A study with Special Reference to Dakshina Kannada District

UGC MINOR RESEARCH PROJECT

GOVERNANCE OF MICROFINANCE

INSTITUTIONS- A STUDY WITH SPECIAL

REFERENCE TO DAKSHINA KANNADA DISTRICT

FINAL REPORT

Submitted To:

UNIVERSITY GRANTS COMMISSION

South Western Regional Office, Bangalore

Principal Investigator:

Mrs. Sarika., M.Com.

Lecturer, Dept of Commerce, SDM College, Ujire, DK District, Karnataka

2013-14

CERTIFICATE

This is to certify that a copy of the final report of Minor

Research Project entitled “Governance of Microfinance

Institutions- A study with special reference to Dakshina

Kannada District” by Mrs. Sarika., of Department of

Commerce, SDM College, Ujire has been kept in the library

of Commerce Department and an executive summary of the

report has been posted on the website of the College.

Principal

i

ACKNOWLEDGEMENT

It is my privilege to express my sincere gratitude to the management of SDM

Educational Society, especially the President, Vice President, Secretaries and the

Principal Dr. B Yashovarma for their whole hearted support in completion of this

research work.

I extend my sincere gratitude to the University Grants Commission, particularly

Joint Secretary and Regional Head, S.W.R.O, Bangalore for granting me the

research project and encouraging me to pursue the research.

I would like to express my deepest gratitude to Dr. P. N. Udayachandra, my

Minor Research Project Guide and Head, Dept of Commerce, SDM College,

Ujire for his invaluable support, guidance and insights throughout my study and

for allowing me to complete the project with required degree of freedom all

through the project period.

I am greatly thankful to Mr. Muruganandan S. & Mr. Chidananda for extending

their help in statistical analysis and interpretation of data of the project

undertaken.

I would also like to express my sincere appreciation and gratefulness to the

Microfinance institutions and I am also greatly indebted to all the respondents of

the MFIs for positively responding to my questionnaire and interactions.

I am thankful to all my colleagues in the Department of Commerce for their

timely co-operation and help in completing this project with reasonable care and

diligence.

My inspiration and the source for what I am today are my parents & family. It is

their blessings & love which made me complete this project.

My sincere thanks are due to all my friends who have given constant support and

stood by my side during ups and downs of my life.

I humbly extend my gratitude to the teaching and non teaching staff of SDM

College for being supportive.

Finally, I am thankful to everyone who helped me directly and indirectly in

completing this project.

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TABLE OF CONTENTS

Acknowledgement i.

Contents ii.

List of Tables And Graphs iii.

List of Figures iv.

Chapter I. Introduction and Design of the Study - 01

Chapter II. Review of Literature - 13

Chapter III. Regional (DK District) Profile - 20

Chapter IV. Microfinance Institution’s Profile - 27

Chapter V. Research Methodology - 37

Chapter VI. Results & Discussion - 41

Chapter VII. Summary & Conclusion - 70

Bibliography - 79

Annexure - 83

iii

LIST OF TABLES AND GRAPHS

Table No. Title Page No. 3.1 Details of SHG Loans (in Rupees) - DK District 24

3.2 Micro Credit in DK District 25

4.1 No. of loans availed for various purposes under micro-credit

through SKDRDP

31

6.1 Respondents Position in the Family 42

6.2 Level of Education of the Respondents 43

6.3 Services availed by the Respondents 44

6.4(a) Descriptive Statistics - Quality of Service of Microfinance

Institutions

45

6.4(b) ANOVA - Quality of Service of Microfinance Institutions 46

6.5 Utilisation of Loans by the Respondents 46

6.6 ANOVA - Utilisation of loans by the Respondents 48

6.7 Measures for Repayment of Loans in time by the

Respondents

49

6.8 ANOVA - Measures of Repayment of Loans 50

6.9 Status of Loans of the Respondents 51

6.10 Suitable Repayment Periods 52

6.11 Grievance Redressal Systems 53

6.12 Awareness on Grievance Redressal Mechanism 53

6.13 ANOVA - Satisfaction on Grievance Redressal System 54

6.14 Challenges faced in Accessing MFIs Services (Garret

Ranking)

55

6.15 Nature of services offered by MFIs 56

6.16 Performance indicators 57

6.17(a) Assessing of Performance of Board of Directors and

Managers

58

6.17(b) Assessing and Evaluation of performance 58

6.18(a) Measures to maintain transparency and avoid conflicts of

interest

59

6.18(b) Frequency of measures taken 59

6.19(a) Board assess its own performance 60

6.19(b) Frequency of assessing its own performance 61

6.20 Frequency of assessing its own performance 62

6.21 Problems Faced in Reaching the Targets (Garret Ranking) 63

6.22 Practices of Auditing followed by MFIs 63

6.23 Automation of Accounting System in MFIs 64

6.24 Services provided to the Customers 65

6.25 Percentage of Loan Repayment 66

6.26 Measures for Repayment of Loans in Time from Borrowers 66

6.27 Grievance Redressal Systems 67

6.28 Technique used for Grievance Redressal Systems 68

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LIST OF FIGURES

Figure No. Title Page No. 1. Family Position of the Respondents (Percentage) 43

2. Level of Education of the Respondents (Percentage) 44

3. Financial Services Availed by the Respondents

(Percentage)

45

4. Utilisation of loans by the Respondents (Percentage) 47

5. Measures of Repayment of Loans (Percentage) 49

6. Status of Respondents Loan (Percentage) 51

7. Status of Respondents Loan (Percentage) 52

8. Awareness on Grievance Redressal Mechanism

(Percentage)

54

9. Nature of Services offered by MFIs (Percentage) 57

10. Frequency of Measures Taken (Percentage) 60

11. Board Assess its Own Performance (Percentage) 61

12. Frequency of assessing Performance by MFIs (Percentage) 62

13. Auditing Practices by MFIs (Percentage) 64

14. Measures for Repayment of Loans in Time from Borrowers

(Percentage)

15. Technique used for Grievance Redressal Systems

(Percentage)

68

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CHAPTER – I INTRODUCTION AND DESIGN OF THE STUDY

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CHAPTER I

INTRODUCTION AND DESIGN OF THE STUDY

1.1 Introduction

From a global perspective, it is surmised that in the aftermath of the

global financial crisis, microfinance has begun to enter a more mature and

sustainable growth phase. Followed by the rapid expansion over the years, the

focus of the microfinance sector has turned towards accelerating the

improvements in governance, responsible finance practices and regulatory

capacity. Further, risk management, which has become a post-crisis priority for

all financial institutions, has improved considerably in the microfinance sector,

which is essential, given that it is offering an increasingly diversified range of

innovative financial services to the poor. Besides taking advantage of new

opportunities, microfinance is well positioned to take further advantage of

technological and market developments.

Indian microfinance has also been showing mild signs of recovery on

account of improving regulatory environment and improvement in governance.

The number of savings linked SHGs increased to about 7.96 million with the

member base of 104 million. The provisional data available from NABARD for

the year 2011–12 shows that the number of SHGs provided with bank loans was

4.36 million, which is about 9 per cent less than the previous year’s performance.

However, the outstanding loan amount recorded an increase of 19 per cent during

the above period. In terms of incremental loans outstanding the SBLP added

57.23 billion.

3

The total client outreach of MFIs was recorded at 26.6 million with a

gross loan portfolio of 209.13 billion. Both the clients outreach and loan portfolio

recorded negative growth in this year. The growth rate in client outreach came

down by 15.7 per cent in the year 2011–12 as against an increase of 19.1 per cent

recorded in the previous year. However, the gross loan portfolio has remained

almost stagnant, registering a marginal fall of 3 per cent. Customer outreach has

recorded a relatively higher deceleration in growth rate as compared to the loan

outstanding, which suggests that MFIs are unable to service existing customers

and perhaps not acquiring new customers. This trend could be attributed to the

liquidity crisis which affected the MFIs during the second half of the year 2010–

11, but remained almost unchanged for the entire year 2011–12. Both SBLP and

MFIs put together achieve outreach of 83.4 million clients during 2011–12,

which is less by 11.6 per cent of their customer base in the previous year. The

degree of deceleration was pronounced more among MFIs (–15.7 per cent) than

SBLP (–9.5 per cent).

The overlapping of customers between MFIs and SBLP is the prevailing

phenomenon, which is still continuing. As it was done during the earlier years,

while adjusting the overlap, 11 a 10 per cent reduction has been made in respect

of the number of members of SHGs and a 35 per cent reduction in respect of

customers of MFIs. After the adjustment of overlap, the number of customers of

microfinance is estimated to have increased by 12.5 per cent1, which is much

higher than the growth rate of last year.

1 Venugopalan Puhazhendhi (2012). Microfinance India State of the Sector Report. Sage

Publications.

4

The History of Microfinance

The history of micro credit is traced back to the early 1700s when

Jonathan Swift, an Irishmen, had the idea to create a banking system that would

reach the poor. He created the Irish Loan Fund, which gave small short term

loans to the poorest people in Ireland who were not being served by commercial

banks, in hopes of creating wealth in the rural areas of Ireland. This idea took

years to catch on, but then grew quickly and expanded globally. By the 1800’s,

the Irish Loan Fund had over 300 banks for the poor and was serving over 20%

of the Irish population. In the 1800s similar banking systems showed up all

across Europe targeting the rural and urban poor. Friedrich Wilhelm Raiffeisen of

Germany realized that the poor farmers were being taken advantage of by loan

sharks. He acknowledged that under the current lending system, the poor would

never be able to create wealth; they would be stuck in a cycle of borrowing and

repaying without ever making personal economic development. He founded the

first rural credit union in 1864 to break this trend. This system was different than

previous banks because it was owned by its members, provided reasonable

lending rates and was created to be a sustainable means of community economic

development.

The idea of credit unions spread globally and by the end of the 1800s,

these micro credit systems had spread all the way from Ireland to Indonesia. At

the turn of the century similar systems were opening in Latin America. Whereas

in Europe the credit unions were owned by its members, in Latin America the

institutions were owned by the government or private banks and were not as

efficient as they were in Europe. In the 1950’s donors and government subsidies

5

were used to fund loans primarily for agricultural workers to stimulate economic

growth but these efforts were short lived. The loans were not reaching the poorest

farmers; they were often ending up in the hands of the farmers who were better

off and didn’t need the loans as critically as others. Funds were being lent out

with an interest rate much below the market rate and there were not enough funds

to make this viable long term. These loans were rarely being repaid, so the banks’

capital was depleting quickly and when the subsidized funds ran out, there was

no more money to pump into the agricultural economy in the form of micro

credit.

In the 1970s the biggest developments in micro finance occurred.

Grameen Bank in Bangladesh started off as an action based research project by a

professor who conducted an experiment credit program. This nonprofit program

dispersed and recovered thousands of loans in hundreds of villages. The professor

tried to extend this idea to other bankers in Bangladesh, but they were afraid that

it was too risky as a business and turned down the offer. Grameen Bank is now

one of the world’s largest micro finance institutions with over 4 million lenders.

By the 1990’s lenders had learned how to increase loan repayment rates enough

to make micro finance institutions sustainable. They targeted women as

borrowers and gave them money to invest in businesses that would increase their

income and charged very low interest rates so the borrowers could pay back their

loans and still have money, i.e. create wealth, for themselves. This is when the

term micro finance was coined to replace micro credit, because the new

institutions were doing more than making loans; they were offering other

financial services to the poor like savings accounts, insurance and money

transfers.

6

Aforementioned, banks are increasingly becoming commercialized. The

first commercial microfinance institution was founded in Bolivia in 1992. The

founders of this commercial MFI were originally the founders of a nonprofit MFI

in 1986 called PRODEM. PRODEM grew so rapidly that after 2 years, it had

more people desiring loans than they could support. They then created BancoSol

to meet the growing needs of the borrowers in Bolivia and became the first ever

MFI to issue dividends. Nonprofit micro finance institutions are successful, but

reach a capacity of lending when they run out of donations. There are currently

over 10,000 micro finance institutions serving 16 million people. The trend now

in 2010 is shifting away from donating to nonprofits and towards investing in

commercial micro finance institutions.

