vast market in the rural as well as in the urban areas. Successful marketing of microfinance

to SHGs will further strengthen the movement. The NGOs therefore needs to be given priority

for standardizing the quality of service. Indian micro finance has recorded substantial

achievements over the past few years. Indias leading MFIs are now highly regarded all over the

world. Linking of SHGs with banks play a vital role for women development.


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CHAPTER-II


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1.1RESEARCH OBJECTIVES:a. To analyze the year wise performance of SHG-linked by Commercial banks, Regional Rural

banks and Co-operative banks in Karnataka.b. Progress under microfinance- bank loans disbursed to SHGs during 2009 -2010 by public

sector banks and private sector banks in Karnataka.

c. To examine the role by banks in terms of savings, loan disbursed and loans outstanding bycommercial banks, RRBs and Co-operative banks in Karnataka.

d. District wise break up of SHGs formed in 2008-09 and bank loan disbursed in the year 2008-09.

e. To examine the role by banks in the development of SHGs in the realm of microfinance.

1.2RESEARCH PROBLEM:Indian is the largest emerging market for microfinance. Over the past decade, them microfinance

sector has been growing in India at a fairly steady pace. Though no microfinance institution

(MFI) in India has yet reached anywhere near the scale of the Well- known- Bangladesh MFIs.

The sector in India is characterized by a wide diversity of methodologies and legal forms.

However, very few Indian MFIs have achieved sustainability yet.

This research attempts to study the growth of microfinance in Karnataka and different state and

evaluation of private and public sector banks in this field.

1.3TYPE OF RESEARCH:This study is a descriptive study which aims to compare the growth of microfinance sector and

contribution of banks in this field in Karnataka. This is based on the secondary data published by

NABARD.


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1.4SCOPE OF THE STUDY:The study aims at providing on in depth knowledge of microfinance, its operations and benefits.

1.5SAMPLING TECHNIQUE:The technique is convenient sampling. The sample taken is the commercial banks, regional rural

banks, cooperative banks and private banks.

1.6RESEARCH TOOLS:Secondary data collection (literature survey)

Sources: Publications of NABARD

Library

E-library

Data analysis

Averages, ratios Tables

1.7RESEARCH LIMITATIONS:a. The study had limitations due to lack of time for the project.b. The study is limited to the secondary data.

1.8NEED FOR STUDY:During 1988-1998, ADB approved 15 microfinance projects totaling about $350 million, 6

projects with microfinance components valued at about $53 million, and 34 technical assistance

activities for about $18 million to support microfinance operations. ADB has, however, provided

this assistance without a well-defined strategy and, as a result, has not been able to fully harness

the potential of microfinance for poverty reduction.

Once almost exclusively the domain of donor and experimental credit projects, institutional

microfinance has evolved during the last decade into an industry with prospects for financial

viability, offering a broader range of services and significant opportunities for expansion.


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The prospects for financial sustainability are revolutionizing the microfinance field and suggest

that a large proportion of the millions of poor people can be provided access to institutional

microfinance.

This change has important implications for ADB. ADB needs to take cognizance of thechallenges and prepare to effectively harness the opportunities in the DMCs. Given the diverse

requirements in the sector, the competing demands for ADB funds, the increasing pressure on

resources in the Asian Development Fund, and the growing complexities and challenges of

improving the quality of life of over 900 million poor people in the Region, ADB must reinforce

its emphasis on efficient allocation and use of resources at its command. A strategy is necessary

to ensure the ADB addresses these concerns effectively and consistently within its objective of

poverty reduction. A strategy can also

a. Provide a clear and consistent link between ADBs microfinance operations and itsoverarching objective of poverty reduction.

b. Facilitate promotion of a common approach to microfinance operations throughout ADB,which will also contribute to better coordination with other funding agencies.

c. Provide a consistent basis for policy dialogue with the DMCs on microfinance and relatedissues;

d. Assist ADBs ongoing efforts to improve the quality of project design, processing andimplementation of microfinance operations; and

e. Facilitate adoption of a longer term perspective than in the past in providing assistance formicrofinance.


