Micro Finance in India

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INTRODUCTION

OF

MICROFINANCE IN INDIA


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Meaning of Microfinance

Microfinance is a term used to refer to the activity of provision of financial

services to clients who are excluded from the traditional financial systems on account

of their lower economic status. These financial services will most commonly take the

form of loans (see micro credit) & savings, through some microfinance institutions

will offer other services such as insurance & payment services. The Microfinance is

changing the landscape of banking across the world. It has changed the ivies of people

& revitalized communities in the worlds poorest as well as richest countries. The

microfinance is a better targeted financial help to a clientele that is poorer &

vulnerable than traditional bank clients. The broad classification of microfinance

includes rural credit through specialized banks traditional informal microfinance like

loans from friends & relatives money lenders etc.

Microfinance as a Development Tool

People living in povertylike everyone else need access to a diverse range of

financial services, including loans, saving services, insurance & money transfers.

Access to financial services can help enable the poor to increase income & smooth

consumption flows, & thus expend their asset base & reduce their vulnerability to the

external shocks that are a part of their daily existence. The availability of financial

services acts as a buffer against sudden emergencies, business risk & seasonal slums

that can push a family into destitution. More & better financial services specifically

geared towards low income groups can help poor households to move from everyday

survival to planning for the future, investing in better nutrition, improver living

condition & childrens health & education.

Microfinance has the potential to benefit poor people both indirectly, through

increased growth, & directly as they gain access to needed services. Impact studies

show that in money cases ,microfinance reduced poverty through increasing income

levels. Studies also show that microfinance improves poor peoples lives by

contributing to improved healthcare, childrens education & nutrition & womens

empowerment.


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In particular, the ability to borrow, save & earn income reduced economic

vulnerability for women & their households, increased financial & food security can

bring a new confidence & hope which often translates to a greater sense of

empowerment to a person.

Nonetheless, microfinance is not a panacea. Even the most innovative & participative

programmes can lead to unwanted negative impacts. Microfinance has in many cases

been shown to benefit the better off poor more than the truly destitute. Many early

impact studies on microfinance showed increasing income levels, but more recent &

better designed studies have shown that in many cases the impact varies per income

group. In most cases the better off benefit more from micro credit, due to their higher

skills level, better market contacts & higher initial resource base. Lower income

groups may be more risk-averse & benefit more from saving & micro insurance.

Many microfinance & micro credit programmed target women in particular, largely

due to their (generally) higher repayment rates, but in many cases this is mixed

blessing. If a programmed excludes men, particularly in areas where access to

financial services is limited, the man may require his wife to get the loan for him.

Others have argued that exclusive access for women actually increases her bargaining

power within the household. While inspiring examples abound of women taking loans

& then using the income from their business to provide employment to others, feed

their childrens send them to school, & become empowered members of their

community & their household, many more examples exist of vivacious circles of debt,

family violence & increased workloads.

How Many People Have Access to Microfinance?

The consultative group to assist the poor (CGAP) estimates that of the three

billion poor people of working age who could be making use of these services about

500 million-one sixth currently have access to formal financial services.

If we are ever to reach the estimated three billion poor people who could use financial

services, it will require a whole range of institutions, not just traditional NGO

microfinance institutions to do it. Microfinance institutions have played a key role in


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the development of microfinance & they will continue to do so. But what is really

needed-to reach both further & deeper-is a whole range of institutions that will jostle

& compete with one another to serve poor people & to innovate to reach more & more

poor people.

Sustainable Microfinance

Microfinance is unique as a development tool because of its potential to be self-

sustaining. Successful microfinance institutions have proven that providing financial

services to the poor can be an effective means of poverty reduction & be a profitable

business. Dozens of institutions have proven that financial services for poor people

can cover their full costs, through adequate interest spreads, relentleless focus on

efficiency & aggressive enforcement of repayment. A large & growing proportion of

todays microfinance services are being provided by institutions that are profitable

even after adjusting for subsidies that they may have recd.