Recent Developments in Microfinance Sector

There has, however, been a sudden downturn in the prospects of the

sector in the second half of 2010-11 owing to reported excesses of some MFI

institutions and the consequent legislative response by a state government. On the

back of these developments, the MFI segment has taken a severe beating with

rising delinquency ratios and downgrades by rating agencies. Lenders have

turned wary leading to drying up of funding channels seriously impinging on the

business. It is reported that disbursements by MFIs in Andhra Pradesh

plummeted significantly in the second half of 2010–11. The recovery rates that

were 99 per cent reportedly fell to a meagre 10 per cent, leading to huge NPAs

which is causing significant stress on the functioning of MFIs. While the loans

given to MFIs during 2010–11 declined to Rs. 8448.96 crore from Rs. 10,728.50

7

crore in 2009–10, the amount of outstanding loans reduced from Rs. 13,955.75

crore in 2009–10 to Rs. 13,730.62 crore in 2010–11.

Many analysts attribute the current crisis to the irrational exuberance of

some MFIs who entered the segment with the sole emphasis on business growth

and bottom lines. They perhaps did not take due cognisance of the vulnerability

of the borrowers and the potential socio-political ramifications their aggressive

approach could possibly lead to. The competition among MFIs led to these

institutions chasing the same set of borrowers, by free riding on SHGs and

loading them with loans that borrowers, possibly, could not afford. It is reported

that as at the end of March 2010, the number of loan accounts per poor household

in Andhra Pradesh was on an average more than 10. In their eagerness to grow

business, the institutions had given a go by to the conventional wisdom and good

practices such as due 1 1 crore = 10 millions BIS central bankers’ speeches 3

diligence in lending and ethical recovery practices. Over-indebtedness of the

borrowers led to difficulties in repayments and the forced recoveries by some

MFIs led to public uproar and the subsequent intervention by the state

government.

The legislation enacted by the Andhra Pradesh Government has brought

the customer protection issues to the centre stage. The legislation stipulated

mandatory registration of MFIs, disclosure of effective interest rate to the

borrowers, ceilings on the interest rates and strict penalties for coercive recovery

practices. One of the fall outs of these developments has been the severe dent in

the MFI business due to dwindling resources. Reserve Bank constituted a

Committee (Chairman: Shri Y H Malegam) to study issues and concerns in the

8

MFI sector. The Committee examined the issues and made recommendations to

address the present concerns. Some of the significant recommendations are as

under:

i. Creation of a separate category of NBFCs operating in the microfinance sector

to be designated as NBFC-MFIs.

ii. Imposition of a margin cap and interest rate cap on individual loans;

iii. Requirement of transparency in interest charges;

iv. Lending by not more than two MFIs to individual borrowers;

v. Creation of one or more credit information bureaus;

vi. Establishment of a proper system of grievance redressal procedure by MFIs;

vii. Creation of one or more “social capital funds”;

viii. Continuation of categorisation of bank loans to MFIs, complying with the

regulation laid down for NBFC-MFIs, under the priority sector, etc.

The recommendations of the Committee have brought out clarity in

regulation of MFIs and led to the containment of the crisis without domino effect.

Based on the recommendations of the Malegam Committee, the Reserve Bank of

India has issued detailed guidelines permitting categorisation as priority sector

advance, of bank credit to certain eligible MFIs. Such eligibility is linked to core

features of microfinance, such as, lending of small amounts to borrowers

belonging to low income groups, without collaterals, with flexible repayment

schedules and with particular emphasis on measures to curb over-indebtedness.

Margin caps and interest rate caps have also been stipulated to ensure protection

9

of borrowers. Subsequently, the Reserve Bank of India created a separate

category of NBFCs dealing in microfinance – NBFC-MFI and issued

comprehensive guidelines covering, inter alia, fair practices in lending such as

transparency in interest rates, non-coercive methods of recovery, measures to

contain multiple lending and over-indebtedness.

Government of India has come out with The Microfinance Institutions

(Development and Regulation) Bill, 2011 which, among other things, envisages

the Reserve Bank of India as the sole regulator of microfinance sector covering

all forms of MFIs in addition to NBFC – MFIs which are presently being

regulated by the Reserve Bank. The Bill has been circulated among various

stakeholders for their views.

Key Lessons and the way forward

Having briefly covered the background to the current state of affairs let

me now focus on some of the specific issues that need to be examined to address

the current impasse. While a number of reasons have been attributed for the

turmoil in the sector, such as, unjustified high rates of interest, lack of

transparency in interest rate and other charges, multiple lending and over-

borrowing, coercive methods of recovery, etc,. I would consider the governance

deficit coupled with people risk, process risk and relationship risk as the more

critical factors that have precipitated the turmoil and need to be addressed. MFIs

need to seriously examine 4 BIS central bankers’ speeches their governance

systems and align their practices with the overall objective of microfinance which

is to facilitate financial inclusion and empower poor.

10

1.2 Relevance of the Study/ Statement of Problem

Microfinance, involving extension of small loans and other financial services

to low income groups, is a very important economic conduit designed to facilitate

financial inclusion and assist the poor to work their way out of poverty. It has the

potential to fill the critical gap left by formal financial institutions in providing

financial services to low income groups. Mainstream institutions shied away from

providing financial services to the poor considering them unviable owing to high

costs involved in reaching out to the unbanked/under banked areas where there is not

enough scale of operations due to low numbers and low value of transactions.

Microfinance became a leading and effective strategy for poverty alleviation

with the potential for far-reaching impact in transforming the lives of poor people. It

is argued that microfinance can facilitate the achievement of the Millennium

Development Goals (MDGs) as well as national policies that target poverty

reduction, empowerment of women, assisting vulnerable groups, and improving

standards of living. But in recent times the role of microfinance has become

controversial, with various sections raising objections and criticisms in this regard2.

It also found that the unethical and extortionist practices by MFIs led to arguably a

draconian measure in its home turf Andhra Pradesh halting the industry in its tracks3.

The Private MFIs in India, barring a few exceptions, are still fledgling efforts and are

therefore unregulated. So, the present study focuses on assessing the governance of

micro-finance institutions.

2 Sibghatullah Nasir, Microfinance in India: Contemporary Issues and Challenges; Middle-East

Journal of Scientific Research 15 (2): 191-199, 2013; ISSN 1990-9233 3 Chakrabarti, R. and S. Ravi, 2011. At the crossroads: microfinance in India. Money and Finance,

Forthcoming.

11

1.3 Need for the Study (Research Gap)

MFIs, are expected to be transparent in their policies, systems, procedures,

and transactions, which call for good governance and accountable to the

stakeholders. The present study aims at understanding the key issues of good

governance, which has a direct impact on the all the stake holders starting from the

investors, promoters, managers of microfinance institutions as well as to the

regulators and the public in general they serve. Hence with this background this

study was undertaken with the following objectives.

1.4 Objectives

1. Assessing the performance of MFI’s in terms of loan disbursement to

SHG members in selected MFI’s of Dakshina Kannada District.

2. Evaluating the governance issues relating to transparency &

accountability of the institutions.

3. Developing a score card for MFI governance assessment.

1.5 Scope and Limitation of the study

The study was undertaken in the selected Micro finance Institutions

identified for the study in Dakshina Kannada district of Karnataka. The main focus

of the study was to draw the inferences on the governance issues prevailing in the

MFI’s and other administrative issues concerning the effective management of the

micro finance institutions. The information by the researcher is sought through

questionnaire, through meeting the respondents personally. The study also covers the

attributes for institutional performance and the impact on the growth by specialized

institutions like SKDRDP from the institutional point of view. But the study is not

12

out of the limitations. Respondents, while expressing their views on the issues

covered, the probability of an element of subjectivity creeping into the responses

could not be ruled out. But an attempt is made to reduce such effects to the minimum

by providing the necessary clarification where ever it is required. The major

limitation was getting Micro Finance Institutions with large scale operations having a

structured management.

1.6 Organization of the study

The present study is divided into eight chapters in order to attain the

research objective. The eight chapters are as follows:

Chapter I - deals with the introduction and design of the study

Chapter II - deals with the review of earlier literatures

Chapter III - deals with the overview of Regional (DK District) Profile.

Chapter IV - deals with the overview of Institutional (MFI) Profile.

Chapter V – presents the Methodology adopted for the study.

Chapter VI – presents the Results and Discussions of the study.

Chapter VII – presents the Summary & Conclusion for the study.

13

CHAPTER – II REVIEW OF LITERATURE

14

Chapter II

Review of Literature

A review of the past studies is useful to understand the various aspects of

the problem taken up for research, to plan the current study, to define concepts,

hypotheses and scope, to select tools of analysis and to analyse the research

problem effectively. Hence, several studies relating to Microfinance are reviewed

and a brief account of the review is presented in this chapter. Microfinance is a

rising concept around the world; several researchers have studied about the extent

of microfinance in financial inclusion, poverty alleviation etc. However, the

researcher went through the available studies as far as possible to obtain a clear

theoretical background for the present study. The findings of the literature review

are briefly reproduced below.

Morduch (1999) 4 The need of microfinance comes from the disadvantaged

sections of the society - who are unable to access to services of formal sector

financial intermediaries - and is typically excluded from the formal banking

system for lack of survival.

Madhubala,S.(2014)5 Various agencies, non-government organisations (NGOs),

government bodies and microfinance institutions (MFIs) are promoting SHGs to

achieve their objectives – spread of education, awareness about social rights and

alleviation of poverty etc.

4 Morduch, J., 1999. The Microfinance Promise. Journal of Economic Literature, 37(4): 1569-

1614. 5 Madhubala, S. (2014). Comparative Study of Microfinance Activities of Self-Help Groups in

Urban India. Africa Development and Resources Research Institute Journal, Vol. 5, No. 5(2), Pp.

54-73.

15

Dr. Patel, A (2004) 6There is a need for well-organized and committed micro

finance institutions for channelizing credit and making it available to the poor

households individually or in groups in India.

Padmalochan Mahanta et.al (2012) 7Lending to the poor through microcredit is

not the end of the problem but beginning of a new era. If effectively handled, it

can create miracle in the field of poverty alleviation. But it must be bundled with

capacity building programs. Government cannot abdicate its responsibility of

social and economic development of poor and down trodden. In absence of any

special skills with the clients of microcredit, the fund is being used in

consumption and procurement of non-productive assets. Hence it is very

important to provide skills development training program like handicraft,

weaving, carpentry, poultry, goat rearing, masonry, bees farming, vegetable

farming and many other agricultural and non agricultural training. Government

has to play proactive role in this case. People with some special skills have to be

given priority in lending microcredit. These clients should also be provided with

post loan technical and professional aid for success of their microenterprises. If

government and MFIs act together then microcredit can play a great role in

poverty alleviation.

Oliver Muller (2013) 8MFIs operating under high-quality local institutions and

governance outcomes are more likely to be profitable and sustainable.

6 Dr. Patel, A., “Micro-Credit and Role of Banks; Need for initiatives and commitment”,

Kurukshetra, February 2004, P: 4-10. 7Padmalochan Mahanta et.al, Status of Microfinance in India - A Review International Journal of

Marketing, Financial Services & Management Research 1(11), November 2012, ISSN 22773622 -

Available Online at www.indianresearchjournals.com 8 Oliver Müller The Impact of External Governance Quality on the Economic Success of

Microfinance Institutions; Int. J. of Monetary Economics and Finance, 2013 Vol.6, No.2/3,

pp.116 – 149

16

Wolday Amha (2008) 9found some key elements for sound corporate

governance in an microfinance institutions such as:

a) A well articulated corporate strategy against which the overall success and the

contribution of individuals can be measured.

b) Setting and enforcing clear assignment of responsibilities, decision making

authority and accountabilities that is appropriate for the risk profile.

c) A strong financial risk management function (independent of business lines),

adequate internal control system (including internal and external audit function),

and functional process design with the necessary checks and balances.

d) Corporate values, codes of conduct and other standards of appropriate

behavior and effective system used to insure compliance. This includes special

monitoring of the risk exposures of MFIs where conflicts of interest are expected

to appear (e.g. relationships with affiliated parties).

e) Financial and managerial incentives to act in an appropriate manner offered to

the board of management and employees including compensation, promotion and

penalties (I,e. compensation should be consistent with the MFIs objective

performance and ethical values).

f) Transparency and appropriate information flows internally and to the public

(adopted from Van Greuning et al 2003).

