Brijesh Kumar Jat - Micro Finance- Financial Product for Bottom of Pyramid Market

8/3/2019 Brijesh Kumar Jat - Micro Finance- Financial Product for Bottom of Pyramid Market

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CONTEMPORARY ISSUE ON SEMINAR

Micro Finance- Financial Product for

Bottom of Pyramid Market

Session: 201012

Presented at

Submitted By: - Submitted To:-Brijesh Kumar Jat Mrs. Anju AgrawalMBA II Sem.


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AcknowledgementThe beatitude, bliss & euphoria that accompany successful completion any taskwould not be completed without the expression of appreciation of simple virtuesto the people who made it possible.So, I take my immense pleasure in expressing a whole hearted thanks to all thefaculty members who guided me all the way making this project successful.

It is my privilege to express a deep sense of gratitude and thanks toMrs.

ANUBHA for providing us various information directly related to project.

I extend my gratitude and thankfulness to Apex Institute of Management &Science.

Date:19-05-11 Submitted By:Place: Jaipur Brijesh Kumar Jat


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PrefaceThe underlying aim of the seminar on contemporary issue as an integral part ofMBA program is to provide the students with practical aspects of the organization

working environment.Such type of presentation helps a student to visualize and realize about thecongruencies between the theoretical learning in the premises of college and

actual followed by the organization. It gives the knowledge of application aspectof the theories learnt in the classroom.

The seminar project inMicro Finance- Financial Product forBottom of Pyramid Market is a complete experience in itself, whichprovide me with the understanding. This has become as inspirable of myknowledge of management being learned in MBA program.


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Table of Contents

1. Introduction

Elements of Microfinance

2. History of Microfinance in India

3. Need for Micro Financing

Who are client of microfinance?

How it helps the poor people?

Arent poor too poor to save?

When is microfinance NOT an appropriate tool

4. Types of Organizations and Composition of the Sector

Formal sector

Semi Formal sector

Informal sector

What are MFIs and SHGs?

5. Why do MFIs charge high interest rates to poor people?

6. Can Micro finance be profitable

7. Impact of microfinance over poverty


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8. Current Scenario of Micro - financing in India

Indian economy and microfinance

Recent trends in Micro finance

Govt. role in supporting Microfinance

Microfinance and capital requirement

Challenges in Indian context

9. Status of microfinance in Rajasthan

Background

Current situation of Micro finance & important issues

Voluntary organizations in Rajasthan

Major issues

10. Women & Micro Finance in india

Women can make Microfinance succeed in India

Rural finance for rural women

Rural women at a glance

Need credit to rural women

Loan facilities to rural women

Saving facilities to rural women

11. Conclusion

12. Bibilography


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1. Introduction

Micro financing is the provision of financial services to poor and low

income households without access to formal financial institutions.

As defined by the Asian Development Bank (ADB), it is - A provision of

a broad range of financial services such as deposits, loans, payment

services, money transfers, and insurance to poor and low-income

households and their micro-enterprises.

To most, microfinance means providing very poor families with very

small loans to help them engage in productive activities or grow their

very small businesses. Like us, many poor people need and use

financial services all the time. They save and borrow, invest in home

repairs and improvements and meet occasional and domestic expenses

such as food and school fees. However, there are some 500 million low

income entrepreneurs in the world and about 5% have access to

financial services. Indeed, the financial services available to the poor

often have serious limitations in terms of cost, risk and convenience.

As a result, over time, microfinance has come to include a broader

range of services (credit, savings, insurance, etc.) as the industry has

come to realize that the poor and the very poor that lack access to

traditional formal financial institutions require a variety of financial

products.


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Elements of Microfinance

is the extension of very small loans (microloans) to the unemployed,

to poor entrepreneurs and to others living in poverty who are not

considered bankable. These individuals lack collateral, steady

employment and a verifiable Microfinance refers to loans, savings,

insurance, transfer services and other financial products targeted at

low-income clients.

Micro credit refers to a small loan to a client made by a bank or other

institution. Micro credit can be offered, often without guarantee, to an

individual or through group lending.

Microcredit credit history and therefore cannot meet even the most

minimal qualifications to gain access to traditional credit. Microcredit is

a part of microfinance, which is the provision of a wider range of

financial services to the very poor.

Microcredit is a financial innovation which originated in Bangladesh

where it has successfully enabled extremely impoverished people to

engage in self-employment projects that allow them to generate an

income and, in many cases, begin to build wealth and exit poverty.

Due to the success of microcredit, many in the traditional banking

industry have begun to realize that these microcredit borrowers should

more correctly be categorized as pre-bankable; thus, microcredit is

increasingly gaining credibility in the mainstream finance industry and

many traditional large finance organizations are contemplating

microcredit projects as a source of future growth. Although almost

everyone in larger development organizations discounted the likelihood

of success of microcredit when it was begun in its modern incarnation

as pilot projects with ACCION and Muhammad Yunus in the mid-
http://en.wikipedia.org/wiki/Self-employmenthttp://en.wikipedia.org/wiki/Povertyhttp://en.wikipedia.org/wiki/Bankinghttp://en.wikipedia.org/wiki/Financehttp://en.wikipedia.org/wiki/Accion_Internationalhttp://en.wikipedia.org/wiki/Muhammad_Yunushttp://en.wikipedia.org/wiki/Self-employmenthttp://en.wikipedia.org/wiki/Povertyhttp://en.wikipedia.org/wiki/Bankinghttp://en.wikipedia.org/wiki/Financehttp://en.wikipedia.org/wiki/Accion_Internationalhttp://en.wikipedia.org/wiki/Muhammad_Yunus


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1970s, the United Nations declared 2005 the International Year of

Microcredit.

Microsavings are deposit services that allow one to store small

amounts of money for future use. Often without minimum balance

requirements, savings accounts allow households to save in order to

meet unexpected expenses and plan for future investments.

Remittances are transfers of funds from people in one place to

people in another, usually across borders to family and friends.

Compared with other sources of capital that can fluctuate depending

on the political or economic climate, remittances are relatively steady

source of funds.

Micro-insurance is a term increasingly used to refer to insurance

characterized by low premium and low caps or low coverage limits,

sold as part of atypical risk-pooling and marketing arrangements, and

designed to service low-income peoples. Micro-insurance is insurance

with low premiums and low caps / coverage. In this definition, micro

refers to the small financial transaction that each insurance policy

generates. The Micro-insurance Regulations, issued in 2005 by the

Indian Insurance Regulatory and Development Authority (IRDA).
http://en.wikipedia.org/wiki/United_Nationshttp://en.wikipedia.org/wiki/2005http://en.wikipedia.org/wiki/International_Year_of_Microcredithttp://en.wikipedia.org/wiki/International_Year_of_Microcredithttp://en.wikipedia.org/wiki/Insurance_Regulatory_and_Development_Authorityhttp://en.wikipedia.org/wiki/United_Nationshttp://en.wikipedia.org/wiki/2005http://en.wikipedia.org/wiki/International_Year_of_Microcredithttp://en.wikipedia.org/wiki/International_Year_of_Microcredithttp://en.wikipedia.org/wiki/Insurance_Regulatory_and_Development_Authority


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History of Microfinance in India

In India, institutional credit agencies (banks) made an entry in rural

areas initially to provide an alternative to the rural money lenders who

provided credit support, but not without exploiting the rural poor.