There will never be enough aid funding available to make an appreciable client the

scale of poverty that still exists around the world. The financial viability of

institutions is what will ultimately guarantee the long term provision of financial

services for poor people and today theres greater consensus than even before on what

is needed to make microfinance sustainable.

How Does Microfinance contribute to the Millennium Development

Goals?

Evidence confirms that access to financial services significantly impacts the lives of

the poor.

Extreme Poverty & Hunger

Empirical evidence shows that among the poor, those who participated in

microfinance programmed were able to improve their living standards-both at the in

individual & household level much better than those without access to financial

services. For examplethe clients of BRAC, formerly known as the Bangladesh rural

advancement committee & the largest NGO in the world, increased household

expenditures by 28% & assets by 112%. In EI Salvador, the weekly income of FICA

clients increased on average by 145%.


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Universal Primary Education

Impact studies show that in poor households with access to financial services.Children are not sent to school in longer nos.-including girls-but they also stay in

school longer. In Bangladesh, almost all girls in grimacer client households had some

schooling, compared to 60% of non-client house-holds.

Womens empowerment

The Indian School of Microfinance for Women, an organization based in

Ahmadabad, is a unique initiative in the discipline of Microfinance. The School hasbeen set up with the purpose of addressing the huge capacity building gap that exists

in the Microfinance sector.

Launched on 4th October 2003, The Schools aim is to strengthen and spread

Microfinance as a strategy for poverty alleviation through development of knowledge

and skilled human resources. It believes that microfinance is an effective tool for the

alleviation of poverty and betterment of the lives of women. It looks to bring the

realities of the lives of women to organizations and people working with microfinance

to help them reach the women better in turn. Promoted by SEWA Bank, FWWB (I),

and Coady International Institute, Canada, The School brings together the best of the

indigenous knowledge and expertise from around the world to a common platform

from where it could be disseminated and made utilitarian for the Microfinance sector.

The Current State of Microfinance

These are interesting time for these involved in the provisioning of financial

services for the poor. The boundaries between microfinance and the formal financial

sector are finally breaking down. In some areas, microfinance is now an inherent part

of the financial system. In other areas, new & innovative financial delivery methods

are being developed to overcome the barriers of sparse, population & large distance

between settlement, as well as poor infrastructure. Technology can play an important

role but we may have to accept that for the moment, some areas truly are unbreakable.


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Many microfinance institutions, many whose origins were social, are

professionalizing becoming sustainable & in some cases even profitable. Many of

these institutions are have seeking commercial funding. To attract this type of

funding, they must become transparent in their financial reporting. The microfinance

Information Exchange (MIX) is an information exchange website where more than

600 MFIs and 75 funds post information on their organizations & their performance.

At the same time, commercial institutions are also beginning to get involved in

providing financial services to poorer clients. CGAP has identified over 200 domestic

retail banks or consumer credit companies getting involved in microfinance, often

driven by competition & technologies that promise to allow then to make small

transactions more cost effectives. E-Banking, smart cards & telephone are beginning

to be used by microfinance providers to reduce transaction costs, a key to reaching

poorer clients.

Challenges Ahead

The real challenge facing the microfinance industry today is scaling up

services to reach the estimated three billion people in developing countries will still

lack access to formal financial services. Successful microfinance institutions have

proven that providing financial services to the poor can be an effective means of

poverty reduction & be a profitable business. A major bottleneck to the development

of sustainable microfinance is limited institutional & managerial capacity at the level

of retail microfinance institutions, as reflected in inadequate man information system,

poor strategic planning, & high operating costs. This is also a marked storage of

organizations that can provide safe saving facilities for the poor & that can

sustainably mobilize these domestic savings for on-lending.

Many of the necessary elements needed to scale up microfinance are already in place.