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CHAPTER-III


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Microfinance is often defined as financial services for poor and low-income clients. In

practice, the term is often used more narrowly to refer to loans and other services from providers

that identify themselves as microfinance institutions (MFIs). These institutions commonly tend

to use new methods developed over the last 30 years to deliver very small loans to unsalaried

borrowers, taking little or no collateral. These methods include group lending and liability, pre-

loan savings requirements, gradually increasing loan sizes, and an implicit guarantee of ready

access to future loans if present loans are repaid fully and promptly.

More broadly, microfinance refers to a movement that envisions a world in which low-income

households have permanent access to a range of high quality financial services to finance their

income-producing activities, build assets, stabilize consumption, and protect against risks. These

services are not limited to credit, but include savings, insurance, and money transfers.

2.1 MICROFINANCE CLIENTS:

Typical microfinance clients are poor and low-income people that do not have access to other

formal financial institutions. Microfinance clients are usually self-employed, household-based

entrepreneurs. Their diverse microenterprises include small retail shops, street vending,

artisanal manufacture, and service provision. In rural areas, micro entrepreneurs often have small

income-generating activities such as food processing and trade; some but far from all are

farmers.

Hard data on the poverty status of clients is limited, but tends to suggest that most microfinance

clients fall near the poverty line, both above and below. Households in the poorest 10% of the

population, including the destitute, are not traditional microcredit clients because they lack stable

cash flows to repay loans, most clients below the poverty line are in the upper half of the poor. It

is clear, however, the some MFIs can serve clients at the higher end of the bottom half. Women

often comprise the majority of clients.

Over the past decade, a few MFIs have started developing a range of products to meet the needs

of other clients, including pensioners and salaried workers. Although little is known about the

universe of potential clients, the number of households without effective access to financial

services is enormous.


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2.3 KINDS OF INSTITUTIONS DELIVER MICROFINANCE:

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

in India. They can be broadly categorized in to two categories namely, formal institutions and

informal institutions. The former category comprises of Apex Development FinancialInstitutions, Commercial Banks, Regional Rural Banks, and Cooperative Banks that provide

micro finance services in addition to their general banking activities and are referred to as micro

finance service providers. On the other hand, the informal institutions that undertake

microfinance services as their main activity are generally referred to as micro finance institutions

(MFIs). While both private and public ownership are found in the case of formal financial

institutions offering micro finance services, the MFIs are mainly in the private sector.

Most MFIs started as not-for-profit organizations like NGOs (non-governmental organizations),

credit unions and other financial cooperatives, and state-owned development and postal savings

banks. And increasing number of MFIs are now organized as for-profit entities, often because it

is a requirement to obtaining a license from banking authorities to offer savings services. For-

profit MFIs may be organized as non-bank financial institutions (NBFIs), commercial banks that

specialize in microfinance, or microfinance departments of full-service banks.

A range of institutions in public sector as well as private sector offers micro finance services in

India. They can be broadly categorized into two categories namely,

1. Formal Institutions.2. Informal Institutions.The former category comprises Apex Development Financial Institutions, Commercial Banks,

Regional Rural Banks, and Cooperative Banks that provide micro finance services in addition to

their general banking activities and are referred to as micro finance service providers.

On the other hand, the informal institutions that undertake micro finance services as their main

activity are generally referred to as micro finance institutions (MFIs). While both private and

public ownership are found in the case of formal financial institutions offering microfinance

services, the MFIs are mainly in the private sector. The micro finance service providers include


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apex institutions like National Bank for Agriculture and Rural Development (NABARD), Small

Industries Development Bank of India (SIDBI), and Rashtriya Mahila Kosh (RMK).