There are 3 main factors that count to the bringing up of

Microfinance as a Policy in India

1. The first of these pivotal events was Indira Gandhis bank

nationalization drive launched in 1969 which required commercial

banks to open rural branches resulting[3] in a 15.2% increase in rural

bank branches in India between 1973 and 1985. Today, India has over

32,000 rural branches of commercial banks and regional rural banks,

14,000 cooperative bank branches.

2. The second national policy that has had a significant impact on the

evolution of Indias banking and financial system is the Integrated

Rural Development Program (IRDP) introduced in 1978 and designed

to be a direct instrument for attacking Indias rural poverty. This

program is interesting to this study because it was a large program

whose main thrust was to alleviate poverty through the provision of

loans and it was considered a failure.

3. The last major event which impacted the financial and banking

system in


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India was the liberalization of Indias financial system in the 1990s

characterized by a series of structural adjustments and financial policy

reforms initiated by the Reserve Bank of India (RBI).

The systems and procedures of banking institutions was emphasizing

on complicated qualifying requirements, tangible collateral, margin,

etc., that resulted in a large section of the rural poor shying away from

the formal banking sector. The search for an alternative mechanism

for catering to the financial service needs of the poor was thus

becoming imperative.

Microfinance has b been in practice for ages (though informally).

Legal framework for establishing the co-operative movement set

up in 1904.

Reserve Bank of India Act, 1934 provided for the establishment

of the Agricultural Credit Department.

Nationalization of banks in 1969

Regional Rural Banks created in 1975.

NABARD established as an apex agency for rural finance in 1982.

Passing of Mutually Aided Co-op. Act in AP in 1995.

3. Need for Micro Financing


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Since independence, various governments in India have experimented

with a large number of grant and subsidy based poverty alleviation

programs. These programs were based on grant/subsidy and the credit

linkage was through commercial banks only. As a result, these

programs became unsustainable, perpetuated a dependant status on

the beneficiaries and depended ultimately on the govt. employees for

delivery. This not only led to misuse of both credit and subsidy but

banks never looked at it as a profitable and commercial activity as

well.

Hence was adopted the concept of micro-credit in India. Success

stories in neighboring countries, like Grameen Bank in Bangladesh,

Bank Rakiat in Indonesia, Commercial & Industrial Bank in Philippines

etc, gave further boost to the concept in India in the 1980s. India thus

adopted the similar model of extending credit to the poorest sector

and took a no. of steps to promote micro-financing in the country.

Who are the clients of microfinance?

The typical microfinance clients are low-income persons that do not

have access to formal financial institutions. Microfinance clients aretypically self-employed, often household-based entrepreneurs. In

rural areas, they are usually small farmers and others who are

engaged in small income -generating activities such as food processing

and petty trade. In urban areas, microfinance activities are more
http://www.microfinancegateway.com/section/faq#Q3http://www.microfinancegateway.com/section/faq#Q3


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diverse and include shopkeepers, service providers, artisans, street

vendors, etc. Microfinance clients are poor and vulnerable non-poor

who have a relatively stable source of income.

Microfinance generally targets poor women because they have proven

to be reliable credit risks and when they have the financial means,

they invest that money back into their families, resulting in better

health and education, and stronger local economies. By providing

access to financial services - loans and responsibility for repayment,

maintaining savings accounts, providing insurance - microfinance

programs send a strong message to households and communities.

Studies have shown that women become more assertive and

confident, have increased mobility, are more visible in their

communities and play stronger roles in decision making.

For instance, micro credit might have a far more limited market scope

than, say, a more diversified range of financial services which includes

various types of savings products, payment and remittance services,

and various insurance products. For example, many very poor farmers

may not really wish to borrow, but rather, would like a safer place to

save the proceeds from their harvest as these are consumed over

several months by the requirements of daily living.

For example, many very poor farmers may not really wish to borrow,

but rather, would like a safer place to save the proceeds from their

harvest as these are consumed over several months by the

requirements of daily living.

How does microfinance help the poor?


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Microfinance brings the power of credit to the grassroots by way of

loans to the poor, without requirement of collateral or previous credit

record. Experience shows that microfinance can help the poor to

increase income, build viable businesses, and reduce their vulnerability

to external shocks.

Poverty is multi-dimensional. By providing access to financial services,

microfinance plays an important role in the fight against the many

aspects of poverty. For instance, income generation from a business

helps not only the business activity expand but also contributes to

household income and its attendant benefits on food security,

children's education, etc. Moreover, for women, who, in many

contexts, are secluded from public space, transacting with formal

institutions can also build confidence and empowerment.

Recent research has revealed the extent to which individuals around

the poverty line are vulnerable to shocks such as illness of a wage

earner, weather, theft, or other such events. These shocks produce a

huge claim on the limited financial resources of the family unit, and,absent effective financial services, can drive a family so much deeper

into poverty that it can take years to recover.

Aren't the poor too poor to save

The poor already save in ways that we may not consider as

"normal" savings--- investing in assets, for example, that can be

easily exchanged to cash in the future (gold jewelry, domestic

animals, building materials, etc.). After all, they face the same

series of sudden demands for cash we all face: illness, school

fees, need to expand the dwelling, burial, weddings.


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These informal ways that people save are not without their

problems. It is hard to cut off one leg of a goat that represents a

family's savings mechanism when the sudden need for a small

amount of cash arises. Or, if a poor woman has loaned her

"saved" funds to a family member in order to keep them safe

from theft (since the alternative would be to keep the funds

stored under her mattress), these may not be readily available

when the woman needs them. The poor need savings that are

both safe and liquid. They care less about the interest rates

that they can earn on the savings, since they are not used to

saving in financial instruments and they place such a high

premium on having savings readily available to meet emergency

needs and accumulate assets.

These savings services must be adapted to meet the Poors

particular demand and their cash flow been in practice for ages

(though informally).

Legal framework for establishing the co-operative movement setup in 1904.

Reserve Bank of India Act, 1934 provided for the establishment

of the Agricultural Credit Department.

Nationalization of banks in 1969

Regional Rural Banks created in 1975.

NABARD established as an apex agency for rural finance in 1982.

Passing of Mutually Aided Co-op. Act in AP in 1995.

When is microfinance an appropriate tool?


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It is hard to imagine that there would be any family in the world today

for which some type of formal financial service couldn't be designed

and made useful. But the fact of the matter is that in most people's

mind, "microfinance" still refers to micro credit.