Haileslasie Tadele, P. Madhu Sudana Rao (2014) 10

The board should maintain

a sound control and risk management framework to make strategic decisions.

Every member of the board should internalize the framework and the risk model

should be designed to accommodate such changes. Proper monitoring and control

9 Wolday Amha, Corporate Governance of the Deposit Taking Microfinance Institutions (MFIs)

in Ethiopia; Occasional paper -no. 23; Association of Ethiopian Microfinance Institutions, Addis

Ababa, Ethiopia : 2008 10

Haileslasie Tadele, P. Madhu Sudana Rao; Journal of Business Management & Social Sciences

Research (JBM&SSR) ISSN No: 2319-5614 Volume 3, No.1, January 2014

17

of activities are the bases for ethical growth and sustainability of MFIs. They

found different types of financial needs of small borrowers such as:

a) Lifecycle Needs: such as weddings, funerals, child-birth, education,

homebuilding, widowhood and old age.

b) Personal Emergencies: such as sickness, injury, unemployment, theft,

harassment or death.

c) Disasters: such as fires, floods, cyclones and man-made events like war or

bulldozing of dwellings.

d) Investment Opportunities: expanding a business, buying land or equipment,

improving housing, se-curing a job (which often requires paying lump sum

amount).

Hartarska, V. and Mersland, R. (2009) 11

Good governance is important for

traditional corporations. But it is not fully applicable to microfinance institutions

as the objectives, operations; composition and market of MFIs are not same as

that of conventional counterparts.

Shahadat Hossain (2013)12

External stakeholder orientation in board does not

ensure financial performance rather than social performance. Regulation and

supervision, external rating, external auditing and reporting, international

orientation and professional affiliation do not help in increasing profitability,

however, sometimes help in deeper outreach. Competition worsens MFIs

financial performance but sometimes improve organizational efficiency.

11

Hartarska, V. and Mersland, R. (2009). Which Governance Mechanisms Promote Efficiency in

Reaching Poor Clients? Evidence from Rated Microfinance Institutions. European Financial

Management, accessed from: doi: 10.1111/j.1468-036X.2009.00524.x. 12

Shahadat Hossain, Research Journal of Finance and Accounting ISSN 2222-1697 (Paper) ISSN

2222-2847 (Online) Vol.4, No.14, 2013

18

Marguerite S. Robinson 13

Microfinance does not end poverty. For that, many

other tools are needed as well. But commercial microfinance increases the

options and the self-confidence of large numbers of poor households by

providing them with a set of financial instruments savings, credit, and other

products. These products are designed and implemented so that clients can

customize their use in ways that meet their own particular needs. This approach

helps such people to expand and diversify their enterprises and decrease risks, to

store their excess liquidity safely and obtain returns on their savings, and to hold

savings accounts that are legally recognized assets. Often the quality of their lives

gradually improves. Women develop enterprises, hold savings in their own

names, contribute to the household economy and gain in experience and

confidence. Children are sent to school, and child labor may decrease. Housing

and health improve. And some of those who expand their economic activities

create jobs for others, providing employment to some of the extremely poor.

Ghate, Prabhu (2006) 14

As there is no law or regulation in India requiring

organizations which provide micro-credit to formally register as microfinance

institutions it is impossible to assess the share of the total market for micro-credit

loans these MFIs together represent. Some observers estimate that there may be

as many as 800 organizations currently providing micro-credit services in India.

CMF (2007) 15

A study summarizes that yet, anecdotal accounts from

practitioners strongly suggest that while there are a large number of organizations

13

Marguerite S. Robinson, Mobilizing Savings from the Public Basic Principles and Practices;

SPEED-USAID; P-44 14

Ghate, Prabhu. 2006. Microfinance in India: A State of the Sector Report, 2006. Delhi:

Microfinance India. Available Online -

http://microfinancenetwork.typepad.com/blog/files/sector_report1.pdf 15

CMF Focus Note: The Geographic Distribution of Microfinance Services in India, 2007

www.ifmr.ac.in/cmf

19

engaged in micro-credit activities, most of these micro-lenders are extremely

small and together make up only a small portion of the overall micro-credit

market. The steep drop-off in client numbers after the ten largest MFIs lends

credence to this claim. In this study in the year 2007, of the top 20 Districts by

MFI Penetration Dakshina Kannada stands 3rd

in terms of Microfinance

penetration in the female population (with a Total Female Population of 1042739

& a Total number of Active Borrowers 177315 with MFI Penetration 17.00%).

The same study also reports that in India, Dakshina Kannada district lists in the

top 20 fastest growing districts by absolute growth in MFI penetration amounting

to 5.71% making it the 12th

fastest growing districts by absolute growth in MFI

penetration in India.

Ghate, Prabhu (2007) 16

MFI penetration in South India, and in particular

Andhra Pradesh, dominates in terms of MFI presence. Two of the top five states

in terms of overall MFI penetration and three of the top five states in terms of

MFI and SHG combined penetration (excluding Pondicherry) are all in the South.

Moreover, with the notable exception of Krishna and Guntur districts in AP,

growth remained strong throughout the South over the year 2006 to 2007.

Several researchers conducted research on microfinance concept by

measuring the extent, need and importance of microfinance for the beneficiaries.

The present study aims at understanding the key issues of good governance,

which has a direct impact on the all the stake holders starting from the investors,

promoters, managers of microfinance institutions as well as to the regulators and

the public in general they serve.

16

Ghate, Prabhu. 2007. Consumer Protection in Indian Microfinance: Lessons from Andhra

Pradesh and the Microfinance Bill. Economic and Political Weekly;

http://www.epw.org.in/epw/user/loginArticleError.jsp?hid_ artid=10446

20

CHAPTER – III REGIONAL (DAKSHINA KANNADA

DISTRICT) PROFILE

21

Chapter III

REGIONAL (DAKSHINA KANNADA DISTRICT) PROFILE

3.1 Dakshina Kannada District Overview

Karnataka, located in the southern part of India is one of the developed

states being the seventh largest GDP producing states in India. Karnataka is the

9th most populous state in India with 61 million people, which can be attributed

to migration. Inspite of showing rapid signs of development, its literacy rate is

only 75%. Sex ratio stands at 973 female per 1000 male which is 20 point above

national average17

. One of the primary causes for growth in Karnataka is its

investment in infrastructure facilities and creation of job opportunities.

An official Census 2011 detail of Dakshina Kannada, a district of

Karnataka was released by Directorate of Census Operations in Karnataka. It

enumerated the following details for Dakshina Kannada District of Karnataka.

3.2 Dakshina Kannada District Population 2011

In 2011, Dakshina Kannada had population of 2,089,649 of which male

and female were 1,034,714 and 1,054,935 respectively. In 2001 census, Dakshina

Kannada had a population of 1,897,730 of which males were 938,434 and

remaining 959,296 were females. Dakshina Kannada District population

constituted 3.42 percent of total Maharashtra population. In 2001 census, this

figure for Dakshina Kannada District was at 3.59 percent of Maharashtra

population.

17

http://www.census2011.co.in/census/state/karnataka.html

22

3.3 Dakshina Kannada District Population Growth Rate

There was change of 10.11 percent in the population compared to

population as per 2001. In the previous census of India 2001, Dakshina Kannada

District recorded increase of 14.59 percent to its population compared to 1991.

3.4 Dakshina Kannada District Density 2011

The initial provisional data released by census India 2011, shows that

density of Dakshina Kannada district for 2011 is 430 people per sq. km. In 2001,

Dakshina Kannada district density was at 416 people per sq. km. Dakshina

Kannada district administers 4,861 square kilometers of areas.

3.5 Dakshina Kannada Literacy Rate 2011

Average literacy rate of Dakshina Kannada in 201118

were 88.57

compared to 83.35 of 2001. If things are looked out at gender wise, male and

female literacy were 93.13 and 84.13 respectively. For 2001 census, same figures

stood at 89.70 and 77.21 in Dakshina Kannada District. Total literate in Dakshina

Kannada District were 1,666,323 of which male and female were 864,019 and

802,304 respectively. In 2001, Dakshina Kannada District had 1,391,738 in its

district.

3.6 Dakshina Kannada Sex Ratio 2011

With regards to Sex Ratio in Dakshina Kannada, it stood at 1020 per 1000

male compared to 2001 census figure of 1022. The average national sex ratio in

India is 940 as per latest reports of Census 2011 Directorate. In 2011 census,

18

Dakshina Kannada District: Census 2011 data http://www.census2011.co.in/census/district/252-

dakshina-kannada.html

23

child sex ratio is 947 girls per 1000 boys compared to figure of 952 girls per 1000

boys of 2001 census data.

3.7 Dakshina Kannada Child Population 2011

In census enumeration, data regarding child under 0-6 age were also

collected for all districts including Dakshina Kannada. There were total 208,297

children under age of 0-6 against 228,060 of 2001 census. Of total 208,297 male

and female were 106,985 and 101,312 respectively. Child Sex Ratio as per census

2011 was 947 compared to 952 of census 2001. In 2011, Children under 0-6

formed 9.97 percent of Dakshina Kannada District compared to 12.02 percent of

2001. There was net change of -2.05 percent in this compared to previous census

of India.

3.8 Dakshina Kannada District Urban Population 2011

Out of the total Dakshina Kannada population for 2011 census, 47.67

percent lives in urban regions of district. In total 996,086 people lives in urban

areas of which males are 493,230 and females are 502,856. Sex Ratio in urban

region of Dakshina Kannada district is 1020 as per 2011 census data. Similarly

child sex ratio in Dakshina Kannada district was 942 in 2011 census. Child

population (0-6) in urban region was 97,221 of which males and females were

50,053 and 47,168. This child population figure of Dakshina Kannada district is

10.15 % of total urban population. Average literacy rate in Dakshina Kannada

district as per census 2011 is 92.12 % of which males and females are 95.50 %

and 88.83 % literates respectively. In actual number 828,007 people are literate in

urban region of which males and females are 423,215 and 404,792 respectively.

24

3.9 Dakshina Kannada District Rural Population 2011

As per 2011 census, 52.33 % population of Dakshina Kannada districts

lives in rural areas of villages. The total Dakshina Kannada district population

living in rural areas is 1,093,563 of which males and females are 541,484 and

552,079 respectively. In rural areas of Dakshina Kannada district, sex ratio is

1020 females per 1000 males. If child sex ratio data of Dakshina Kannada district

is considered, figure is 951 girls per 1000 boys. Child population in the age 0-6 is

111,076 in rural areas of which males were 56,932 and females were 54,144. The

child population comprises 10.51 % of total rural population of Dakshina

Kannada district. Literacy rate in rural areas of Dakshina Kannada district is

85.33 % as per census data 2011. Gender wise, male and female literacy stood at

90.97 and 79.83 percent respectively. In total, 838,316 people were literate of

which males and females were 440,804 and 397,512 respectively.

SHG Loans – DK District

Table 3.1: Details of SHG Loans (in Rupees) - DK District

25

Micro Credit in DK District

Table 3.2: Micro Credit in DK District

Status of SHG-BLP: MYRADA, considered as the pioneer of the Self

Help group concept, invented itself in the state of Karnataka. Since early 1980s,

the SHGs are being promoted and nurtured by the NGOs across the states.