The micro finance initiative in private sector can be traced to the initiative undertaken by Ms.Ela

Bhatt for providing banking services to the poor women employed in the unorganized sector inAhmadabad City of Gujarat State.

NABARD during the early eighties conducted a series of research studies in association with

MYRADA (a leading NGO from South India) and also independently which showed that despite

having a wide network of rural bank branches that implemented specific poverty alleviation

programs and self-employment opportunities through bank credit for almost two decades, a very

large number of the poorest of the poor continued to remain outside the fold of the formal

banking system. NABARD, however, also took a conscious decision to experiment with other

successful strategies such as replicating Grameen, wholesaling funds through NGOMFIs.

The dominant model of microfinancethe group lending model pioneered by the Grameen Bank

in Bangladeshsocializes the costs of lending to poor women by providing them access to credit

on the basis of Social Collateral obtained through membership in borrower groups. Here

social capital helps correct for imperfect information about borrowers lacking in formal credit

and employment histories and substitutes for collateral by ensuring against default through social

sanction and peer enforcement.

2.3MICROFINANCE SERVICE PROVIDERS:The micro finance service providers include apex institutions like National Bank for Agriculture

and Rural Development (NABARD), Small Industries Development Bank of India (SIDBI), and,

Rashtriya Mahila Kosh (RMK). At the retail level, Commercial Banks, Regional Rural Banks,

and Cooperative banks provide micro finance services. Today, there are about 60,000 retail

credit outlets of the formal banking sector in the rural areas comprising 12,000 branches ofdistrict level cooperative banks, over 14,000 branches of the Regional Rural Banks (RRBs) and

over 30,000 rural and semi-urban branches of commercial banks besides almost 90,000

cooperatives credit societies at the village level. On an average, there is at least one retail credit

outlet for about 5,000 rural people. This physical reaching out the far-flung areas of the country

to provide savings, credit and other banking services to the rural society is an unparalleled


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achievement of the Indian banking system. In the this paper an attempt is made to deal with

various aspects relating to emergence of private microfinance industry in the context of

prevailing legal and regulatory environment for private sector rural and micro finance operators.

2.4PLAYERS IN MICROFINANCE SECTOR:The different actors on the basis of the roles they play in building of the rural financial structures

depending on their needs and goals.

i. The Rural Poor:a. Perceive thrift as their strength as also as the bonding factor among themselves.b. Realize that timely and adequate credit was preferable and productive than subsidies and

doles.

c. They need hassle-free delivery mechanisms.ii. NGOs:a. Act as catalysts of changeb. Combine social and economic agenda with synergistic effectc. Recognize sustainability as the core factor in development.

iii. Banking Systema. Accept SHG-bank linkage a cost effective means of reaching the poorb. Accept peer pressure as collateral substitute for excellent recovery of loans.

iv. Government:a. Formulate supportive policy frameworkb. Encourage routing of social programs through SHGs

v. Reserve Bank of India:a. RBI policy inputs on micro finance lead increased involvement of banks.b. Liberalize interest rates and deregulated interest rate structure for micro credit, leading to

flexibility in lending rates.vi. NABARD

a. Provides inputs in capacity building for banks and partner agenciesb. Promotes the idea of organizing thrift and credit groups among the NGOs as an add-on

activity and encouraged linking them with banks.


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2.5BASIC FACTS OF MICROFINANCE:a. Microfinance is the provision of financial services to poor households.b. The microfinance sector currently has an estimated total loan volume of 25 billion dollars.c. Economists estimate that around 250 billion dollars would be needed to satisfy demand.d. Loans usually start just below 100 dollars and can, over time, reach several time this amount.e. In Asia, shares of female debtors are as high as 99%.

2.6Organizations Implementing Micro Finance Activities:Organizations implementing micro-finance activities can be categorized into three basic groups.

a. Organizations which directly lend to specific target groups and carrying out all relatedactivities like recovery, monitoring, follow-up etc. some of these organizations are

graduating to become exclusive MFOs, but such cases are few.

b. Organizations that only promote and provide linkages to SHGs and are not directly involvedin micro lending operations.

c. Organizations which are dealing with SHGs and plan to start micro-finance related activities.