A great deal of knowledge about the requirement of sustainable microfinance already

exists. High-performing microfinance institutions have developed methodologies to

extend credit, saving & other services to the poor clients. A no. of banks & other

institutions with nationwide distribution system are beginning to take defective

interest in reaching poorer clients. Advances in information technology have the

opportunity to lower the cost & risk of providing microfinance to the poor. The


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challenge is to mobilize this knowledge & apply it on a much vaster scale, creating

financial systems that work for the poor & boost their contribution to economic

growth.

One approach is to tap into developed capital market through microfinance

investment funds enable individual investors & portfolio managers to allocate a part

of their equity or fixed income investment to microfinance as an asset class.

The microfinance is changing the landscape of banking across the world. It has

change the ivies of people & revitalized communities in the worlds poorest as well as

richest countries. The microfinance is a better targeted financial help to a clientele that

is poorer & vulnerable than traditional bank clients. The broad classification of

microfinance includes rural credit through specialized banks traditional informal

Microfinance like loans from friends & relatives money lenders etc. BANK-NGO

partnership based on microfinance, non NGO, non collateralized microfinance,

Garmin bank type microfinance etc. anyone who can access to saving, credit,

insurance other financial services is more resilient & better able to deal with everyday

demands. Microfinance helps the poor & low income clients deal with such basic

needs, like with access to micro insurance which is a part of microfinance, poorpeople can cope with sudden expenses associated with serious illness or loss of assets.

It also provides them access to formal saving accounts & thus an incentives to save.

Clients who join & stay in microfinance programmed have better economic condition

than no clients.


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FURTHERSTIC STUDY OF MICRO FINANCING IN INDIA

The micro financial institutions are today, no doubt, acquiring the status of

moment in the banking sector. Its importance can be gauged from the fact that United

Nations has designated year 2005 as the international year of micro credit. Today

effective micro finance is seen as solution to many of the existing social and emotive

problems ranging from rural employment to empowerment. The various micro

finance institutions models are quite effective in dispensing the much needed credit to

the targeted clients. However, there exists certain weakness in existing micro finance

institution models. There is enough space of more efficiency and better results in

credit disbursement through micro finance institutions.

If we look back, it is found that Garmin Bank type micro finance institution model is

one of the most successful models in micro finance. The bank has successfully served

the rural people in Bangladesh with on physical collateral relying on group

responsibility to replace the collateral requirements. This model, like other model, has

also some weaknesses. It involves too much of external subsidy which is not

replicable. Garmin Bank has not oriented itself towards mobilizing peoples

resources. The repayment system of 50 weekly equal installments is not practical

because poor do not have a stable job and have to migrate to other places for job. The

communities are agrarian during lean seasons it becomes responsible for them to

repay the loan. Pressure for high repayment drives members to money lenders.

Most of the existing micro finance institutions are facing problems regarding skilled

labor, which is not available for local level accounting. Drop out of the trained staff is

very high. Also most of the models do not lend for agriculture.

The four pillars of micro finance credit systems are

Supply of credit Demand for finance Intermediation by individuals or authorities. Regulation by statutory bodies.

The end goal of any such basic model is accessibility of finance to poor.


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The new model calls for exploiting the latent rural human resource by talent

spotting and training them as per their, for example, the graduates can be trained in

accounting or as Self Help Group leaders. The awareness campaign regarding various

rights, subsidies, and incentives given by various micro finance schemes may be

disseminated by involving local rural youth, which may very well connect to the local

based on similarity in dialect, living ways and culture.

It envisages the CENTRE as the hub of all activities. It is a place where all funding,

responsibility and accountability, is concentrated. This will ensure efficiency, better

control and reduced cost of interfacing between dispenser and taker of credit. The

CENTRE will also do a grading systems-A,B,C,D, Effect under which grading

system would be based on number of years client has been attached with any of the

micro finance institutions and its positive track in repaying the loans, including the

condition that at least one amount of the loan was greater than rupees 5000.

The criteria for grading are:

A>=12 years attached with any MFI, subject to the conditions above.

B>=10 years attached with any MFI, subject to the condition above.

C>=7 years attached with any MFI, subject to the condition above.

D>=5 years attached with any MFI, subject to the condition above.