Micro credit is only useful in certain situations, and with certain types

of clients. As we are finding out, a great number of poor, and

especially extremely poor, clients exclude themselves from micro

credit as it is currently designed. Extremely poor people who do not

have any stable incomesuch as the very destitute and the homeless

should not be microfinance clients, as they will only be pushed

further into debt and poverty by loans that they cannot repay. As

currently designed, micro credit requires sustained, regular, and often

significant payments from poor families.

Micro credit serves best those who have identified an economic

opportunity and who are in a position to capitalize on that opportunity

if they are provided with a small amount of ready cash. Thus, those

poor who work in stable or growing economies, who have

demonstrated an ability to undertake the proposed activities in an

entrepreneurial manner, and who have demonstrated a commitment

to repay their debts (instead of feeling that the credit represents some

form of social re-vindication), are the best candidates for micro credit.

The universe of potential clients expands exponentially however, once

we take into account the broader concept of microfinance.

4.Types of Organizations and Composition of

the Sector


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Microfinance providers in India can be classified under three broad

categories: formal, semiformal, and informal.

Formal Sector

The formal sector comprises of the banks such as NABARD, SIDBI and

other regional rural banks (RRBs).

They primarily provide credit for assistance in agriculture and micro-

enterprise development and primarily target the poor. Their deposits

at around Rs. 350billion and of that, around Rs. 250billion has been

given as advances. They charge an interest of 12-13.5% but if we

include the transaction costs (number of visits to banks, compulsory

savings and costs incurred for payments to animators/staff/local

leaders etc) they come out to be as high as 21-24%.

Semi - formal Sector

The majority of institutional microfinance providers in India are semi-

formal organizations broadly referred to as MFIs and SGHs. Registered

under a variety of legal acts; these organizations greatly differ in

philosophy, size, and capacity. There are over 500 non-government

organizations (NGOs) registered as societies, public trusts, or non-

profit companies.

Informal Sector


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In addition to friends and family, moneylenders, landlords, and traders

constitute the informal sector. While estimates of their importance

vary significantly, it is undeniable that they continue to play a

significant role in the financial lives of the poor.

What are MFIs and SGHs?

Quite simply, a microfinance institution is an organization that offers

financial services to low income populations. Almost all of these offer

microcredit and only take back small amounts of savings from their

own borrowers, not from the general public. Within the microfinance

industry, the term microfinance institution has come to refer to a wide

range of organizations dedicated to providing these services: NGOs,

credit unions, cooperatives, private commercial banks and non-bank

financial institutions (some that have transformed from NGOs into

regulated institutions) and parts of state-owned banks, for example.

The image most of us have when we refer to MFIs is of a financial

NGO, an NGO that is fully and virtually exclusively dedicated to

offering financial services; in most cases micro credit NGOs are not

allowed to capture savings deposits from the general public. These

groups of a few hundred NGOs have led the development of

microcredit, and subsequently microfinance, the world over.

A great many NGOs that offer microcredit, perhaps even a majority,

do many other non-financial development activities and would bristle

at the suggestion that they are essentially financial institutions. Yet,

from an industry perspective, since they are engaged in supplying


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financial services to the poor, we call them MFIs. The same sort of

situation exists with a small number of commercial banks that offer

microfinance services. For our purposes, we refer to them as MFIs,

even though only a small portion of their assets may actually be tied

up in financial services for the poor. In both cases, when people in the

industry refer to MFIs, they are referring only to that part of the

institution that offers microfinance.

There are other institutions, however, that consider themselves to be

in the business of microfinance and that will certainly play a role in a

reshaped and deepened financial sector. These are community-based

financial intermediaries. Some are membership based such as credit

unions and cooperative housing societies. Others are owned and

managed by local entrepreneurs or municipalities. These institutions

tend to have a broader client base than the financial NGOs and already

consider them to be part of the formal financial sector. It varies from

country to country, but many poor people do have some access to

these types of institutions, although they tend not to reach downmarket as far as the financial NGOs.

SELF HELP GROUPS (SHG) is group of rural poor who have

volunteered to organize themselves into a group for eradication of

poverty of the members. They agree to save regularly and convert

their savings into a Common Fund known as the Group corpus. The

members of the group agree to use this common fund and such other

funds that they may receive as a group through a common

management. The group formation will keep in view the following

broad guidelines:


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Generally a self-help group may consist of 10 to 20 persons.

However, in difficult areas like deserts, hills and areas with scattered

and sparse population and in case of minor irrigation and disabled

persons, this number may be from 5-20. Generally all members of the

group should belong to families below the poverty line. However, if

necessary, a maximum of 20% and in exceptional cases , where

essentially required, up to a maximum of 30% of the members in a

group may be taken from families marginally above the poverty line

living contiguously with BPL families and if they are acceptable to the

BPL members of the group. This will help the families of occupational

groups like agricultural laborers, marginal farmers and artisans

marginally above the poverty line, or who may have been excluded

from the BPL list to become members of the Self Help Group.

However, the APL members will not be eligible for the subsidy under

the scheme. The group shall not consist of more than one member

from the same family. A person should not be a member of more than

one group. The BPL families must actively participate in the

management and decision making, which should not ordinarily beentirely in the hands of APL families. Further, APL members of the Self

Help Group shall not become office bearers (Group Leader, Assistant

Group Leader or Treasurer) of the Group.

The group should devise a code of conduct (Group management

norms) to bind itself. This should be in the form of regular meetings

(weekly or fortnightly), functioning in a democratic manner, allowing

free exchange of views, participation by the members in the decision

making process.

The group should be able to draw up an agenda for each meeting and

take up discussions as per the agenda.


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The members should build their corpus through regular savings. The

group should be able to collect the minimum voluntary saving amount

from all the members regularly in the group meetings. The savings so

collected will be the group corpus fund.

The group corpus fund should be used to advance loans to the

members. The group should develop financial management norms

covering the loan sanction procedure, repayment schedule and interest

rates.

The members in the group meetings should take all the loaning

decisions through a participatory decision making process.

The group should maintain simple basic records such as Minutes book,

Attendance register, Loan ledger, General ledger, Cash book, Bank

passbook and individual passbooks. The sample Performa for

maintenance of above records by the group is in the Annexure II for

guidance. These could be used with necessary changes/ modifications

wherever required.

50% of the groups formed in each block should be exclusively for the

women. In the case of disabled persons, the groups formed should

ideally be disability-specific wherever possible, however, in case

sufficient number of people for formation of disability-specific groups

are not available, a group may comprise of persons with diverse

disabilities or a group may comprise of both disabled and non-disabled

persons below the poverty line.


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5. Why do MFIs charge such high interest rates

to poor people?

Providing financial services to poor people is quite expensive,

especially in relation to the size of the transactions involved. This is

one of the most important reasons why banks don't make small loans.

A $100 dollar loan, for example, requires the same personnel and

resources as a $2,000 one thus increasing per unit transaction costs.

Loan officers must visit the client's home or place of work, evaluate

creditworthiness on the basis of interviews with the client's family and

references, and in many cases, follow through with visits to reinforce

the repayment culture. It can easily cost US$25 to make a micro loan.