2.7GOVERNMENT ROLE IN SUPPORTING MICROFINANCE:

Government can contribute most effectively by:

a. Setting sound macroeconomic policy that provides stability and low inflation.b. Avoiding interest rate ceilings when governments set interest rate limits, political factors

usually result in limits that are too low to permit sustainable delivery of credit that involves

high administrative costs-such as tiny loans for poor people. Such ceilings often have the

announced intention of protecting the poor, but are more likely to choke off the supply of

credit.

c. Adjusting bank regulation to facilitate deposit taking by solid MFIs, once the country hasexperience with sustainable microfinance delivery.


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d. Creating government wholesale funds to support retail MFIs if funds can be insulated frompolitics, and they can hire and protect strong technical management and avoid disbursement

pressure that force fund to support unpromising MFIs.

The NABARD led Pilot Project commence with the support of the Central Bank of the country,i.e., Reserve Bank of India, from 1992 onwards aimed at promoting and financing 500 SHGs

across the entire country, the SHG- bank linkage strategy has come a long way. However,

NGOs and MFIs acted as a catalyst for change and helped in bringing about such paradigm

shift. They were very successful in combining social and economic agenda with synergistic

effect. They also recognized sustainability as the core factor in development.

The statistics in this field are mind-blogging. During the period April 2003 to March 2004-

361,731 new SHGs were financed by banks to a tune of Rs 18.55 billion (US $ 412 million) by

way of loans. Cumulatively, banks have lent Rs 39.04 billion (US $ 867 million) to banks

during 2003-04 bring the cumulative refinance amount to Rs 21.24 billion (US $ 472 million).

These successes have been achieved only due to strict monitoring and functioning of the NGOs

and MFIs. For example, the Non Governmental Organizations (NGOs) and Microfinance

institutions promoting SHGs must abide by the international best practices for microfinance,

which suggests that good financial analysis is the basis for successful and sustainable

microfinance operations leading to the success of the SHG concept. With this understanding of

the world of MF, this research was carried out in accordance with the famous phrase I f you

want to evaluate the forest, look at the trees. Thus it is important to evaluate an institutions

performance with regard to different areas of its operation i.e. product, service, delivery, etc.

Microfinance as a developmental and economic tool has caught the imagination of banks and

other financial institutions, and NGOs in India.

NGOs newly involved in microfinance tend to point to high repayment rates as an indicator of

their success. If there is one universal microcredit doctrine, it is that repayment rates of close to

100 percent are within reach if the microfinance institutions conduct their operations along

Best Practice explanations for good repayments rates include high frequency collection

schedules, tight controls, a good management information system, loan officer incentives, good

follow up, and a quick jump on delinquency. On the borrowers side, the effects of peer


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pressure in group based schemes, and the attractiveness of products with relatively low

transaction costs also explain good repayment rates.

2.8ASSESSING A SELF HELP GROUP:The norms for SHG in a particular place may have to be developed keeping in view the local

conditions. The above pattern is only a model and indicative one and could be used as the basis

for developing suitable norms for financing SHGs is it banks or any other financing institution. A

few proactive commercial banks, Regional Rural Banks and Cooperative Banks have already

introduced their own norms and the same is being followed by the financing units.

(This not may be read with NABARD circular letter dated February 2002, which also shares

different formats for appraising a SHG for finance).

For any financing institution, appraisal is very important for ensuring the utility of the loan and

repayment of the loan. Bankers generally appraise the project and the borrower. In case of SHG

financing, most of the project appraisal norms like assessing the cost benefit and profits will not

be workable due to the peculiarities of SHG financing. For considering a loan application for

financing the Financer has to evaluate the capacity and character of the prospective borrower.