E>=3 years attached with any MFI, subject to the condition above.

The client of A, B and Consumption can take loan directly from the CENTRE, other

conditions for eligibility being the same. These are persons who have successfully

came out of the vicious circle of poverty, cycle and are aspiring to grow big and still

bigger, comparatively.


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Micro Finance (MF) Institutions

Introduction

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

microfinance services in India. They can be broadly categorized in to two categories

namely, formal institutions and informal institutions. The former category comprises

of Apex Development Financial Institutions, Commercial Banks, Regional Rural

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

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

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

main activity are generally referred to as micro Finance Institutions (MFIs). Whileboth private and public ownership are found in the case of formal financial

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

Micro Finance Service Providers

The micro finance service providers include apex institutions like National

Bank for Agriculture and Rural Development (NABARD), Small Industries

Development Bank of India (SIDBI), and, Rashtriya Mahila Kosh (RMK). At theretail level, Commercial Banks, Regional Rural Banks, and, Cooperative banks

provide micro finance services. Today, there are about 60,000 retail credit outlets of

the formal banking sector in the rural areas comprising 12,000 branches of district

level cooperative banks, over 14,000 branches of the Regional Rural Banks (RRBs)

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

90,000 cooperatives credit societies at the village level. On an average, there is at

least one retail credit outlet for about 5,000 rural people. This physical reaching out to

the far-flung areas of the country to provide savings, credit and other banking services

to the rural society is an unparalleled achievement of the Indian banking systems.


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The Emergence of Private Micro finance Industry

The micro finance initiative in private sector can be traced to the initiative

undertaken by Ms.Ela Bhat for providing banking services to the poor women

employed in the unorganized sector in Ahmedabad City of Gujarat State. Shri Mahila

SEWA (Self Employed Womens Association) Sahakari Bank was set up in 1974 by

registering it as a Urban Cooperative Bank. Since then, the bank is providing banking

services to the poor self-employed women working as hawkers, vendors, domestic

servant etc. As on March 2003, the mFI had a membership of 30,000, seventy per cent

of whom are from urban area. The deposit and loan portfolio stood at Rs 623.9

million ($ 13.86 million) and Rs133.6 million ($2.97 million) respectively. Though

the mFI is making profit, yet the SEWA bank model of mFI has not been replicated

elsewhere in the country.

In the midst of the apparent inadequacies of the formal financial system to cater to the

financial needs of the rural poor, NABARD sponsored an action research project in

1987 through an NGO called MYRADA. For this purpose a grant of Rs. 1 million

($22,222) was provided to MYRADA for an R&D programme related to credit

groups. Encouraged by the results of field level experiments in group based approach

for lending to the poor, NABARD launched a Pilot Project in 1991-92 in partnership

with Non-governmental Organizations (NGOs) for promoting and grooming self help

groups (SHGs) of homogeneous members and making savings from existing banks

and within the existing legal framework. Steady progress of the pilot project led to the

mainstreaming of the SHG-Bank Linkage Programme in 1996 as a normal banking

activity of the banks with widespread acceptance. The RBI set the right policy

environment by allowing savings bank accounts of informal groups to be opened bythe formal banking system. Launched at a time when regulated interest rates were in

vogue, the banks were expected to lend to SHGs at the prescribed rates, but the RBI

advised the banks not to interfere with the management of affairs of SHGs,

particularly on the terms and conditions on which the SHGs disbursed loans to their

members.

The uniqueness of the micro finance through SHG is that it is a partnership based

approach and encouraged NGOs to undertake not only social engineering but also


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financial intermediation especially in areas where banking network was not

satisfactory. The rapid progress achieved in SHG formation, which has now turned

into an empowerment movement among women across the country, laid the

foundation for emergence of MFIs in India.