While that might not seem unreasonable in absolute terms, it might

represent 25% of the value of the loan amount, and force the

institution to charge a high rate of interest to cover its cost of loan

administration.

Evidence shows that clients willingly pay the higher interest rates

necessary to assure long term access to credit. They recognize that

their alternativeseven higher interest rates in the informal finance

sector (moneylenders, etc.) or simply no access to creditare much

less attractive for them. Interest rates in the informal sector can be as

high as 20 percent per day among some urban market vendors.

Moreover, the interest rate is only a small part of their overall

transaction cost of credit, and if microfinance institutions offer credit

on a more accessible basis, substantial costs in terms of time, travel,

paperwork, etc. can be reduced, thus benefiting the poor.


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6. Can microfinance be profitable?

Yes it can. Data from the Micro Banking Bulletin reports that 63 of the

world's top MFIs had an average rate of return, after adjusting for

inflation and after taking out subsidies programs might have received,

of about 2.5% of total assets. This compares favorably with returns in

the commercial banking sector and gives credence to the hope of

many that microfinance can be sufficiently attractive to mainstream

into the retail banking sector. Many feel that once microfinance

becomes mainstreamed, massive growth in the numbers of clients can

be achieved.

Others worry that an excessive concern about profit in microfinance

will lead MFIs up-market, to serve better off clients who can absorb

larger loan amounts. This is the crowding out effect. This may

happen; after all, there are a great number of very poor, poor, and

vulnerable non-poor who are not reached by the banking sector.

It is interesting to note that while the programs that reach out to the


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poorest clients perform less well as a group than those who reach out

to a somewhat better-off client segment, their performance is

improving rapidly and at the same pace as the programs serving a

broad-based client group did some years ago. More and more MFI

managers have come to understand that sustainability is a precursor

to reaching exponentially greater numbers of clients. Given this,

managers of leading MFIs are seeking ways to dramatically increase

operational efficiency. In short, we have every reason to expect that

programs that reach out to the very poorest micro clients can be

sustainable once they have matured, and if they commit to that path.

The evidence supports this position.

7. Impact of microfinance over poverty

There is increasing emphasis on the significance of the wider impacts

of microfinance those beyond the immediate financial and social

benefits for the individual. Yet, the wider impacts of microfinance are

notoriously difficult to identify or assess. Often, MFOs confident claims

to be having a wider impact and to be able to assess these impacts are

based on weak, circumstantial evidence. Here we consider ways in

which building evidence of wider impacts may be approached, which

reflects processes of microfinance more faithfully, including the

intended and unintended consequences of microfinance operations.


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Wider impacts may occur in the following ways:

through the labour market: poor people taken on by expanding

micro-finance borrowers may as a consequence be taken upward

across the poverty line;

through the capital market: the intervention of a micro-finance

institution may make existing lending institutions in the market,

such as private moneylenders, lower their interest rates to

compete, with beneficial effects on borrowers from institutions

other than the one being studied;

through the markets for goods consumed by poor people: ifmicro-finance induces an increase in supply, and hence a

cheapening in the price, of goods consumed by poor people,

households other than those of borrowers will benefit;

through production linkages: an expansion of livelihoods

(agricultural or otherwise) induced by micro-finance will support the

formation of rural industries and services, and help to bring about

income changes among non-borrower households;

9. Current Scenario of Micro - financing in India

Indian Economy and Micro Microfinance

Home to about 1.9 billion people as of 2008, India constitutes

approximately one sixth of the worlds total population. It is theworlds largest democracy and a key emerging market alongside China

and Brazil. The picture of growing GDP and rising foreign investments

shows an environment where wealth is increasing for the nation.


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Due to its large size and population of around 1000 million, India's

GDP ranks among the top 15 economies of the world. However,

around 300 million people or about 60 million households are living

below the poverty line. It is further estimated that of these

households, only about 20 percent have access to credit from the

formal sector. Additionally, the segment of the rural population above

the poverty line but not rich enough to be of interest to the formal

financial institutions also does not have good access to the formal

financial intermediary services, including savings services.

A group of micro-finance practitioners estimated the annualized credit

usage of all poor families (rural and urban) at over Rs 45,000 crores,

of which some 80 percent is met by informal sources. This figure has

been extrapolated using the numbers of rural and urban poor

households and their average annual credit usage (Rs 6000 and Rs

9000 pa respectively) assessed through various micro studies.

Estimated that 350 million people live Below Poverty Line

This translates to approximately 75 million households.

Annual credit demand by the poor in the country is estimated to

be about Rs. 60,000 crores.

Cumulative disbursements under all microfinance programs is

only about Rs. 5000 crores.(Mar. 04)

Total outstanding of all microfinance initiatives in India

estimated to be Rs. 1600 crores. (March 04)

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

Though a cumulative of about 20 million families have accessed

microfinance to the extent of Rs. 5000 crores, the total

outstanding is estimated to be only about Rs. 1600 crores. The


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active borrowers are estimated to have a per capita outstanding

of only Rs. 2500.

With 75 million poor households potentially requiring financial services,

the microfinance market in India is among the largest in the world.

Estimates of household credit demand vary from a minimum of Rs.

2,000 to Rs. 6,000 in rural areas and Rs. 9,000 in urban settings.

Given that 80 percent of poor households are located in rural areas,

total credit demand ranges between Rs. 255 billion and Rs. 500 billion.

However, only Rs.18 billion of this amount has been generated so far.

The reason for this is that major portion for rural crediting has been

from the informal sector and this is at a very high interest rate, thus

reducing the volumes of such credits, and by far has been for

investment purposes (13%) and more for family emergencies (29%)

and social expenditures (19%).

There are a number of factors why rural crediting by the formal sector

has not taken pace so far.

High fiscal deficits have meant that Government is appropriating

a large share of financial savings for itself.

Persisting interest rate restrictions reduce the attractiveness of

lending, particularly to small, rural clients.

On the other hand, informal credits have been attractive although high

interest rates due to:

Flexible repayment options

Convenience and frequency with which such loans can be

accessed


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As on March31, 2007, 25.5 lac SHG has taken bank credit of Rs.14320crore across the company, bringing 4 crore families under the bankingumbrella. The journey was made possible with the long and enduringwork of the banking sector in rural India.

Growth in purchasing power of rural people

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89- 90 94- 95 7- Jun

Rural

Urban

Annual growth(%) keeping pace with urban growthUrban 2.4 3.2Rural 3.4 4.5

the growth in purchasing power of rural people is high compare tourban people it shows the future opportunity in rural market in India.

Credit source of poor people in India

The dependency of poor for credit on their family is 39% while only

2% out of total creditor is taken through SHGs. Moneylenderspercentage in total credit is 37% which show the dependency onmoneylender. Merely 2% share in total credit show the need toconcern about it.