SHGs also being customers have to be appraised before extending credit facilities. But then

assessment of creditworthiness of a SHG is very different from that of an individual. SHGs are

not to be assessed in terms of Group dynamics like cohesion, vibrancy, and goal-oriented action,

participation of members, democratic decision and collective leadership. The appraiser has to see

whether the group is functioning, actually as a group, why the members have come together,

whether it is for obtaining loan from bank or the group sees other purposes, what is the group

discipline and whether it is sustainable.

The basic principles on which the SHGs function are:

a. The members of the groups should be residents of the same area and must have an affinity.Homogeneity of relationship could be in terms of caste/occupation/gender o0r economic

status (which is critical).

b. Savings first, credit thereafterc. SHGs should hold regular meetings


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d. SHGs should maintain record of financial and other transactionse. They should have norms regarding membership, meetings etc.f. Group leaders should be elected by members and rotated periodicallyg. Transparency in operations of the group and participatory decision takingh. Rates of interest on loans should be decided by the groupi. Group liability and peer pressure to act as substitutes for traditional collateral.For assessing a Self Help Group the important aspects that a financer should look into

include:

1. Norms for functioning:The SHG should have developed some kind of norms for its functioning the norms should be

covering major areas of its functioning as well as the decision making processes, leadership etc.,

Norms generally relate to

a. Membership.b. Meetingstime, periodicityc. Savingsamount, periodicity, rate of interest (return)d. Credit procedure for sanction, ceiling amount, purposes, rate of interest to be charged,

repayment period etc.e. Fines in case of default in attending meetings, savings and credit repayment. Group may

also levy any fines for any deviant behavior etc.

f. Leadershipelection or nomination of leaders, rotation of leaders etc.g. Personal/social improvement minimum literacy level to be achieved, social work to be

done etc.

The above norms may be written or oral. They may be decided in the initial meetings or they

may evolve over a period of time depending upon the need of the group. The important aspectsto be looked into are:

1. How norms evolved, whether by the consensus of the whole group.2. Whether the members are aware of the norms (even if they are oral) and understand them,3. Whether the norms are implemented.


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2. Meetings:The group decides the periodicity of the meetings i.e., weekly, fortnightly or monthly. They also

decide on the time of the meeting. Decision on time and periodicity helps in regular conduct of

meetings. The regularity in the holding of the meeting and the attendance during meeting gives

an indication about groups functioning. Therefore a financer should see whether.

a. The meetings have been held regularlyb. The attendance in the meetingsc. The members are punctual and stay till the end of the meetingd. Are there any sanctions for the delinquent members?The financier can use his observations during the meetings and the meeting registers to get data

on this appraisal aspect.

3. Maintenance of Books:Whether group is maintaining the basic books that will give details of its functioning and

accounts of the group is an important criterion to be judged. The books should give the details of

number of meetings held, decisions taken in the meetings, amount of savings of the members and

credit availed, the total savings of the group and repayments. Who maintains these books is

another important criterion for judging the group. Do members maintain it; if not are they

making efforts to achieve basic numeracy or literacy so that they can start doing it themselves.

Financer has to verify:

1. Whether details of meetings, proceedings, and attendance are maintained.2. Whether member-wise records of saving and credit are maintained.3. Whether the records are up to date.4. Whether all members are kept informed of their savings and credit balances from time to

time.

5. In case of illiterate groups whether what is the system followed, does the group verify thebooks maintained by NGO/outsider.