MFIs and Legal Forms

With the current phase of expansion of the SHG Bank linkage programme

and other mF initiatives in the country, the informal micro finance sector in India is

now beginning to evolve. The MFIs in India can be broadly sub-divided into three

categories of organizational forms as given in Table 1. While there is no published

data on private MFIs operating in the country, the number of MFIs is estimated to be

around 800. However, not more than 10 MFIs are reported to have an outreach of

100,000 micro finance clients. An overwhelming majority of MFIs are operating on a

smaller scale with clients ranging between 500 to 1500 per mFI. The geographical

distribution of MFIs is very much lopsided with concentration in the southern India

where the rural branch network of formal banks is excellent. It is estimated that the

share of MFIs in the total micro credit portfolio of formal & informal institutions is

about 8 percent.

MFIs:There are a large number of NGOs that have undertaken the task of financial

intermediation. Majority of these NGOs are registered as Trust or Society. Many

NGOs have also helped SHGs to organize themselves into federations and these

federations are registered as Trusts or Societies. Many of these federations are

performing non-financial and financial functions like social and capacity building

activities, facilitate training of SHGs, undertake internal audit, promote new groups,

and some of these federations are engaged in financial intermediation. The NGO

MFIs vary significantly in their size, philosophy and approach. Therefore these NGOs

are structurally not the right type of institutions for undertaking financial

intermediation activities, as the byelaws of these institutions are generally restrictive

in allowing any commercial operations. These organizations by their charter are non-

profit organizations and as a result face several problems in borrowing funds from

higher financial institutions. The NGO MFIs, which are large in number, are still


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outside the purview of any financial regulation. These are the institutions for which

policy and regulatory framework would need to be established.

Non-Profit Companies as MFIs: Many NGOs felt that combining financial

intermediation with their core competency activity of social intermediation is not the

right path. It was felt that a financial institution including a company set up for this

purpose better does banking function. Further, if MFIs are to demonstrate that

banking with the poor is indeed profitable and sustainable, it has to function as a

distinct institution so that cross subsidization can be avoided. On account of these

factors, NGO MFIs are of late setting up a separateNon-Profit Companies for their

micro finance operations. The mFI is prohibited from paying any dividend to its

members. In terms of Reserve Bank of Indias Notification dated 13 January 2011,

relevant provisions of RBI Act, 1934 as applicable to NBFCs will not apply for

NBFCs (i) licensed under Section 25 of Companies Act, 1956, (ii) providing credit

not exceeding Rs. 50,000 ($1112) for a business enterprise and Rs. 1, 25,000 ($2778)

for meeting the cost of a dwelling unit to any poor person, and, (iii) not accepting

public deposits.

Mutual Benefit MFIs: The State Cooperative Acts did not provide for an

enabling framework for emergence of business enterprises owned, managed and

controlled by the members for their own development. Several State Governments

therefore enacted the Mutually Aided Co-operative Societies (MACS) Act for

enabling promotion of self-reliant and vibrant co-operative Societies based on thrift

and self-help. MACS enjoy the advantages of operational freedom and virtually no

interference from government because of the provision in the Act that societies under

the Act cannot accept share capital or loan from the State Government. Many of the

SHG federations, promoted by NGOs and development agencies of the State

Government, have been registered as MACS. Reserve Bank of India, even though

they may be providing financial service to its members, does not regulate MACS.

For-Profit MFIs: Non Banking Financial Companies (NBFC) are companies

registered under Companies Act, 1956 and regulated by Reserve Bank of India.

Earlier, NBFCs were not regulated by RBI but in 1997 it was made obligatory for

NBFCs to apply to RBI for a certificate of registration and for this certificate NBFCs


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were to have minimum Net Owned funds of Rs 25 lakhs and this amount has been

gradually increased. RBI introduced a new regulatory framework for those NBFCs

who want to accept public deposits. All the NBFCs accepting public deposits are

subjected to capital adequacy requirements and prudential norms. There are only a

few MFIs in the country that are registered as NBFCs. Many MFIs view NBFCs more

preferred legal form and are aspiring to be NBFCs but they are finding it difficult to

meet the requirements stipulated by RBI. The number of NBFCs having exclusive

focus on mF is negligible.