Additionally, government sponsored programs like Stree Sakthi and SGSY have

contributed significantly in promotion of the SHGs across the state. Karnataka is

one of the leading performers in SHG-BLP with about 6.29 lakh SHGs having

saving bank linkages with a total deposit of INR 1, 00, 212.87 lakh. Among the

major States, SHGs in Karnataka maintain the highest savings balance of over

26

INR 16,000 per SHG. While number of SHGs having outstanding loans has

declined across the country in year 2010-11, Karnataka maintained its status.

Further, Karnataka has the highest average loan outstanding among SHGs with

INR 1.30 lakh per SHG, whereas the national average is about INR 0.83 lakh per

SHG and average loan outstanding is about INR 1.07 lakh per SHG in southern

region. The NPA against bank loans to SHGs in the state is very low at 3.35% as

compared to national figure of 6.09%. While, there are examples where SHGs in

Karnataka have engaged in livelihood activities, technology intervention in SHG

activities has not been observed much. SHGs in Karnataka are linked with

NABARD, wherein NABARD directly promotes and finances their activities.

27

CHAPTER – IV MICROFINANCE INSTITUTION’S PROFILE

28

Chapter IV

MICROFINANCE INSTITUTION’S PROFILE

Several micro financial institutions are emerged in the DK district for the

development of vulnerable people in this district. The profile of microfinance

institutions are shown as follows:

4.1 Shri Kshethra Dharmasthala Rural Development Project

Shri Kshethra Dharmasthala Rural Development Project, popularly

known as SKDRDP, is a charitable trust promoted by Dr. D. Veerendra

Heggade. SKDRDP concentrates on the empowerment of rural women by

organizing Self-help Groups (SHGs) on the lines of Joint Liability Groups (JLBs)

of Bangladesh and provides infrastructure and finance through micro credit for

the rural people.

The Shri Kshetra Dharmasthala Rural Development Project encompasses all

aspects of enriching the rural life. It is currently engaged in developmental

activities in Dakshina Kannada, Udupi, Uttara Kannada, Coorg, Shimoga,

Chickmagalur, Dharwad, Haveri, Gadag, Tumkur, Belgaum, Mysore,

Chamarajnagar, Koppal, Davangere, Chitradurga, Hassan, Mandya, Bangalore

Rural, Bellary, Raichur and Bagalkote districts operating in 25,000 villages

covering more than 28,19,500 families. SKDRDP is active with its Community

Development Programs throughout the state. The core strengths of the

organization are the blessings of its promoters, dedicated band of workers, good

will of the stakeholders and above all a comprehensive program to better the

living environment of the chosen areas. During the year SKDRDP has extended

29

its area of operation to six more districts viz., Hassan, Mandya, Bangalore Rural,

Bellary, Raichur and Bagalkote.

SKDRDP (R.) is registered under the Charitable Trust Act of 1920 in the

office of Sub-Registrar, Government of Karnataka, Belthangady Taluk, Dakshina

Kannada District in the year 1991.

SKDRDP began to play its role in transfer of technology, providing

infrastructure, and providing finance through micro credit. Besides this, the

project concentrated on the empowerment of rural women and hence began

'Jnanavikasa Program'. In response to the social needs of the area the SKDRDP

innovated into activities like Janajagruthi, Community Development, and Siri etc.

A village level worker known as 'Sevaniratha' would approach the stakeholder

families, sit with them to prepare a five year development plan and assist them to

implement the same. The Dharmasthala temple has given the required material

support like equipment's, seed materials on a charity basis. In keeping with the

HR policy of the organization, the supervisory staffs were promoted from the

sevaniratha cadre in the prevailing areas. This provided a great opportunity for

the youngsters to show their organizational skills in the new area.

In order to give opportunities to the housewives and unemployed young

women in rural areas who have time and inclination to do social work, SKDRDP

has developed a new cadre called the Sevaprathinidhi, who work in their spare

time and support the SHG movement in the village. Most sevaprathinidhis are

women and this has positively affected women men ratio in the organization.

30

Large quantities of rice were distributed during the initial decades as a

compensation for the families while they worked in their own lands. the concept

of 'Food for Work' was implemented by SKDRDP, with a view to develop the

lands. Thus the initial decade of SKDRDP can be considered as the charity

phase.

In the early 90s, on review of the project, it was realised that mere charity

does not give the desired result. Hence SKDRDP adopted the self-help mode by

organizing Self-help Groups (SHGs), more on the lines of Joint Liability Groups

(JLBs) of Bangladesh.

SKDRDP as a BC and BF of the banks: SKDRDP took an active part in

implementing the Financial Inclusion plan of the government of India by working

as Banking Correspondent and Business Facilitator (BC and BF) in several

districts of Karnataka. Under the programme SKDRDP is promoting Self Help

groups enabling the poor people in the remote villages to access banking facilities

at their door steps. SKDRDP is BC and BF to State Bank of India in Dharwad,

Gadag and Haveri districts, Union Bank of India in Gokak, Davangere, Koppala,

Chamarajnagar, Mysore and Kasargod districts, Canara Bank in Chitradurga

district, Corporation bank in Tumkur, Belgaum, Mandya and Hassan districts,

Rathnakar bank in Bagalkote district, IDBI bank in Raichur and Bangalore Rural

and Pragathi Grameen Bank in Bellary districts.

SKDRDP initiated a micro-financing scheme known as Pragathinidhi in

1996, which provides loans to members to help promote their livelihoods or

develop infrastructure. The main features of Pragathinidhi include the provision

of adequate funds without any administrative formalities, a convenient tenure,

31

easy accessibility and easy weekly repayment installments. The funds required

for lending are sourced from bank loans or the savings of the members which are

deposited with the group's account.

In 2003, with plans to extend Pragathinidhi on a larger scale, SKDRDP

reinvigorated the program with systematic procedures. The group can now take

loans for agricultural purposes, infrastructure development, non-formal sector

development activities and group enterprises.

Table 4.1 No. of loans availed for various purposes under micro-credit

through SKDRDP

Purpose No. of loans 2013-14 Since inception

Agricultural Development Program 117,859 794,498

Irrigation Program 20,507 197,962

Housing and Sanitation 157,421 1,083,922

Self Employment 110,530 648,160

Other Programs 425,511 2,855,573

Total 831,828 5,580,115

4.2 VIMUKTI

Dayalbagh Rural Development Programs is an entity of Social work in

Belthangady Taluk. Since 1969 it has initiated its effort for the development of the

economically poor and the backward people, irrespective of their caste and creed.

Ever since, it has been working without stop for the development of the poor by

considering the different issues, programs based on the need of the people at

different stages. Integral development of the family is the goal. Development of the

32

family, a major part of it can be realized through the women. Hence keeping the

concept of Self Help Group the project has started to form the SHGs and as a result

of our efforts the first group was started on 26th Feb. 1999. This provided a impetus

for formation of SHGs and within a year 100 groups were formed in 28 villages of

Belthangady Taluk. As a result of the coming together, the SHGs arose and the

VIMUKTI WOMEN'S FEDERATION of over 2000 women was inaugurated on

26th February 2000.Today the federation has 19 units of 150 Self Help Groups who

function on their own leadership and maintain micro finance activity, financial

savings over a crore rupees and making a loan transaction of above three crores.

Programs on Health, Education, seminars, training, awareness programs and

entrepreneurial activities are undertaken by the women as the empowerment process.

4.2.1 VIMUKTI SHG FEDERATION

Formation, nurture, promotion and strengthening of the SHGs are the main

activity of the society for the last 10 years. The SHGs are the basic structure for all

the developmental activities of the society. Under the patronage of Vimukti there are

150 SGHs in 33 villages. The total number of members of women has crossed 3000.

At present all the SHGs are functioning under the banner of VIMUKTI.

4.2.2 THE STRUCTURE OF THE FEDERATION

The Clusters are the bridge between the SHGs and the Federation. Once in 3

months, the cluster meetings are organized to share their problems and their

achievements. The SHGs meet with the intention of the overall development of the

members and to share their problems. There is common discussion among the SHGs.

During the meeting the project team will give the possible solution for their

problems, appraise their achievements and give some awareness on related topics.

33

The Vimukti women federation is growing and extending its branches day by day.

The women have realized that the collective action leads to better and lasting results.

Hence the women take a very active role in the developmental issues and other

related topics.

Ongoing training and awareness programs on health, education, self

employment and other micro finance activities motivate the members to develop

their families as well as the community.

All the developmental work is financially supported by the Child Fund India.

Vimukti was affiliated to CFI in the year 2000 and now 800 children are benefiting

directly. This organization has no caste, creed, religion or color barrier. Everybody is

equal when it comes to help child, family or community. The main mission

statement of CHILD FUND INDIA is that ''it creates an environment of hope and

respect for needy children of all cultures and belief in which they have opportunities

to achieve their full potential, and provides tools for positive change to children,

families and communities. The organization receives support not from the rich but

from the middle class people and students from America, Canada, Germany and

some other Asian Counties. It is their sacrifice, generosity; love for the unfortunate

has kindled the hearts of millions of children all over the world. The programs are

divided into 6 sectors like Health and Sanitation, Nutrition, Early Childhood

Development, Basic Education, Child Participation and Protection, Livelihood and

Economic Enhancement programs.

4.3 NAVODAYA SELF HELP GROUP PROJECT

Navodaya Self Help Group project has been set up under the auspices of

SCDCC Bank Ltd, Mangalore in 29th January 2000 with the far reaching vision of

34

Sri M. N. Rajendra Kumar, at Sural of Karkal Taluk, with the main objective of

empowerment of Rural poor for their Socio Economic Development to make them

able and capable by developing them Socio Economically.

Navodaya Grama Vikas Charitable Trust @ was started on 1.10.2004 by its

Managing Trustee Dr.M.N. Rajendra Kumar, a dynamic leader of co-operative

movement and President of S.C.D.C.C Bank. At present the NGVCT has formed

27,618 consisting 2,80,508 members in 5 districts viz. D.K, Udupi, Dharwad, Uttar

Kannad & Shimoga Districts. Out of them 72% are women members actively

participating in its developmental activities. The total savings of the groups is

approximately 100 crores.

4.3.1 Objectives

Formation of SHG for the socio- economic, development and cultural

programmes for the development of rural people.

Training the rural unemployed youth, especially the women to make them

self-reliant.

Formation of training centers for the self-employment.

Organizing unemployed youths and encouraging them to take up self-

employment.

Formation of self help groups in rural areas state wide and developing

their economic, social and culture status through appropriate programmes.

In order to provide overall health protection to the Navodaya Self Help

Group members. Introducing Chaitanya Health Insurance Scheme.

35

Conducting awareness programme on the availability of economic and

other help from various women's development programmes for the self

employment.

Personality development programme.

To conduct free Health checkup camps for health care of the rural poor.

To help the financially poor patients suffering from cancer, cardiac

disease, kidney failure etc.

Opening of Educational institution to impart good and higher education

for the children of rural poor.

To promote and preserve art and culture and to specially encourage their

own immense folk heritage.

Awareness and training to preserve and protect the herbal plants of great

medicinal value.

To promote self employment opportunities and encourage skill training

with a view to tap alternative source of income.

Establishment of job oriented training centers for the rural unemployed

youth.

4.3.2Philosophy

Make the rural populace able and capable to earn live hood with self respect

and to ovate their Self Help Groups, there by brining unity, empowerment,

discipline and self respect within the reach. Types of Training Programmes

organized by NGVCT for Self Help Group Members: Rural Entrepreneurship

Development programme (REDP) consisting of:

1. Agriculture & Allied Activity.

2. Dairy farming.

36

3. Bee Keeping.

4. Horticulture.

5. Mushroom cultivation.

6. Dress Designing.

7. Agarbathi Manufacturing.

8. Screen Printing.

9. Vermiculture.

4.3.3 Programs for Self Help Groups:

Programs for self help groups consist of basic orientation to members for

formation of group. Maintains of books of accounts, credit management, capacity

Building, skill to carry out group member etc. These programs are provided at the

doorsteps of the members of SHG's.