6. Whether systems have been developed to ensure safe custody of cash.


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4. Leadership:Two or three group members are elected as leaders*/ book-writers. Initially the opinion leaders

may be the leaders and over a period of time they are expected to be taking turns. The group

leaders are expected to

a. Regularly convene and conduct the meetings.b. Help the group members in taking decisions.c. Resolve conflicts.d. Maintain books of account ande. Approach bank branch for operation of accounts.The aspects that are to be seen are:

Whether the leaders have been elected and rotated. Whether they help in democratic functioning of the group. Whether there is a conscious attempt to groom other members to take up leadership. Are they marginalizing the benefits (especially loans)

5. Participation and Awareness of Group Members:Are the Members aware of the purpose of group formation, the operations and activities of the

group viz? The savings and the credit of the group as well as the individual members savings

and credit details.

a. Do they participate in group discussions and decision making.b. Do they help solve the problem that are raised in the meetings.c. Do they work cohesively and have transparent dealings.The democratic character of the group may be judged by attending one or two meetings and

talking to individual members. The awareness level of members helps in healthy functioning of

the group and resolution of conflicts within the group.


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6. Savings:The group decides on the amount of savings as also its periodically. It has to be seen whether the

saving, as decided upon, is regularly made, how the defaults are dealt with and whether the

system is modified as per the requirements of the members.

7. Credit:The following aspects to be looked into while assessing the credit function of the group:

a. The decision making process of selecting loaners.b.

The system followed in assessing credit requirement of individual members and the amountto be sanctioned.

c. The system of monitoring the credit.d. The repayment performance of members and incidence of defaults besides the effectiveness

to deal with such defaults; whether the concept of peer pressure is working.

8. Self Reliance of the Group:Can the group function on its own without the support of the NGO is an important criterion for

assessment? The level of dependency on the NGO/promoter of the group and impact of

withdrawal of NGO/promoter on the group is to be assessed.

SELECTION CRITERIA OF SHG FOR LINKAGE TO BANK LOAN:

a. SHG scoring more than 12 marks out of maximum of 150 marks could be chosen for creditlinkage.

b. SHG scoring less than 120 marks will have to be further developed before linkage.


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2.9NABARD and MICROFINANCENABARDs Vision and Mission

Vision:

To facilitate sustained access to financial services for the unreached poor in rural areas through

various micro finance innovations in a cost effective and sustainable manner.

Mission Accomplished:

Provision of financial access to 16.7 million poor families through formation and credit linkage

of 1,079,091 self help groups as on 31st

march 2009.

Mission-Ahead

Formation and credit linkage of 585,000 new self help groups by the year 2009 with 60% of

them coming from 13 priority underdeveloped states of the Country. Facilitate mature SHGs to

graduate from microfinance for consumption or production credit to microenterprises.

Micro Finance-NABARDs Strategy

Overall Strategy

a. Forming and nurturing small, homogeneous and participatory self-help groups (SHGs) of thepoor has today emerged as potent tool for human development. This process enables the

poor, especially the women form the poor households, to collectively identify and analyze

the problems they face in the perspective of their social and economic environment. It helps

them to pool their resources, human and financial, and priorities their use for solving their

own problems.

b. The emphasis on regular thrift collection and it use to solve immediate problems ofconsumption and production not only helps to meet their most urgent needs, but also trains

them to handle larger financial resources more skillfully, prudently and with a more lasting

impact.

c. Encourage SHGs to become a forum for many social sector interventions.


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2.10 SHG-BANK LINKAGE PROGRAM:Facilitating SHGs to access credit from formal banking channels. SHG-Bank Linkage Program

has proved to be the major supplementary credit delivery system with wide acceptance by banks,

NGOs and various government departments.

Region-specific Initiatives

a. NABARD has intensified its efforts for roping in new partners for promotion and linkage ofgroups in regions where the growth of groups has not been commensurate with potential.

b. Priority has been assigned to awareness-building and for identification of NGOs and otherpartners in 13 priority states, which account for 70% of rural poor in the country.

Capacity Building Initiatives:

1. NABARD has supports/ sponsors capacity building programs for various partners in the fieldof microfinance to sensitize and equip them with concept and nuances of SHG bank linkage

program. Up to the end of March 2004 about 687,000 persons have been trained by us

through our regional offices, training establishments, resource NGOs and partner agencies.