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credit source of poor people

29

37

32

2

Moneylenderfamilymember

individual to bank

SHGs

Recent trends in micro finance

The scenario of microfinance sector facing drastically changes recently.The initial trademark of CSR (Corporate Social Responsibility) is nowchanges to profit earning sector. Many big corporate giant are mullingtowards the microfinance sector.

1. Retailers in micro finance

Now it is clear that microfinance is a large untapped market. Todaysretail industry are directly dependent on rural production, theyconsider microfinance as ally of their retail industry

Under these consideration Reliance Capital, the financial services armof Anil Dhirubhai Ambani Group, has funded two two microfinanceinstitutions in Gujarat - MAS Financial Services and Vardan Trust. Theyhavent disclosed the investments, but this is probably the first known

foray for Reliance Capital in this area.Reliance Capital plans to fund microfinance institutions initially inGujarat and Maharashtra, before spreading out on a national scale.

MAS Financial Services, with 61 branches across Gujarat, caters toover 2,50,000 customers in the urban, semi-urban and rural markets.Vardan Trust offers microfinance to farmers, small shopkeepers,


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artisans, small enterprise workers and individuals engaged in animalhusbandry. Indian microfinance space is getting hotter with MFIs likeSKS.

2. Money transfer

A new concept comes in micro finance is Dhan Sthanantran, throughthese scheme poor people can transfer their money to their relativethrough their SHGs account, which is living far from them. Forexample if a person living in Gujarat interested to send money totheirrelative living at rajasthan, he can deposit the money in gujarat to thename of the SHG in rajasthan and his relative can withdraw money

from rajasthan

3. Banks in microfinance

The rural banking market is still untapped because of tiny saving by

people, lack of infrastructure etc. now banks are penetrating ruralmarket through microfinance.

ICICI Bank has taken a stake of under 20 per cent in FinancialInformation Network and Operations Private Ltd (FINO), which waslaunched on 13th July 2007. FINO would provide technologicalsolutions as well as services to finance providers to reach theunderserved in the country. ICICI Bank is the lead facilitator in FINO.ICICI Bank expects to target 200 micro-finance institutions (MFIs) byMarch 2008.

YES Bank, also launching its microfinance division YES MicrofinanceIndia today, has signed an MoU for technical collaboration with Boston-based Accion International, a microfinance institution. YES Bank hasset apart Rs 10 crore for the next two years for the microfinancedivision. The division will offer credit, savings, insurance andremittances in phases to the urban and rural poor.


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International bank ABN AMRO also targeting to reaches 10 lachousehold by 2009 with maintaining a nil non performing assetsportfolio.

4. Individual investor

Now microfinance is not merely social services, individual investor canearn money through investing money in micro finance sector. Manyorganizations like Calvert Foundation, IIRM offering the investment inmicrofinance sector.

Terms of investment

Interest rate- 2.0 per yearMaturity- 12 monthSecurity issuer- Calvert Foundation, IIRM etc.

This security is not a mutual fund not FDIC or SIPC and has certainrisk.

5. Biometric ATM backed microfinance initiativeFor long, banks have been lenders to their rural customers. Now they

have announced some rather unique ways in micro financing to getthem to deposit savings,Citibank has launched the Pragati saving account for its micro financecustomers. This account is similar to a no frills account and does notrequire any minimum balance.

The bank will provide services through a biometric ATM that will alsospeak to customers in Hindi, Marathi, Tamil and Telugu.

"As the customers start saving, there will be ability to sweep this

money into deposits so that they earn better interest than theconventional saving account. As we start getting imprints of customersin terms of deposit behaviour we may be able to set them overdraftfacilities as opposed to convention loan," says PS Jay Kumar, BusinessManager - Global Consumer Group, Citigroup India.

Incidentally, ICICI Bank also has a micro saving product in Orissa forfarmers. Other banks like Andhra Bank and Bank of India also offer
http://news.moneycontrol.com/india/news/business/microfinancingatm/citibanksbiometricatmbackedmicrofinanceinitiative/20/44/article/254162http://news.moneycontrol.com/india/news/business/microfinancingatm/citibanksbiometricatmbackedmicrofinanceinitiative/20/44/article/254162http://news.moneycontrol.com/india/news/business/microfinancingatm/citibanksbiometricatmbackedmicrofinanceinitiative/20/44/article/254162http://news.moneycontrol.com/india/news/business/microfinancingatm/citibanksbiometricatmbackedmicrofinanceinitiative/20/44/article/254162http://news.moneycontrol.com/india/news/business/microfinancingatm/citibanksbiometricatmbackedmicrofinanceinitiative/20/44/article/254162http://news.moneycontrol.com/india/news/business/microfinancingatm/citibanksbiometricatmbackedmicrofinanceinitiative/20/44/article/254162


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biometric ATM facility to their micro finance customers. In fact bankssee this untapped segment not as philanthropy but as sound business,at a time when cheap deposits are hard to come by.

What is the governments role in supporting

microfinance?

Governments have a complicated role when it comes to microfinance.

Until recently, governments generally felt that it was their

responsibility to generate development finance', including credit

programs for the disadvantaged. Twenty years of insightful critique of

rural credit programs revealed that governments do a very bad job of

lending to the poor. Short term political gain is just too tempting for

politically controlled lending organizations; they disburse too quickly

(and thoughtlessly) and they collect too infrequently (unwillingness to

be tough on defaulters). In urban areas, governments never really got

into the act, and subsidized micro enterprise credit is still relatively

rare when compare to its rural counterpart.

Now that microfinance has become quite popular, governments are

tempted to use savings banks, development banks, postal savings

banks, and agricultural banks to move microcredit. This is not

generally a good idea, unless the government has a clear acceptance

of the need to avoid the pitfalls of the past and a clear means to do so.


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Many governments have set up apex facilities that channel funds from

multilateral agencies to MFIs. Apex facilities can be quite complicated

and there are few successful examples in microfinance. Successful

apex organizations in microfinance tend to be built on the backs of

successful MFIs, not the other way around. Finally, governments can

also get involved in microfinance by concerning themselves with the

regulatory framework that impinges on the ability of a wide range of

financial actors to offer financial services to the very poor. This topic is

treated below.

Microfinance and Capital Requirement

The demand situation in the microfinance market can be gauged from

the Table:

At a Glance: Scale of Indian MicrofinancePopulation of India (estimate - June 08) 1,830 million

Microfinance Services - potential client outreach 600 million

Microfinance Services - current client outreach (Mar. 08) 60 million

Annual growth in Microfinance Services - 50%

Microfinance loan portfolio (Mar. 08) USD 25 billion

financing needs - 4 year estimate (Sept. 08) USD 250 billion

Table 2: Demand for micro-lending in Indian

Source: Microfinance India (MFI) 2008

Given these figures there is need for broad basing the reach of

financial services to the people falling in the low income category, help

them invest in and benefit from their skill sets and tide over the

impact of adverse shocks in the process. The intentions might sound


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quite philanthropic however microfinance is turning out to be a

profitable market for commercial banks which is quite evident from

their presence in this area. The new commercial banks do not have the

infrastructure to ensure the last mile connectivity and have to rely

heavily of microfinance institutions (MFI).