4.4 Dakshina Kannada Rural Development Society (DKRDS)

The Dakshina Kannada Rural Development Society Registered, Belthangady is the

official Social work department of the diocese of Belthangady. Dakshina Kannada

Rural Development Society works for Women Empowerment Women In Micro

Enterprise Child Rights Promotion HIV/AIDS Mitigation Farmers Empowerment

Poor Girls Marriage Fund IDEA project. Dakshina Kannada Rural Development

Society also works in Key Issues: Agriculture, Children, Civic Issues, Disaster

Management, Education & Literacy, Environment & Forests, Health & Family

Welfare, HIV/AIDS, Housing, Human Rights, Micro Finance (SHGs), Panchayati

Raj, Right to Information & Advocacy, Rural Development & Poverty Alleviation,

Vocational Training, Women’s Development & Empowerment, and Youth Affairs.

37

CHAPTER – V RESEARCH METHODOLOGY

38

CHAPTER V

RESEARCH METHODOLOGY

The present study is a cross sectional study which explores the governance of

microfinance institutions from both points of view the beneficiaries as well as the

providers. This section presents the research methods that are used in order to attain

the goal of the research study. The primary objective of the study is to assess the

governance of micro-finance institutions.

5.1 Geographical Area Covered

The study was undertaken in the selected Micro finance Institutions

identified for the study in Dakshina Kannada district of Karnataka.

5.2 Sampling Technique

Sampling is intended to gain information about population. Thus it is critical

at the outset to identify the population properly and accurately. It is very important to

determine how researchers will choose their samples; there are several methods

where researchers choose samples based on their research purposes.

It is noteworthy to determine the research population before discussing

sampling issues. Without understanding the research population, researchers can not

conduct their empirical studies and results will not appear. The population for the

current study is the selected Micro Finance Institutions which offer Micro

Finance facilities to the poor. Representatives of MFI’s, Members of SHG’s and

Employees of the Institutions are taken as respondents for the current study.

Systematic Random Sampling Technique was used for collection of data.

39

Data was collected from respondents who hold Key posts in Microfinance

Institutions in Dakshina Kannada District like managers/office bearers. A

total of 20 respondents from various MFI’s were available for assessment.

Data was also collected from respondents who were associated with

MFI’s in Dakshina Kannada District as beneficiaries through Self Help

Groups. A total of 90 respondents were available for assessment.

5.3 Data Sources:

For the present study the researcher has used both primary and secondary

data to attain the research goals of the study. As the study concentrates on both

side service providers and their beneficiaries the researcher has used two separate

structured questionnaires were used and data were collected.

Questionnaire for respondents who hold Key posts in Microfinance

Institutions in Dakshina Kannada District like managers/office bearers.

(See Annexure).

Questionnaire for respondents who were associated with MFI’s in

Dakshina Kannada District as beneficiaries through Self Help Groups.

(See Annexure).

Secondary data were collected from various knowledge base including

journals, periodicals, microfinance books, reports and relevant websites.

5.4 Method

To assess the present governance methods of the selected MFI’s in

Dakshina Kannada District a cross sectional Study was designed and a onetime

data through separate questionnaires was collected from both MFI’s and SHG

40

members who are the beneficiaries of MFI’s. The data so collected was assessed

for presence of good governance practices in the institutions.

The questionnaires were designed to suit the needs of the study. The

respondents were explained about the study and were asked for consent before

collecting data. The questionnaires were administered to the respondents and

suitable clarifications given when asked. The investigator remained passive and

unbiased for the responses collected. Thus data collected from the questionnaires

were tabulated in Microsoft Excel for Data evaluation.

5.5 Statistical Tools and Techniques used for the study

To analyze the governance practiced in Micro Finance Institutions, tools

like Descriptive Statistics (Frequency, Mean, and Standard Deviation), ANOVA

and Garret Ranking are used in order to prove the hypotheses. Statistical analysis

has been done using SPSS. In order to draw suitable conclusions with meaningful

analysis, interpretation of data is made using tables and graphs.

41

CHAPTER – VI RESULTS & DISCUSSION

42

CHAPTER VI

RESULTS AND DISCUSSIONS

In this chapter the researcher has analysed and discussed how far the

customers are benefited from the Microfinance institutions and also assessed the

governance of microfinance institutions. This chapter is segregated into two

sections such as:

i. Beneficiaries of Microfinance Institutions (MFIs)

ii. Governance of Microfinance Institutions (MFIs)

SECTION I

6.1 BENEFICIARIES OF MICROFINANCE INSTITUTIONS

Basic Information of the respondents

The basic information’s of the microfinance beneficiaries are shown as

follows:

6.1.1 RESPONDENTS POSITION IN THE FAMILY

Table no. 6.1 Respondents Position in the Family

Level of Education Frequency Percentage

Head 8 8.9

Spouse 64 71.1

Dependent 18 20

Any other specify - -

Total 90 100

Source: Interview Schedule

43

Figure 1 Family Position of the Respondents (Percentage)

From the above table 6.1 shows the respondents position in the family.

The result reveals that majority (64 out of 90) 71.1 per cent of the sample

respondents are Spouses, 20 per cent (18 out of 90) of the respondents are

dependent, and 8.9 per cent (08 out of 90) of the respondents head in their family.

6.1.2 LEVEL OF EDUCATION OF THE RESPONDENTS

Table no. 6.2 Level of Education of the Respondents

Level of Education Frequency Percentage

Illiterate 14 15.6

Sec. Certificate 08 8.9

Diploma 20 22.2

Bachelor 48 53.3

Masters - -

Total 90 100


From the above table 6.2 shows the level of education of the

sample respondents. The result reveals that majority (48 out of 90) 53.3 per cent

8.9 %

71.1%

20%

0

10

20

30

40

50

60

70

80

Head Spouse Dependent

44

of the sample respondents completed their Bachelor degree, 22.2 per cent (20 out

of 90) of the respondents are diploma holders, 15.6 per cent (14 out of 90) of the

respondents are illiterates and 8.9 per cent (08 out of 90) of the respondents

education is at secondary level.

Figure 2 Level of Education of the Respondents (Percentage)

6.1.3 SERVICES AVAILED BY THE RESPONDENTS

Table no.6.3 Services availed by the Respondents

Microfinance Services

Frequency Percentage

Yes 55 61.1

No 35 38.1

Total 90 100

Banking Services

Yes 60 66.7

No 30 33.3

Total 90 100


15.6%

8.9%

22.2%

53.3%

0

10

20

30

40

50

60

illiterate Secondary Diploma Bachelor degree

45

Figure 3 Financial Services Availed by the Respondents (Percentage)

From the above table 6.3 shows Microfinance Services availed by the

Respondents. The result reveals that majority (55 out of 90) 61.1 per cent of the

sample respondents availed the services provided by the microfinance institutions

and 38.1 per cent (35 out of 90) of the respondents did not avail all services

provided by the microfinance institutions.

Majority (60 out of 90) 66.7 per cent of the sample respondents availed

the full services provided by the banks and 33.3 per cent (30 out of 90) of the

respondents did not avail the banking services provided by the banking

institutions.

6.1.4 QUALITY OF SERVICE OF MICROFINANCE INSTITUTIONS

Table no. 6.4(a) Descriptive Statistics

N Mean Std.

Deviation Std. Error

95% Confidence Interval for

Mean

Lower Bound Upper Bound

illiterate 14 3.9286 .61573 .16456 3.5731 4.2841

literate 68 3.7500 1.02760 .12462 3.5013 3.9987

Secondary 8 4.0000 .92582 .32733 3.2260 4.7740

Total 90 3.8000 .96221 .10143 3.5985 4.0015


61.1%

66.7%

38.1% 33.3%

0

10

20

30

40

50

60

70

80

Microfinance Banking Services

Yes

No

46

The above table 6.4(a) reveals the descriptive statistics for quality of

service availed from microfinance institutions among the different education

level of customers. The result reveals that the overall mean score is 3.80 (illiterate

3.92, literate 3.75, and Secondary 4.00), which clearly states that all levels of

customers agreed that microfinance institutions are providing quality service to

them.

Ho: There is no significant difference on quality of service availed from

Microfinance institutions among customers.

Table no. 6.4(b) ANOVA

Sum of

Squares

df Mean

Square

F Sig.

Between

Groups 5.136 3 1.712 1.905 .135

Within Groups 77.264 86 .898

Total 82.400 89

5 per cent significant level

The above table 6.4(b) shows the analysis of variance for test whether

there is any significant difference on the quality of service among the customers.

The result reveals that the p.value .135 is greater than the 5 per cent significant

level. So, the null hypothesis is accepted. Hence, there is no significant difference

on quality of service availed from Microfinance institutions among customers.

6.1.5 UTILISATION OF LOANS BY THE RESPONDENTS

Table no 6.5 Utilisation of Loans by the Respondents


Consultation Yes 90 100

No - -

Total 90 100

Loans used for intend

purpose Always 80 88.88

Always not 10 11.12

47

Total 90 100

Improved living condition Yes 56 62.22

No 34 37.78

Total 90 100

Received any training before

getting loan Yes 42 46.67

No 48 53.33

Total 90 100

Supervision on loan

utilization

Yes 46 51.11

No 44 48.89

Total 90 100

Supervision on loan

repayment Yes 90 100

No - -

Total 90 100


Figure 4 Utilisation of loans by the Respondents (Percentage)

The above table 6.5 shows the opinions and utilisation of loans by the

respondents provided by the microfinance institutions. The survey result shows

that all respondents (100 per cent) are consulted with the institutions to make

their MFIs policy directions based on their need.

Majority 88.88 per cent (80 out of 90) of the respondents used loans for

intended purposes (i.e. used loans for the purpose they availed) and 11.12 per

Yes

No 0

20

40

60

80

100

100% 88.88%

62.22%

46.67% 51.11%

100%

0% 11.12%

37.78% 53.33% 48.89%

0%

48

cent (10 out of 90) of the respondents did not use the loans properly for the

purpose they availed from the microfinance institutions.

Majority 62.22 per cent (56 out of 90) of the respondents living conditions

improved due to the credit scheme of the microfinance institutions and 37.38 per

cent (34 out of 90) of the respondents felt that the credit scheme provided by the

microfinance institutions did not improve their living conditions.

Majority 53.33 per cent (48 out of 90) of the respondents did not receive

any sort of training before receiving loans from the microfinance institutions and

46.67 per cent (42 out of 90) of the respondents received training before

receiving loans from the respective microfinance institutions.

Majority 51.11 per cent (46 out of 90) of the respondents portrayed that

they availed supervision from the microfinance institutions for the utilisation of

the loans received and 48.89 per cent (44 out of 90) of the respondents said that

they were not supervised for the utilisation of the loans received from the

microfinance institutions.

The result also reveals that all (100 per cent) the respondents were

supervised by the microfinance institutions for their repayment of the loans.

Ho: There is no significant difference on utilisation of loans among the

customers.

Table no. 6.6 ANOVA

Sum of

Squares

Df Mean

Square

F Sig.

Between

Groups 48.214 3 16.071 2.212 .023

Within Groups 624.774 86 7.264

Total 672.988 89


49

The above table 6.6 shows the ANOVA for testing whether there is any

difference on utilisation of loans among the customers. The ANOVA result

reveals that the p.value 0.23 is lesser than the 5 per cent significant level. So, the

null hypothesis is rejected. Hence, there is a significant utilisation of loans

availed from microfinance institution among customers.