2. NABARD provides training inputs on SHG financing to training establishments ofparticipating banks, to help them to internalize the training requirements at their level.

3. NABARD gives technical support to banks to evolve suitable intermediate structures likeFarmers Clubs (Vikas Volunteer Vahini Program of the National Bank) to increase the

outreach of their branches in promotion and linking SHGs.

4. NABARD supports and helps banking institutions (especially RRBs and cooperative banks)to take on the role of Self Help Promoting Institutions (SHPIs).

Support to Governments:

a. Necessary assistance is provided to the governments by NABARD for dovetailing mfpractices with the poverty alleviation programs.

b. NABARD also encourages the association of Panchayati Raj Institutions (RIs) in adoptinggroup processes for maximization of empowerment.


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c. NABARD, in association with Lal Bahadur Shastry National Academy of Administration,Mussoorie conducts tailor made exposure program on self help group and microfinance for

senior and middle level officers of Indian Administrative Services (IAS) who were posted as

district collectors/ Chief Executives Offices of local administrative set ups (Zilla Parishad)

Support to NGO Partners:

a. Several steps have been taken by NABARD for capacity building of NGOs which partner inpromotion and nurturing of SHGs. The emphasis is on involving a large number of NGOs.

Special focus is on those NGOs participating in watershed development, health, literacy and

women development, to encourage them to take up promotion nurturing and linkage of SHGs

as an ad-don activity.

b. NABARD has a scheme of part-financing the cost of promotion of groups by NGOs.c. NABARD has developed specialized programs for use by CEOs of NGOs for appropriately

Envisioning this as an add-on concept. Separate programs have also been designed for NGO

field staff to appreciate the nuances of SHG functioning.

Alternate MF Practices:

a. The NGOs and other local bodies at village, block and district levels in the North EasternStates are encouraged to take up alternative micro-credit delivery mechanisms through direct

funding.

b. Formation and operation of SHG Federations in supported and encouraged by NABARD.Similarly, networking of NGOs is also encouraged.

Coordinating MF Efforts in India:

NABARD coordinates the MF activities in India at international/ national/ state/ district levels.

These include organizing international/national Workshops, Seminars; etc for experience

sharing, Organizing National and State level meets of Bankers and NGOs etc.

Monitoring and Review:

Block/district/state level review meetings are organized and/or organized by NABARD. The

relative documentation and database is also carried out by NABARD. In addition, periodical


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Monitoring studies are conducted through NABARD/Bank Officers. Internal Impact Studies and

are conducted by NABARD periodically.

2.11 MF-Regulation and Supervisory Aspects:This section looks at the emerging requirements for regulation and supervision of microfinance

institutions in India and introduces the issues and policies related to it.

A. Emerging Microfinance Institution (MFIs): Banks provide MF service as one of the many services provided by them, along with their

other conventional business. Therefore, banks can be classified as MF service providers.

There are other agencies and institutions which provide MF service for the poor, as apredominant activity. These institutions are called microfinance institutions (MFIs).

NGOs have, over the past two decades, started financial intermediation as an add on activity,to enhance acceptability of their social welfare programs. Over the years they have emerged

as the major microfinance institutions, although most of them continue with their social

sector interventions.

Three broad categories of MFIs are:a. Not for Profit MFI, comprising NGOs, Trusts and Not-for-Profit companies;b. Mutual Benefit MFIs, mostly State and National level Cooperatives; andc. For-Profit MFIs, which are classified as Non Banking Financial Companies. It is estimated that more than 500 NGOs are providing MF services to the poor at present. Similarly, 2155 NGOs have participated in SHG-credit linkage program till march 2005.A task force was set up by NABARD to look into the entire gamut of MF and MFIs to catalyze

their growth.

B. Transformation of Donar ship into Ownership of MFIs:Recognition of NGO-MFIs

Although not legally recognized as such, the role of NGO as providers of financial serviceshas been accepted by Government of India and RBI.