Challenges in the Indian context

Traditionally banks have usually not provided financial services to

clients with little or no cash income. Banks must incur substantial costs

to managing a client account, regardless of how small the sums of

money involved. For example, the total revenue from delivering one

hundred loans worth $1,000 each will not differ greatly from the

revenue that results from delivering one loan of $100,000. But it takes

nearly a hundred times as much work and cost to manage a hundred

loans as it does to manage one. A similar equation resists efforts to

deliver other financial services to poor people. There is a break-even point

in loan and deposit sizes below which banks lose money on each

transaction they make. Poor people usually fall below it.

In addition, most poor people have few assets that can be secured by

a bank as collateral. As documented extensively by Hernando de Soto and

others, even if they happen to own land in the developing world, they

may not have effective title to it. This means that the bank will have

little recourse against defaulting borrowers.

Seen from a broader perspective, it has long been accepted that the

development of a healthy national financial system is an important goal

and catalyst for the broader goal of national economic development.
http://en.wikipedia.org/wiki/Bankshttp://en.wikipedia.org/wiki/Costhttp://en.wikipedia.org/wiki/Breakevenhttp://en.wikipedia.org/wiki/Collateralhttp://en.wikipedia.org/wiki/Hernando_de_Soto_(economist)http://en.wikipedia.org/wiki/Titlehttp://en.wikipedia.org/wiki/Defaulthttp://en.wikipedia.org/wiki/Financial_systemhttp://en.wikipedia.org/wiki/Economic_developmenthttp://en.wikipedia.org/wiki/Bankshttp://en.wikipedia.org/wiki/Costhttp://en.wikipedia.org/wiki/Breakevenhttp://en.wikipedia.org/wiki/Collateralhttp://en.wikipedia.org/wiki/Hernando_de_Soto_(economist)http://en.wikipedia.org/wiki/Titlehttp://en.wikipedia.org/wiki/Defaulthttp://en.wikipedia.org/wiki/Financial_systemhttp://en.wikipedia.org/wiki/Economic_development


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However, national planners and experts focus their attention mainly on

developing a commercial banking sector dealing in high-value transactions,

and often neglect the delivery of services to households of limited

means, even though these households comprise the large majority of

their populations.

Because of these difficulties, when poor people borrow they often visit

their relatives or the ubiquitous local moneylender. Moneylenders often

charge over 10% a month, or even a few percentage points 'a day' for

their money. While they often demonized and accused of usury, their

services are convenient and fast, and they can be very flexible when

borrowers run into problems. Hopes of quickly putting them out of

business have proven unrealistic, even in places where microfinance

institutions are very active.

In nations with lower population densities, meeting the operating costs

of a retail branch by serving nearby customers has proven

considerably more challenging.

Although much progress has been made, the problem has not been

solved yet, and the overwhelming majority of people who earn less

than $1 a day, especially in the rural areas, continue to have no

practical aspects to formal sector.
http://en.wikipedia.org/wiki/Commercial_bankhttp://en.wikipedia.org/wiki/Moneylenderhttp://en.wikipedia.org/wiki/Usuryhttp://en.wikipedia.org/wiki/Commercial_bankhttp://en.wikipedia.org/wiki/Moneylenderhttp://en.wikipedia.org/wiki/Usury


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10. Status of microfinance in Rajasthan

Background

Rajasthan is the largest state in India and the peculiar natural, social

and economic features of Rajasthan define the need and scope for a

strong microfinance movement. The primary sector dominates the

essentially agrarian economy, with 2/3rd of the population dependent

on agriculture and allied activities for their livelihoods. As per the

Human Development Index, Rajasthan comes at 12th rank among 15

major states in India.

In terms of availability of credit from RFI the state is among the least

privileged states. This is reflected in the number of bank outlets per

lakh population, per capita bank deposits, per capita bank credit and,

over all credit deposit ratio. In all these respects Rajasthan is lagging.

For example, per capita bank deposit in Rajasthan is Rs 6151, as

against Rs. 12922 for the country as a whole; per capita bank credit in

Rajasthan is Rs. 3355, as against Rs. 7486 for the country. Overall

bank penetration is also low.


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Current Situation of Microfinance and important issues

In Rajasthan, microfinance is almost synonymous with Self Help

Groups. There is no other model of mF in the state. There are

approximately 1.5 lakh self help groups of women. Department of

women and child development has promoted about 50% of these

groups. Other government departments under developmental schemes

like SGSY, Watershed Development etc, have organized another 20-25% group. NGOs have promoted remaining 25-30% groups.

The Self Help Movement started more as social mobilization of women

for their better place in family and society rather than microfinance

movement in Rajasthan. Many voluntary organizations had been

working with poor organizing them in village development

committees. But participation of women in these VDCs was sub

optimal. So they started a separate group of women Mahila Smooh/ orMahila Mandals as subset of larger village institution purely with a

purpose of having increased participation of women in development.

Most development practitioners and policy makers realized that mere

women participation through MM/MS is not adequate and some direct

action in terms of improving economic status of women is needed. The

assumption was that if women have access to income/money, theirstatus in family and society would be better. Many voluntary

organizations and government (together and/or separately) started

organizing women in to groups to take up small business (IG

Activities) collectively. Most of these activities were Off Farm like


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sewing, dari, galicha, candle, chalk, agarbatti, achar, bidi, papad,

handicrafts, etc.

But due to lack of proper marketing networks and many other reasons,

there was mixed experience. Except some success stories at highly

micro level, no significant impact is seen. It is probably a case of

Double Fault First pushing poor to become entrepreneur and that too

in a collective way.

Yearly progress in SHG-Bank linkage(NABARD)

Year No. of SHGscredit linked

Annual loanamount in lac

Cumulative loanamount

March03 22742 2184 4685

March04 33846 2587 7213

March05 59906 6723 13936

March06 98219 9725 23661

March07 137837 12558 36219

Voluntary Organization in Rajasthan

In every district, there are about 5-10 voluntary organizations. That

are organizing SHGs either on their own or in collaboration with

government. Most of the voluntary agencies have promoted 50 to 100

SHGs. However there are a few agencies that have substantial number

(300 to 800 SHGs) of groups. For example:

PEDO in dungarpur,

Lupin Foundation in Bharatpur,

PRADAN in Dausa, Dholpur,

IBTADA in Alwar,

ASSEFA IN Baran and Banswara,


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URMUL in Bikaner,

Sewa Mandir in Udaipur,

Navyuvak Mandal in Bhoruka etc.

Need of financial services:

It has been well researched and documented that poor have

temporary surpluses and they are in need of services to keep their

savings safe. A poor family may get the payment for their labour or

they sell their small assets or crops etc. The money received from such

transactions would have small temporary surplus, which they would

use over next few days/ months. If they do not have access to a place

where they can save that safely, it might result in to expenses on less

critical items or even on things like drinking etc. It has been noticed

that due to lack of access to banks or SHGs, they keep the money in

cash and it does not earn any interest.