6.1.6 MEASURES FOR REPAYMENT OF LOANS

Table no 6.7 Measures for Repayment of Loans in time by the Respondents

Measures Frequency Percentage

Claim against personal

wealth

Yes 61 67.8

No 29 32.2

Total 90 100

Claim against guarantors Yes 51 56.7

No 39 43.3

Total 90 100

Social sanction (loss of

status) Yes 90 100

No - -

Total 90 100

Fear of Losing Future

loans

Yes 40 44.4

No 50 55.6

Total 90 100


Figure 5 Measures of Repayment of Loans (Percentage)

Yes

No 0

20

40

60

80

100

Claim against

personal

wealth

Claim against

guarantors Social sanction

(loss of status) Fear of Losing

Future loans

67.8%

56.7%

100%

44.4%

32.2% 43.3%

0%

55.6%

50

The above table 6.7 shows the measures used to repay the loans by the

respondents. The result reveals that majority 67.8 (61 out of 90) per cent of the

respondents claim against personal wealth for repayment of loans in time and

32.2(29 out of 90) per cent of the respondents were not claimed against personal

wealth for repayment of loans in time.

Majority 56.7 (51 out of 90) per cent of the respondents claim against

guarantors for repayment of loans in time and 43.3 (39 out of 90) per cent of the

respondents were not claimed against guarantors for repayment of loans in time.

The result also reveals that all the respondents accepted that measures of

Social Sanction (loss of status) for their repayment of the loans in time.

Majority 44.44 (40 out of 90) per cent of the respondents repay their loans

in time because they have the fear of losing future loans (i.e. they repay their

loans to avail more loans) and 55.6 (50 out of 90) per cent of the respondents

doesn’t have any fear of losing future loans while they repay their loans in time.

Ho: There is no significant difference on measuring repayment of loans in time

among the customers.

Table 6.8 ANOVA

Sum of

Squares

Df Mean

Square

F Sig.

Between

Groups 48.087 3 16.029 2.406 .073

Within Groups 572.902 86 6.662

Total 620.989 89


The above table 6.8 shows the analysis of variance to test whether there is

any significant difference on measuring repayment of loans in time among the

customers. The result reveals that the p.value .073 is greater than the 5 per cent

51

significant level. So, the null hypothesis is accepted. Hence, there is no

significant difference on measuring repayment of loans in time among the

customers.

6.1.7 RESPONDENTS STATUS OF LOANS

Table no 6.9 Status of Loans of the Respondents

Status Frequency Percentage

Fully repaid

Yes 82 91.1

No 08 8.9

Total 90 100

Repayment on

schedule

Yes 67 74.4

No 23 25.6

Total 90 100

Repayment in

arrears

Yes 18 20

No 72 80

Total 90 100


Figure 6 Status of Respondents Loan (Percentage)

The above table 6.9 shows the status of loans of the respondents who

availed from the microfinance institutions. The result reveals that majority 91.1

(82 out of 90) per cent of the respondents fully repaid their loans and only 8.9 (08

out of 90) per cent of the respondents have not fully repaid their loan they availed

from microfinance institutions.

0 20 40 60 80 100

Repayment in Arrears

Repayment on Schedule

Fully Repaid

20%

74.4%

91.1%

80%

25.6%

8.9%

No

Yes

52

Majority 74.4 per cent of the respondents repaid their loans on schedule

fixed by the microfinance institutions and 25.6 per cent of the respondents did not

repay their loans on the scheduled time.

Majority 80 per cent of the respondents repaid their loans without arrears

and 20 per cent of the respondents repaid their loans in arrears.

6.1.8 REPAYMENT PERIODS

Table no 6.10 Suitable Repayment Periods

Repayment Periods Frequency Percentage

Suitable Repayment

periods Yes 88 97.8

No 02 2.2

Total 90 100


Figure 7 Status of Respondents Loan (Percentage)

The above table 6.10 reveals that majority 97.8 per cent of the

respondents felt that they availed suitable time period for repayment of their

loans and only 2.2 per cent of the respondents felt that the time period to repay

97.8%

2.2%

0

20

40

60

80

100

120

Yes No

53

the loans is not suitable and they need to increase the time period for their

repayment.

6.1.9 GRIEVANCE REDRESSAL SYSTEMS

Table no 6.11 Grievance Redressal Systems


Grievance

Redressal Systems

Yes 90 100

No - -

Total 90 100


The above table 6.11 shows whether the microfinance institutions have

proper grievance redressal systems. The result reveals that all respondents have

agreed that microfinance institutions have proper grievances redressal systems to

overcome grievances faced by them while they perceive financial services from

the microfinance institutions.

6.1.10 AWARENESS ON GRIEVANCE REDRESSAL MECHANISM

Table no 6.12 Awareness on Grievance Redressal Mechanism

Awareness Aware Neutral Unaware Total

Are you aware that you can

submit a complaint mentioning

about your grievances if any, with

regard to services on MFIs

60

(66.68)

30

(33.32) -

90

(100)

Dou you know to whom to submit

your complaint

32

(35.56)

55

(61.11)

03

(3.33)

90

(100)


The above table 6.12 shows the awareness level of customers towards

grievance redressal system in Microfinance institutions. The result reveals that

majority 66.68 per cent of the respondents are fully aware of grievance redressal

system for submitting their complaints regarding the services provided by the

54

institutions and 33.32 per cent of the respondents had neutral level of awareness

towards grievance redressal system in microfinance institutions.

Figure 8 Awareness on Grievance Redressal Mechanism (Percentage)

The result also reveals that majority 61.11 per cent of the respondents are

having neutral level of awareness about to whom they want to submit their

complaints, 35.56 per cent of the respondents are fully aware of it and 3.33 per

cent of the respondents are not aware to whom they had to submit their

complaints regarding the services they consumed.

6.1.11 SATISFACTION ON GRIEVANCE REDRESSAL SYSTEM

Ho: There is no significant difference on satisfaction of grievances redressal

systems among customers.

Table no. 6.13 ANOVA

Sum of

Squares

Df Mean

Square

F Sig.

Between

Groups 9.208 3 3.069 3.447 .020

Within Groups 76.581 86 .890

Total 85.789 89


Aware

Neutral

Unaware

0

10

20

30

40

50

60

70

Submit your

complaint to whom to submit

66.68%

35.56%

33.32

61.11%

0% 3.33%

55

The above table 6.13 shows the analysis of variance to test whether there

is any significant difference on satisfaction of grievances redressal systems

among the customers. The ANOVA result reveals that the p.value .020 is less

than the 5 per cent significant level. So, the null hypothesis is rejected. Hence,

there is a significant difference on satisfaction of grievances redressal systems

among customers.

Challenges faced in accessing MFIs Services

Table no 6.14 Challenges faced in Accessing MFIs Services (Garret Ranking)

Challenges Mean Score Rank

Lack of security 48.02 5

Few MFIs 47.21 6

High Interest Rate 41.45 11

Short repayment period 45.76 9

Getting trust worthy group members 46.78 7

Strict/inflexible terms 44.98 8

Weekly repayment-hard to raise money on a

weekly basis 50.28 2

Small amounts given at a time 52.40 1

Long procedure 50.12 3

Lack of investment opportunities 44.68 10

Too much paper work 48.34 4

Initial expenses too high yet not catered for

during loan repayment 39.65 12

Money is deducted yet interest has to be paid 34.34 13


The above table 6.14 shows the challenges faced by the respondents in

accessing MFIs Services. The garret ranking results reveals that small amount

given at a time stands first rank with a mean score of 52.40, weekly repayment –

hard to raise money on a weekly basis ranked second by the respondents with a

mean score of 50.28, long procedure ranked third with a mean score of 50.12, too

much paper work ranked fourth with a mean score of 48.34, lack of security

56

ranked fifth with a mean score of 48.02, Few MFIs ranked sixth, getting trust

worthy group members ranked seventh, strict/inflexible terms ranked eighth with

a mean score value of 48.02,47.21,46.78 and 44.98 respectively. Short repayment

period ranked ninth with a mean score of 45.76, lack of investment opportunities

ranked tenth with a mean score of 44.68, high interest rate ranked eleventh with a

mean score of 41.45, Initial expenses too high yet not catered for during loan

repayment was ranked twelve, Money is deducted yet interest has to be paid

ranked thirteenth with a mean score value of 39.54 and 34.34 respectively.

It is concluded that the respondent’s opinion that a small amount given at

a time was a major challenge faced in accessing MFIs Services.

SECTION II

6.2 MICROFINANCE INSTITUTIONS

In this section we discuss the governance of Microfinance institutions.

6.2.1 NATURE OF SERVICES OFFERED

Table 6.15 Nature of services offered by MFIs

Savings


Yes 20 100

No - -

Total 20 100

Insurance

Yes 20 100

No - -

Total 20 100

Loans

Yes 20 100

No - -

Total 20 100

Remittances

Yes 18 90

No 02 10

Total 20 100

SHG Promotion

Yes 19 95

No 01 05

Total 20 100


57

Figure 9 Nature of Services offered by MFIs (Percentage)

The above table 6.15 shows the nature of service offered by the

microfinance institutions. The result reveals that all the twenty microfinance

institutions are offering savings, insurance, loan facilities to the customers, 90 per

cent of the institutions are providing remittances and 95 per cent of the

institutions are offering SHG promotional activities.

6.2.2 PERFORMANCE INDICATORS TO MEASURE THE

EFFECTIVENESS OF MANAGEMENT

Table no. 6.16 Performance indicators

Performance Indicators


Yes 20 100

No - -

Total 20 100



any measures to evaluate the performance and effectiveness of the management.

The result reveals that all twenty microfinance institutions have unique

performance indicators to measure the effectiveness of management.

Yes

No 0

50

100 100% 100% 100%

90% 95% 0 0 0 10%

5%

58

6.2.3 ASSESSING OF PERFORMANCE OF BOARD OF DIRECTORS

AND MANAGERS

Table no. 6.17(a) Assessing of Performance of Board of Directors and

Managers

Performance of board

of directors and

managers


Yes 20 100

No - -

Total 20 100


The above table 6.17(a) shows whether the microfinance institutions

regularly assess the performance of board of directors and their managers. The

result reveals that all twenty microfinance institutions are regularly assessing and

evaluating the performance of board of directors and managers.

6.2.4 FREQUENCY OF EVALUATION OF PERFORMANCE OF BOARD

OF DIRECTORS AND MANAGERS

Table no. 6.17(b) Assessing and Evaluation of performance

Evaluation of

Performance


Weekly 05 25

Monthly 06 30

Quarterly 05 25

Half yearly 04 20

Annually - -

Total 20 100


The above table 6.17(b) shows the frequency of assessing the

performance of board of directors and their managers of microfinance

institutions. The result reveals that majority 30 per cent of the institutions assess

the performance of their board of directors and managers every month, 25 per

cent of the institutions assess the performance weekly and quarterly respectively

59

and 20 per cent of the microfinance institutions assess and evaluate the

performance of board of directors and managers every six months.

6.2.5 MEASURES TO MAINTAIN TRANSPARENCY AND AVOID

CONFLICTS OF INTEREST

Table no. 6.18(a) Measures to maintain transparency and avoid conflicts of

interest

Measures


Yes 20 100

No - -

Total 20 100


The above table 6.18(a) shows whether the microfinance institutions took

any measures to maintain transparency as well as to avoid any conflicts of

interest. The result reveals that all twenty microfinance institutions took

appropriate measures to maintain transparency and to avoid any conflicts of

interest arising.

6.2.6 FREQUENCY OF MEASURES TAKEN

Table no. 6.18(b) Frequency of measures taken

Frequency of measures

taken


Rarely - -

Often 06 30

Very often 12 60

Whenever required 02 10

Total 20 100


60

Figure 10 Frequency of Measures Taken (Percentage)

The above table 6.18(b) shows the frequency of measures taken by

microfinance institutions to maintain the transparency and to avoid conflicts of

interest. The result reveals that majority 60 per cent of the institutions took

measures very often, 30 per cent of the institutions are took measures often and

10 per cent of the microfinance institutions took measures whenever required to

avoid conflicts of interest and to maintain their transparency in providing

services.