There are however, certain inherent restrictions in the financial activities of the NGO-MFIsas regards.


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Mobilization of savings. Lack of equity concept for leveraging bank loan. Uncertain status as regards taxation on interest earned. Inability to transfer resources to form a new company. With a view to professionalizing MF, certain NGOs have promoted exclusive Non-Banking

Financial Companies for MF.

Entry of Foreign Capital into MF:

a. At present, certain restrictions are imposed on entry of foreign equity into rural credit andmicrofinance.

b. The minimum capital requirement even for an MF-NBFC is Rs. 20 million, the same as forany other company.

Areas for transformation of MFIs:

a. Development of systems for Resource Mobilization by the MFIs in a sustainable manner.b. Building managerial competence and creating qualified manpower.c. Managing transition from a subsidy-dependent culture to a commercial culture.d. Provision of sufficient protection in the laws for non-profit organizations.

C. Organization and Economics of Supervisions:a. Banks as MF service providers are supervised by RBI and NABARD as part of their overall

banking business.

b. The MF activities of the NGO MFIs are unregulated and unsupervised.c. Only MFIs registered as Cooperatives and NBFC are presently regulated.

2.12 NEED FOR REGULATION:a. Savers with MFIs are legally notmembers of the MFIs, but only clients.b. Protection of the savings of the poor is needed.c. Infusion of financial discipline into the credit activities of MFIs is necessary.


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Task Force on MF considers formation of Self Regulatory Organizations (SROs) to be the best

suited for regulation of MFIs. Such SROs will have to emerge from suitable associations of

MFIs.

2.13 Innovative Pilot Projects:The phenomenal growth rate of microfinance sector, especially the SHG bank linkage program

has posed number of issues and challenges which need immediate attention. In response to this

NABARD has initiated a number of innovations basically as an investment for posterity. At the

core of these innovations is a desire to improve the outreach and sustainability of the program.

Some of the pilot projects and initiated recently are summarized here.

2. Introduction of Smart Cards-Application of IT in SHG Bank Linkage Program:There are now many branches of Commercial Banks and Regional Rural Banks that service more

than 200 SHG accounts which were hitherto considered impossible. Howsoever welcome the

trend may be, the burgeoning numbers have also brought to the fore a host of issues relating to

tracking, monitoring and adequately servicing SHG accounts. It was felt that the best way to deal

with huge numbers would be to take recourse to new technologies available.

Also in general, the branch manager in the rural areas is hard pressed for time and as a result

does little for developing the business of the branch or for scouting for new business

opportunities for the branch. It was felt that use of Information Technology in the form of

processor/memory cards for SHGs and other clients coupled with automation in a branch would

serve to solve these vexed issues and leave adequate time for business development work.

NABARD has therefore decided to experiment with about five branches per RRB in different

regions of the country. Introducing Processor/Memory Cards for active clients and SHGs and

automation of book keeping in SHGs is expected to reduce paper work, save time and thus

improve the efficiency of the field worker. This is also expected to reduce the scope of

manipulation, reduce unintended leakages and also maintain up to date books at SHG level.

The first pilot project on smart cards has been launched with Sri Visakha Grameena Bank in

Andhra Pradesh, which has been one of the front-runner banks in financing SHGs. It is expected

that with enhanced use of rural-oriented technology, the bank would be able to provide value


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addition to services being offered to the rural clients and further expand it outreach in a

sustainable manner.

The users of processor/memory cards would include SHGs and other good customers of the bank

who are its regular customers. About 500 such customers, who would perform all bankingtransactions on a fast track, would be selected in each bank branch; Time taken for banking by

these regular good clients is likely to be reduced considerably. Use of processor/memory cards

by SHG customers also adds another set of advantages like effective book keeping, tracking and

monitoring of SHGs, reducing the hassles of illiterate SHG

Documents

A Study on Microfinance Sector in Karnataka