Financial needs and financial services.

In developing economies and particularly in the rural areas, many

activities that would be classified in the developed world as financial

are not monetized: that is, money is not used to carry them out.

Almost by definition, poor people have very little money. But

circumstances often arise in their lives in which they need money or

the things money can buy.


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In Stuart Rutherfords recent book The Poor and Their Money, he citesseveral types of needs:

Lifecycle Needs: such as weddings, funerals, childbirth, education, home-building, widowhood, and old age. Personal Emergencies: such as sickness, injury,

unemployment, theft, harassment or death.

Disasters:such as fires, floods, cyclones and man-made eventslike war or bulldozing of dwellings.

Investment Opportunities: expanding a business, buying landor equipment, improving housing, securing a job (which oftenrequires paying a large bribe), etc.

Poor people find creative and often collaborative ways to meet these

needs, primarily through creating and exchanging different forms of

non-cash value. Common substitutes for cash vary from country to

country but typically include livestock, grains, jewellery and preciousmetals.

Need of financial services:

It has been well researched and documented that poor havetemporary surpluses and they are in need of services to keep theirsaving safe. A poor family get the payment for their labour or they selltheir small assets or crops etc. the money received from suchtransaction would have small temporary surplus, which they would useover next few days/ months. If they do not have access to a placewhere they can save that safety, it might result in to expenses on lesscritical items or even on things like drinking etc. it has been noted thatdue to lack of access to banks or SHGs they keep the money in cashand it does not earn any interest.


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Category Description Credit For Loan Size Source of credit

VeryPoor

Landless,SC/ST, Singlewomen HHMigrants

Food, clothIllness, HHconsumption

Consumptionloans up toRs2000/-

Moneylenders,

Poor Small andMarginalFarmers,Traditonal servicestrades

Food, health,marriage andother socialobligations,equipments

Consumptionandproductiveloans up toRs10000/-

Moneylenders,SHGs,friends,relatives

Average Medium farmers,shopkeepers

Workingcapital, agriinputs, andsmall assets

Productiveloans up toRs25000/-

SHG, PACSBanks,moneylenders

Betteroff

Large farmer,permanent/semiprmanent job

holders,traders

Big assets-vehicle to payold loans,to

advance loans

More thanRs25,000

loans,may be uptoRs.2,00,000

Commercialbanks, coopbanks

The major issues that need to be addressed ar e:

1. Access of poor to formal financial institutions.

2. Quality of the existing Self Help Groups- only 30% SHGs have

been Able to take Loan from Banks.


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3. Spread of the movement: About 80% of SHGs are located in

30% of The districts.

4. Outreach: Large number of poor is still beyond the reach of

SHGs and Formal financial institutions.

5.Microfinance is limited to micro savings and credit.

6.Human resource challenge: Perspective and capacities of mf

promoters is very Limited, Numbers of skilled persons in

microfinance is very less.

7.Most mf products and services offered are pre determined and

they are not based On the needs of the clients.

8. There is double reporting (same group being reported by

different SHG Promoters), There are also cases where one person is

member of many groups.

9. Largely the SHGs are promoted to meet project requirements/

targets

10. Still there are many operational problems in SHG-Bank linkage

11. Inadequate financial support so far on SHG formation, it needsat least 3 years, and about Rs.8-10, 000/- per SHG for promoting a

good quality SHG.


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11 Women and micro finance

Although men, as well as women, face difficulties in establishing an

additional enterprise, women have barriers to overcome. Among them

are negative socio-cultural attitudes, legal barriers, practical external

barriers, lack of education and personal difficulties.

In spite of this, for women and especially for poor women,

microentreprise ownership has emerged as a strategy for economical

survival. One of the most essential factors contributing to success in

microentrepreneurship is access to capital and financial services. For

various reasons, women have had less access to these services than

men.

In this context, credit for microentreprise development has been a

crucial issue over the past two decades. Research has shown that

investing in women offers the most effective means to improve health,

nutrition, hygiene, and educational standards for families and

consequently for the whole of society. Thus, a special support for

women in both financial and non-financial services is necessary.

Regarding limited-access to financial services, women depend largely

on their own limited cash resources or, in some cases, loans from

extended family members for investment capital. Smaller amounts of

investment capital effectively limit women to a narrow range of low-

return activities which require minimal capital outlays, few tools and

equipment and rely on farm produce or inexpensive raw materials.


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In general, women need access to small loans (especially for working

capital), innovative forms of collateral, frequent repayment schedules

more appropriate to the cash flows of their enterprises, simpler

application procedures and improved access to saving accounts.

Surveys have shown that many elements contribute to make it more

difficult for women in small businesses to make a profit. These

elements are:

o Lack of knowledge of the market and potential profitability,

thus making the choice of business difficult.

o Inadequate bookkeeping.

o Employment of too many relatives which increases social

pressure to share benefits.

o Setting prices arbitrarily.

o Lack of capital.

o High interest rates.

o Inventory and inflation accounting is never undertaken.

o Credit policies that can gradually run their business (many

customers cannot pay cash; on the other hand, suppliers

are very harsh towards women).

Women can make micro-credit succeed in India:

'India has to understand that micro-finance is workable and

sustainable anywhere where there is poverty. And to make it

successful, it needs to emphasize and mobilize the role of women in


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each rural and poor household,' the chief architect of Bangladesh's

Grameen Bank told a conference organized by the Federation of Indian

Chambers of Commerce and Industry (FICCI). 'India and Bangladesh

have no major difference in poverty. If micro-finance or micro-credit is

successful in Bangladesh, it can be successful in India as well,' Yunus

emphasized. 'The Grameen Bank and the work that we do is not

something extraordinary and neither is it a model. It is a rather simple

way of solving the complex problems of poverty,' the 66-year-old

economist said.

'Bangladesh is very close to achieving the UN millennium development

goal of eradicating poverty. And we have been able to successfully

reach 80 percent poor households. India has a long way to go, but it

can come out with excellent results only if it catches the pace,' he

reiterated.

How to increase and support women's participation in

micro-finance activities?

Both governments and donors should explore ways of developing

innovative credit programs using intermediary channels or institutions

closer to the target groups such as co-operatives, women's group

associations and other grassroots organizations. Savings and credit

programs should be designed in a way not to exclude women fromparticipating.

Additionally, there is a need to examine the impact of structural

adjustment policies on men and women at the family level as well as


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within various sub-sectors of the labour market and within the small

enterprise sector itself.

In general terms, in order to facilitate the participation of women in

micro and small enterprise, donors should:

* Encourage micro enterprise programs to develop specific strategies

for recruiting women as clients, from within their existing target

groups.

* Encourage micro enterprise programs to expand their target groups

to include the sizes and types of enterprise activities in which women

engage and/or experiment with assistance strategies, business and

technical assistance needs of these types of enterprises.