6.2.7 BOARD ASSESS ITS OWN PERFORMANCE

Table no. 6.19(a) Board assess its own performance

Assess its own

performance


Yes 19 95

No 01 05

Total 20 100


0

20

40

60

Rarely Often

Very Often Whenever

Required

0

30%

60%

10%

61

Figure 11 Board Assess its Own Performance (Percentage)

The above table 6.19(a) shows whether the board assesses its own

performance in achieving its goals. The result reveals that majority 95 per cent of

the microfinance institutions board assess their own performance in order to

measure the target they achieved and 05 per cent do not assess their own

performance.

6.2. 8 FREQUENCY OF ASSESSING ITS OWN PERFORMANCE

Table no. 6.19(b) Frequency of assessing its own performance

Meetings


Monthly 09 47.37

Quarterly 06 31.58

Half yearly 03 15.79

Annually 01 5.26

Total 19 100


95%

5%

Assess Own Performance

Yes

No

62

Figure 12 Frequency of assessing Performance by MFIs (Percentage)

The above table 6.19(b) shows the frequency of assessing their

performance. The result reveals that majority 47.37 per cent of the boards assess

their performance monthly, 31.58 per cent of the institutions boards assess their

performance quarterly, 15.79 per cent assess every six months once and only 5.26

per cent of the microfinance institutions boards assess their own performance

yearly.

6.2.9 FREQUENCY OF MEETINGS CONDUCTED IN THE

INSTITUTIONS

Table no. 6.20 Frequency of assessing its own performance

Meetings


Bimonthly - -

Monthly 20 100

Quarterly - -

Half yearly - -

Annually - -

Total 20 100


47.37%

31.58%

15.79%

1.2%

Frequency

Monthiy

Quarterly

Half Yearly

Annually

63

The above table 6.20 shows the frequency of meetings conducted by the

institutions. The result reveals that all twenty microfinance institutions conduct

their meetings monthly for the upliftment of their services.

6.2.10 PROBLEMS FACED BY MFIS IN REACHING OUT THE

TARGETS

Table no. 6.21 Problems Faced in Reaching the Targets (Garret Ranking)

Problems faced Mean Score Rank

Security Reasons 14.12 5

Travel time to clients 12.22 6

Lack of business opportunities 20.34 1

Lack of basic infrastructure 19.41 2

Inadequate information about clients 16.74 3

Lack of trained personnel 10.24 7

Inadequate financial resources 14.39 4


The above table 6.21 shows the problems faced by the microfinance

institutions in reaching the target. The Garret Ranking result reveals that majority

of the institutions opined that lack of business opportunity is a major problem

faced by them with a mean score of 20.34 followed by lack of basic infrastructure

(mean score 19.41), Inadequate information about the clients (16.74), inadequate

financial resources (14.39), Security reasons (14.12), travel time to clients (12.22)

and lack of trained personnel (10.24).

6.2.11 PRACTICES OF AUDITING BY MFIs

Table no. 6.22 Practices of Auditing followed by MFIs

External Auditor


Yes 08 40

No 12 60

Total 20 100

Internal Audit System

Yes 17 85

No 03 15

Total 20 100

64

Staff in charge of

internal audit

Yes 15 75

No 05 25

Total 20 100


Figure 13 Auditing Practices by MFIs (Percentage)

The above table 6.22 shows the auditing practices followed by the

Microfinance institutions. The result reveals that majority 60 per cent of the

institutions doesn’t depend on external auditors, 85 per cent of the institution

practices internal audit system and 75 per cent of the institutions audit their

accounts with help of full time staff in charge of internal audit.

6.2.12 AUTOMATION OF ACCOUNTING SYSTEM

Table no. 6.23 Automation of Accounting System in MFIs

Automation


Fully Automated 20 100

Partially - -

Manual - -

Any others - -

Total 20 100


40%

85%

75%

60%

15%

25%

0

10

20

30

40

50

60

70

80

90

External Auditor Internal Audit System Staff in charge of

internal audit

Yes

No

65

The above table 6.23 shows the accounting system used by the

microfinance institutions. The result reveals that all the twenty institutions

accounting system is fully automated.

6.2.13 SERVICES PROVIDED TO THE CUSTOMERS

Table no. 6.24 Services provided to the Customers


Consultation Yes 20 100

No - -

Total 20 100

Loans used for intend purpose Always 20 100

Always not - -

Total 20 100

Improved living condition Yes 20 100

No - -

Total 20 100

Training customers before

getting loan Yes 18 90

No 02 10

Total 20 100

Supervision on loan utilization Yes 20 100

No - -

Total 20 100

Supervision on loan repayment Yes 20 100

No - -

Total 20 100


The above table 6.24 shows the services provided by the microfinance

institutions to their customers. The result reveals that all the twenty institutions

provided consultation services to their customers regarding the services such as

loans, insurance etc., they claim that the loans received by the customers are

utilised for the intended purpose and also improves the living condition of the

customers.

Majority 90 per cent of the institutions are providing training to their

customers before issuing the loans, all twenty institutions are effectively

participating in the supervision on loan utilisation and loan repayment of

customers.

66

6.2.14 PERCENTAGE OF LOAN REPAYMENT

Table no. 6.25 Percentage of Loan Repayment

Percentage of Loan

Repayment


Less than 30 per cent - -

30-60 per cent 20 100

More than 60 per cent - -

Total 20 100


The above table 6.25 shows the percentage of loans repaid by the

customers. The result reveals that all twenty microfinance institutions claim that

30-60 per cent of the loans are repaid by the customers.

6.2.15 MEASURES FOR REPAYMENT OF LOANS FROM

BORROWERS

Table no 6.26 Measures for Repayment of Loans in Time from Borrowers

Measures Frequency Percentage

Claim against personal

wealth

Yes 19 95

No 01 05

Total 20 100

Claim against guarantors Yes 17 85

No 03 15

Total 20 100

Social sanction (loss of

status) Yes 07 15

No 13 85

Total 20 100

Fear of Losing Future

loans

Yes 16 80

No 04 20

Total 20 100

Penalty for single term

default Yes 01 05

No 19 95

Total 20 100


67

Figure 14 Measures for Repayment of Loans in Time from Borrowers

(Percentage)

The above table 6.26 shows the measures used by the institutions for

repayment of loans from borrowers. The result reveals that 95 per cent of the

institutions claim against the personal wealth and 85 per cent of the institutions

also claim against guarantors for loan repayments.

Majority 85 per cent of the institutions are not using the social sanction as

a measure for loan repayment from the borrowers and 95 per cent of the

institutions are not charging penalty for the single term default from the

borrowers.

6.2.16 GRIEVANCE REDRESSAL SYSTEMS

Table no 6.27 Grievance Redressal Systems


Grievance

Redressal Systems

Yes 20 100

No - -

Total 20 100


Yes

No 0

20

40

60

80

100

Claim

against

personal

wealth

Claim

against

guarantors

Social

sanction

(loss of

status)

Fear of

Losing

Future

loans

Penalty for

single term

default

95%

85%

15%

80%

5%

5% 15%

85%

20%

95%

68


proper grievance redressal systems. The result reveals that all microfinance

institutions have proper grievances redressal systems to overcome grievances

faced by customers while they perceive financial services from the microfinance

institutions.

Table no 6.28 Technique used for Grievance Redressal Systems


Feed back Yes 19 95

No 01 5

Total 20 100

Written complaint Yes 20 100

No - -

Total 20 100

Suggestion Box Yes 16 80

No 04 20

Total 20 100

Resolution

Monitoring System

Yes 18 90

No 02 10

Total 20 100


Figure 15 Technique used for Grievance Redressal Systems (Percentage)

Yes

No 0 10 20 30 40 50

60

70

80

90

100

Feedback Written

Complaint Suggestion

box Resolution

Monitoring

System

95% 100%

80% 90%

5% 20%

10%

69

The above table 6.28 shows the techniques used by the microfinance

institutions for grievance redressal mechanism. The result reveals that 95 per cent

of the institutions are getting feedback from customers to overcome the

grievances faced by the customers, all twenty are getting written complaint from

the customers, 80 per cent of the institutions have suggestion box for receiving

grievances and 90 per cent of the institutions used the resolution monitoring

system for receiving grievances from the customers.

70

CHAPTER – VII SUMMARY & CONCLUSIONS

71

CHAPTER VII

SUMMARY & CONCLUSION

Inclusive growth always received special emphasis in the Indian policy

making. Government of India and the Reserve Bank of India has taken several

initiatives to expand access to financial systems to the poor. Some of the salient

measures are nationalization of banks, prescription of priority sector lending,

differential interest rate schemes for the weaker sections, development of credit

institutions such as Regional Rural Banks, etc. Despite the policy efforts, gap

remains in the availability of financial services in rural areas. The dependence of

the rural poor on money lenders continues, especially for meeting emergent

requirements. Such dependence is more pronounced in the case of marginal

farmers, agricultural labourers, petty traders and rural artisans belonging to

socially and economically backward classes and tribes whose capacity to save is

too small.

It is in this backdrop that microfinance emerged in India. The Self-Help

Group (SHG)-Bank Linkage Program (SBLP) which was launched in 1992 on a

pilot basis soon grew significantly. As per the latest estimates, SHGs enable 97

million poor households’ access to sustainable financial services from the

banking system and have an outstanding institutional credit exceeding Rs. 31,200

crore as at the end March 2011. SBLP is considered to be the fastest growing

microfinance initiative in the world. The other model of microfinance, i.e. MFI

model comprising of various entities, such as, non-banking financial companies

(NBFCs), non-governmental organisations (NGOs), trusts, cooperatives, etc. has

also been growing significantly in the recent years.

72

WHY MICROFINANCE?

“Lack of access to credit is generally seen as one of the main reasons

why many people in developing economies remain poor” (Hermes and

Lensink 2007).

Even today the discussion about what defines a microcredit is still going

on. Some definitions point to their lending mechanisms as one of its most

characteristic features, “group lending is not the only mechanism that

differentiates microfinance contracts from standard loan contracts. The programs

[...] also use dynamic incentives, regular repayment schedules, and collateral

substitutes to help maintain high repayment rates” (Morduch, 1999). Other

definitions, like the one agreed during the Microfinance Summit in 1997 put the

stress into poorness and self-employment, as microcredit’s are defined as

“programmes extend small loans to very poor people for self-employment

projects that generate income, allowing them to care for themselves and their

families” (Srinivas, 1997).

Evidently, microfinance programmes have become one of the most

important interventions in developing countries’ efforts to reduce poverty. There

has been a huge growth of MFIs in terms of numbers and size of organisations,

numbers of clients and provision of subsidised donor funding in many developing

countries. A large proportion of these organisations include poverty reduction in

their mission or objectives. Hence, there is a need to understand and improve the

impact of MFIs as a key premise to successful poverty reduction. Until recently,

however, most MFIs did not measure the impact of their work, nor did they

73

establish whether there were ways in which they could improve the impact they

had on the clients they sought to serve.

MICROFINANCE INSTITUTIONS

Microfinance has been growing rapidly with $25Bn currently at work in

microfinance loans. Microfinance is a general term to describe financial services

to low-income individuals or to those who do not have access to typical banking

services. Microfinance is a broad category of services including microcredit.

Microcredit is provision of credit services to poor clients. Although microcredit is

one of the aspects of microfinance, critics attack microcredit referring to it

indiscriminately as either 'microcredit' or 'microfinance'.

GOVERNANCE IN MFIs

Governance, as we all know, is essentially about doing business and

maximizing shareholders’ wealth legally, ethically and on a sustainable basis.

Being fair and to be seen as being fair to all the stakeholders without

discrimination or bias, is the test for good governance. Governance system

represents the value framework, the ethical framework and the moral framework

as also the legal framework under which business decisions are taken.

Governance would encompass self regulation both at the individual entity level

and at industry level through the SRO mechanism. These two would form the

first line of defence with the regulatory framework providing the backstop. In the

absence of effective self regulation, the regulatory framework becomes more

prescriptive which raises costs to regulators and supervisors in administering the

regulatory framework and also increases compliance costs to the regulated

entities. This clearly is a suboptimal solution. The considerable intellectual

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appeal of principles based regulation which had committed proponents is a case

in point. In the wake of the subprime crisis of 2008, it has yielded considerable

ground to the proponents of rules based regulation. Let me clarify that principles

based regulations and rules based regulations are not binary choices. What

distinguish them are the less or more prescriptive regulations.

Governance is based on the basic tenets of transparency and

accountability. Transparency in decision-making provides comfort to all stake

holders and accountability which follows from transparency fixes responsibilities

for actions taken or not taken. Together they safeguard the interests of the

stakeholders in the organization.

There were serious deficiencies observed in the governance framework of

some of the MFIs. The corporate governance issues in the MFI sector were

exacerbated by some of the “for profit” MFIs, dominated and controlled by

promoter shareholders which led to inadequate internal checks and balances over

executive decision making and conflict of interests at various levels. Other

undesirable practices such as connected lending, excessively generous

compensation practices for senior management, founders/ directors and failure of

internal controls leading to frauds precipitated the crisis. Some of the MFIs

chased high growth trajectory at the expense of corporate best practices. The

listing and trading of the shares of the “for profit” MFIs generated a set of

incentives which attracted capital looking for high returns whereas the capital

suited for catering to the needs of the poor has to be patient capital. This

disconnect led to further worsening of the situation. What is more disturbing is

that there were enough warning signals of trouble in making over an extended

period of time but the MFIs, at least some of them, carried away by their

75

immediate success, failed to pay heed. These events have been narrated by Dr. Y

V Reddy, former Governor, Reserve Bank of India in an article titled

“Microfinance Industry in India: Some thoughts” in Economic and Political

Weekly (EPW) (October 8, 2011). Relating the events in Andhra Pradesh, he has

stated that Government of Andhra Pradesh always had discomfort with the

NBFC-MFIs and every effort was made by the Reserve Bank of India to

introduce a voluntary code of conduct. Resolution in this regard was thought to

have been achieved in 2007. In retrospect, Dr. Reddy says that perhaps the trust

that Reserve Bank placed in the commitment of MFIs was misplaced and, given

the track record, the Reserve Bank should have insisted on enforceable regulation

and not been content with an advisory role. Dr. Reddy’s observations lead to

another very important tenet of corporate governance i.e. the need to pay

attention to the feedback loops, particularly the negative feedback loops and to

take mid-course corrective actions. Those who fail to do so, end up paying a

heavy price.

FINDINGS

In the present study, on the basis of primary & secondary data and interactions

with the MFIs and SHG members the researcher recorded the following findings:

SHG Members findings:

Not only heads of the family but also spouses/ dependents and mainly females

were major beneficiaries of the SHGs and also the majority was educated. Both

Microfinance and Banking services were availed by majority of the respondents.

Majority of respondents irrespective of their educational status agreed that their

MFI’s provided quality service. The loans were used for the purpose they were

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availed and their living conditions improved, majority of who did not receive a

formal training from their MFIs before availing loan and all the respondents were

supervised by the microfinance institutions for their repayment of the loans. The

measures taken for repayment of loan were satisfactory and acceptable to the

SHG members. The status of loan repayment satisfactory but there is still a need

for measures in improving the status. The majority of SHG members felt that

suitable time frame for repayment period existed, although some felt they

required more time. Further the responses revealed that a satisfactory grievance

redressal system existed in the MFIs but a considerable number of respondents

were not aware of the existence of grievance redressal system. A small amount of

lending given at a time was a major challenge faced in accessing MFIs Services

by the SHG members.

Microfinance institutional findings:

Of the 20 Microfinance institutions who responded offered savings, insurance,

loan facilities, remittances and SHG promotional activities to the customers and

unique performance indicators to measure the effectiveness of management were

present. Performance of board of directors and managers was done periodically &

appropriate measures to maintain transparency and to avoid any conflicts of

interest arising but they were not done in the same time frame in all the MFIs.

Monthly meetings were conducted in MFIs to assess their own performance and

auditing either internal or external was practiced. All the MFIs did not have an

external auditing procedure incorporated. All had a fully automated accounting

system. They took fair measures for loan repayment monitoring as reported and

provided services like consultation, grievance redressal system. The loan

repayment was only satisfactory and not to the expected levels.

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Majority of the institutions opined that lack of business opportunity is a major

problem faced by them followed by lack of basic infrastructure.

SUGGESTIONS

On the basis of the research undertaken, the data collected through secondary and

primary data

Following suggestions are recommended.

1. MFIs are expected to render services to the rural poor. Most of the MFIs

suffer from late loan repayment problems and need to improve the

techniques or device newer methods for effective recovery.

2. Creation of opportunities of Self employment from the financial service

SHG members receive should be focused for longer financial stability of

the poor.

3. Client friendly approaches can be further implemented with emphasis on

providing more financial support and training.

4. Proper education and information to clients should be emphasized.

5. Efficient performance and increased transparency needs more effective

Governance in MFIs.

6. Governance should be effectively implemented in all the institutions. This

can be possible by properly educating the MFIs.

7. Revising existing and establishing proper regulatory mechanisms through

regulatory bodies is a necessity.

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CONCLUSION

Microfinance institutions (MFIs) gaining importance in the rural population have

expanded their outreach resulting in a need for ensuring effective management.

Although governance strategies exist a need for added input and involvement by

the board of managements of MFIs, regulatory mechanisms through regulatory

bodies, a client friendly environment is essential to achieve the basic objectives

of Microfinance. Deposits from savers and investors, loan recovery in a

scheduled time frame need to be prioritized by MFIs. The need for responsible

behavior from the SHG members is also required.

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ANNEXURE

83

ANNEXURE

QUESTIONNAIRES

GOVERNANCE OF MICROFINANCE INSTITUTIONS- A STUDY WITH

SPECIAL REFERENCE TO DAKSHINA KANNADA DISTRICT

-----------------------------------------------------------------------------------------------------------

MICROFINANCE BENEFICIARY QUESTIONNAIRE

-----------------------------------------------------------------------------------------------------------

Date: - - 2014

1. General Information

a) Name of the Individual :

b) Head of family (Name) :

c) Position in the family : Head/ Spouse/ Dependant/Any Other -

Specify………

d) Address :

e) Contact Details :

f) Level of Education : Illiterate/ Literate/ Sec. Certificate/ Diploma/

Bachelor/ Masters

2. Basic Information :

S. No Name of MFI/

SHG

Year of

membership Occupation Other Information

Month Year

01.

3. Microfinance :

S. No Microfinance services/ facility Availed

if Any

Bank/ Other Loan facility Availed if

Any

(Y/ N) Details (Y/ N) Details

4. Any other Information :

84

5. Are you consulted to make your MFI’s policy directions responsive to your

needs?

YES / NO – Details:

6. Are loans used for intended purpose?

Always / Not always – Details:

7. Have living conditions improved due to the credit scheme


8. Whether you received any training before receiving loan


9. Whether there is supervision on loan utilization


10. Whether there is supervision on loan repayment


11. What are the measures for you to repay loan in time

a) Claim against personal wealth YES / NO

b) Claim against guarantors YES / NO

c) Social sanction (loss of status) YES / NO

d) Fear of Losing Future loans YES / NO

12. What is the status of the loans?

a) Fully repaid YES / NO

b) Repayment on schedule YES / NO

c) Repayment in arrears YES / NO

13. Is Repayment period suitable


14. Does your MFI have a grievance Redressal System


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15. Awareness on grievance Redressal System Mechanism

Awareness Aware Neutral Unaware Total

Are you aware that you can submit a

complaint mentioning about your

grievances if any, with regard to

services on MFIs

Dou you know to whom to submit

your complaint

16. Satisfaction towards MFIs Grievance Redressal System

a) Highly satisfied b) Satisfied c) Neutral d) Dissatisfied e) Highly

dissatisfied

17. Challenges faced in accessing MFIs Services (Rank the items)

Challenges Rank

Lack of security

Few MFIs

High Interest Rate

Short repayment period

Getting trust worthy group members

Strict/inflexible terms

Weekly repayment-hard to raise money on a weekly basis

Small amounts given at a time

Long procedure

Lack of investment opportunities

Too much paper work

Initial expenses too high yet not catered for during loan repayment

Money is deducted yet interest has to be paid

18. What do you think about the Best Practices of your group - Explain Briefly

Any other Information :

86

GOVERNANCE OF MICROFINANCE INSTITUTIONS- A STUDY WITH

SPECIAL REFERENCE TO DAKSHINA KANNADA DISTRICT

-----------------------------------------------------------------------------------------------------------

MICROFINANCE INSTITUTIONAL QUESTIONNAIRE

-----------------------------------------------------------------------------------------------------------

Date: - - 2014

1. General Information

a) Name of the Respondent:

b) Present Designation:

c) Name of the Organization:

d) Address:

e) Telephone(area code) __________ (Office)_________________

(Cell)___________________

f) E-mail Address : ________________________

g) Website : __________________

h) Year of establishment : ___________________

Any other Information :

87

2. Nature of Services offered by your institution

a) Savings Yes No

b) Insurance Yes No

3. Whether the institution has performance indicators to measure the effectiveness of

management –


4. Whether the institution regularly assesses and evaluates the performance of board of

directors and manager?


Frequency of assessing performance

a) Weekly b) Monthly c) Quarterly d) Half yearly e)

Annually

5. Whether measures are taken by the institution to maintain transparency and avoid

conflicts of interest


Frequency of measures taken

a) Rarely b) Often c) Very often d) Whenever required

6. Whether the board assesses its own performance


Frequency of measures taken

a) Monthly b) Quarterly c) Half yearly d) Annually

7. How frequently the meetings are conducted in the institution

a) Weekly

b) Bimonthly

c) Monthly

d) Quarterly

e) Half- Yearly

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8. Who are the parties involved in decision making process (Tick the appropriate)

a) Board of Trustees

b) Board of Directors

c) Managers

d) Any Other (Specify)

9. Problems faced in reaching targets(Rank the items)

Problems faced Rank

Security Reasons

Travel time to clients

Lack of business opportunities

Lack of basic infrastructure

Inadequate information about clients

Lack of trained personnel

Inadequate financial resources

10. Which of the following practices does your institution follow in relation to audits?

a) Employs services of an external auditor YES/ NO

b) Internal audit system is practiced YES/ NO

c) Full time staff in charge of Internal audit YES/ NO

11. Whether the Accounting System is Automated (Tick the appropriate- Give Details)

a) Fully Automated

b) Partially

c) Manual

d) Any other (Specify)

12. Do you consult clients to make your MFI’s policy directions responsive to their

needs?

YES / NO – Details

13. Are loans used for intended purpose?


14. Whether the living conditions improved due to the credit scheme

YES/ NO – Details:

89

15. Whether the respondents received any training before receiving loan


16. Whether there is supervision on loan utilization


17. Whether there is supervision on loan repayment


18. What are the measures for borrowers to repay loan on time

a) Claim against personal wealth YES/ NO

b) Claim against guarantors YES/ NO

c) Social sanction (loss of status) YES/ NO

d) Fear of Losing Future loans YES/ NO

e) No reasons YES/ NO

19. What is the Minimum & Maximum Penalty rate for single term Default


20. Percentage of loan repayment

d) Less than 30

e) 30-60

f) More than 60

21. Do you have a Grievance Redressal System


22. Technique Used for Grievance Redressal System

a) Feedback Yes No

b) Written Complaint Yes No

c) Suggestion Box Yes No

d) Resolution Monitoring System Yes No

23. What are the Best Practices of your institution with respect to governance- Explain

Briefly

24. Any other information

Documents

A study with Special Reference to Dakshina Kannada District