* Consider expanding support to a broader range of organizations,

especially poverty-focused organizations active in rural areas. Support

for these organizations should include technical assistance and training

in programs planning, management and in developing teams of female

staff to assist clients in business planning and management.

Rural Finance for Rural Women

Poverty hits hardest at the female half of humankind. If woman living

in a rural area of a developing country, they are likely to be poorer

than a man, more vulnerable, own no land, be less educated and in


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poorer health. And you are unlikely to live as long. Struggling to

combine a 'double day' of low-paid work with care for the home, rural

women often have to cope with frequent pregnancies and child

mortality. For women, perhaps the cruelest reality of all is that they

have less chance than men to escape from poverty. A rural woman is

likely to have little or no say in the way the family spends its income.

Discrimination in education is the start of the vicious spiral of poverty.

A girl may be deprived of schooling and literacy for no other reason

than that she is female. Seventy per cent of poor women in India

cannot read or write. Illiteracy often excludes people from written

knowledge and decision-making. Some rural women have been

affected by trade liberalization they are unable to participate in the

marketing of export crops as they lack land rights and access to

essential farm inputs. On the other hand, some women have gained by

securing jobs in new export activities. Investment in rural women pays

off.

* Indian population is 48.1% women and 51.9% men

* Female illiteracy is 62% whereas the male illiteracy rate is 34%

* The labour force participation rate of women is 22.7%, less than half

of the men's rate of 51.6%

* In rural India, agriculture and allied industrial sectors employ as

much as 89.5% of the total female labour

* Women have extensive work loads with dual responsibility for farm

and household production

* Women's work is getting harder and more time-consuming due to

ecological degradation and changing agricultural technologies and

practices


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* Women have an active role and extensive involvement in livestock

production, forest resource use and fishery processing

* Women contribute considerably to household income through farm

and non farm activities as well as through work as landless agricultural

labourers

* Women's work as family labour is underestimated

* There are high degrees of inter-state and intra-state variations in

gender roles in agriculture, environment and rural production.

Rural Women at a glance

Rural women comprise more than one quarter of the total world

population. 500 million women live below the poverty line in rural

areas... Women perform 30 per cent of the agricultural work in

industrialized countries. Rural women the world over are an integral

and vital force in the development processes that are the key to socio-

economic progress. Rural women from the backbone of the agricultural

labour force across much of the developing world and produce 35-45%of Gross Domestic Product and well over 50% of the developing

world's food. Yet, half a billion rural women are poor and lack access

to resources and markets."

Need credit to rural women

Rural women play a fundamental role in daily management of

agricultural activities and of the family unit. They are however often


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confronted with numerous obstacles when applying for credit.

Consequently, they try to optimize their possibilities of accessing credit

from the various existing rural finance services:

The "unofficial" system (an alternative established by community

members)

The "official" system (banks and other official financial institutions),

and

Farmers' organizations which give loans to their members

Rural women fulfill multiple functions on a daily basis: they are

mothers providing for their family's well-being, farmers producing food

for the family, shopkeepers supplying indispensable additional income.

They are also in charge of natural resources management which

ensures future food security for their families.

Although rural women represent a fundamental pillar for survival and

management of the family unit, they are confronted with real

difficulties in accessing additional resources such as credit. Various

barriers arise when they try to undertake or develop any income-

generating production activities.

Loans facilitates to rural women

Loans play an important role in the economic, social and political

improvement of the situation of women throughout the world.


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Improving rural women's access to finance gives them a chance to

become autonomous. This can contribute to increase agricultural

productivity, development of income-generating activities alongside

their production activities, better control of production methods, and

improved natural resource management. As a result they will be able

to ensure food security for the future of which they are the guarantors.

Additional sources of finance can help in developing necessary

commercial agriculture within the national and international context,

whilst retaining subsistence farming for the community's daily needs.

By increasing their economic power, they will be able to organize

themselves more efficiently, to affirm their position as rural women

farmers, to participate in decision making processes and to draw up

policies which concern them; as well as defending their own interests

with public authorities and other relevant institutions.

Savings facilitate for rural women

Savings are seen as insurance against foreseeable future difficulties

(constituting a dowry, bridging a difficult period, etc) or completely

unpredictable (food shortages, natural weather phenomenon,

foodstuffs sold cheaply because of the death or accident of a member

of the family, etc). Rural women therefore insure themselves against

future risks by saving in the form of land, herds, trees, gold jewellery,

or by hoarding money, which also include risks such as theft, the

compulsory gift of a sum to a member of the family in difficulty, a

livestock epidemic, etc.

Access to safe and secure savings is an important part of addressing

short-term, medium-term and long-term unforeseen circumstances.


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These savings allow them to protect their own funds and, as a result,

to undertake other income-generating activities. Allowing them to

control their incomes and to be paid for these activities is to

participate in granting autonomy to rural women.

12. Conclusion

In concluding way microfinance is a good tool for combating to the

poverty and facilitates poor to the financial services.

Some valuable lessons can be drawn from the experience of successful

Microfinance operation. First of all, the poor repay their loans and are

willing to pay for higher interest rates than commercial banks provided

That access to credit is provided. The solidarity group pressure and

sequential lending provide strong repayment motivation and produce

extremely low default rates. Secondly, the poor save and hence

microfinance should provide both savings and loan facilities. These two

findings imply that banking on the poor can be a profitable business.

However, attaining financial viability and sustainability is the major

institutional challenge. Deposit mobilization is the major means for

Microfinance institutions to expand outreach by leveraging equity. In

order to be sustainable, microfinance lending should be grounded on


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market principles because large scale lending cannot be accomplished

through subsidies.

A main conclusion of this paper is that microfinance can contribute to

solving the problem of inadequate housing and urban services as an

integral part of poverty alleviation programs. The challenge lies in

finding the level of flexibility in the credit instrument that could make

it match the multiple credit requirements of the low income borrowers

without imposing unbearably high cost of monitoring its end-use upon

the lenders. A promising solution is to provide multi-purpose loans or

composite credit for income generation, housing improvement and

consumption support. Consumption loan is found to be especially

important during the gestation period between commencing a new

economic activity and deriving positive income. Careful research on

demand for financing and savings behavior of the potential borrowers

and their participation in determining the mix of multi-purpose loans

are essential in making the concept work.

Eventually it would be ideal to enhance the creditworthiness of the

poor and to make them more "bankable" to financial institutions and

enable them to qualify for long-term credit from the formal sector.

Microfinance institutions have a lot to contribute to this by building

financial discipline and educating borrowers about repayment

requirements.

13. Bibliography:

WEBSITES

1. www.microfinancegateway.org2. www.coolavenues.com


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3. www.wikipedia.com4. www.wikianswers.com5. www.indianmba.com6. www.wikipedia.org7. www.thehindubusinessline.com

8. www.hindu.com9. www.littleindia.com

Documents

Brijesh Kumar Jat - Micro Finance- Financial Product for Bottom of Pyramid Market