Capital Requirements

NGO-MFIs, non-profit companies MFIs, and mutual benefit MFIs are

regulated by the specific act in which they are registered and not by the Reserve Bank

of India. These are therefore not subjected to minimum capital requirements,

prudential norms etc. NGO MFIs to become NBFCs are required to have a minimum

entry capital requirement of Rs. 20 million ($ 0.5 million). As regards prudential

norms, NBFCs are required to achieve capital adequacy of 12% and to maintain liquid

assets of 15% on public deposits.

Foreign Investment

Foreign investment by way of equity is permitted in NBFC MFIs subject to a

minimum investment of $500,000. In view of the minimum level of investment, only

two NBFCs are reported to have been able to raise the foreign investment. However, a

large number of NGOs in the development - empowerment are receiving foreign fund

by way of grants. At present, over Rs.40, 000 million ($ 889 million) every year flows

into India to NGOs for a whole range of activities including micro finance. In a way,

foreign donors have facilitated the entry of NGOs into micro finance operations

through their grant assistance.

Deposit Mobilization

Notfor profit MFIs are barred, by the Reserve Bank of India, from mobilizing

any type of savings. Mutual benefit MFIs can accept savings from their members.

Only rated NBFC MFIs rated by approved credit rating agencies are permitted to


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accept deposits. The quantum of deposits that could be raised is linked to their net

owned fund.

Borrowings

Initially, bulk of the funds required by MFIs for on lending to their clients

were met by apex institutions like National Bank for Agriculture and Rural

Development, Small Industries Development Bank Of India, and, Rashtiya Mahila

Kosh. In order to widen the range of lending institutions to MFIs, the Reserve Bank of

India has roped in Commercial Banks and Regional Rural Banks to extend credit

facilities to MFIs since February 2011. Both public and private banks in the

commercial sector have extended sizeable loans to MFIs at interest rate ranging from

8 to 11 per cent per annum. Banks have been given operational freedom to prescribe

their own lending norms keeping in view the ground realities. The intention is to

augment flow of micro credit through the conduit of MFIs. In regard to external

commercial borrowings (ECB) by MFIs, not-for-profit MFIs are not permitted to raise

ECB. The current policy effective from 31 January 2004, allows only corporate

registered under the Companies Act to access ECB for permitted end use in order to

enable them to become globally competitive players.

Interest Rates

The interest rates are deregulated not only for private MFIs but also for formal

banking sector. In the context of softening of interest rates in the formal banking

sector, the comparatively higher interest rate (12 to 24 per cent per annum) charged

by the MFIs has become a contentious issue. The high interest rate collected by the

MFIs from their poor clients is perceived as exploitative. It is argued that raising

interest rates too high could undermine the social and economic impact on poor

clients. Since most MFIs have lower business volumes, their transaction costs are far

higher than that of the formal banking channels. The high cost structure of MFIs

would affect their sustainability in the long run.


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Collateral requirement

All the legal forms of MFIs have the freedom to waive physical collateral

requirements from their clients. The credit policy guidelines of the RBI allow even

the formal banks not to insist on any type of collateral and margin requirement for

loans up to Rs 50,000 ($1100).

Regulation & Supervision

India has a large number of MFIs varying significantly in size, outreach and credit

delivery methodologies. Presently, there is no regulatory mechanism in place for

MFIs except for those that are registered as NBFCs. As a result, MFIs are not required

to follow standard rule and it has allowed many MFIs to be innovative in its approach

particularly in designing new products and processes. But the flip side is that the

management and governance of MFIs generally remains weak, as there is no

compulsion to adopt widely accepted systems, procedures and standards. Because the

sector is unregulated, not much is known about their internal health. Following

Committees have examined the road map for regulation and supervision of MFIs

Task Force (appointed by NABARD) Report on Regulatory and Supervision.

Framework for MFIs, 1999. (Kindly see publications Section for a complete report

Working Group (constituted by Government of India) on Legal & Regulation of

MFIs, 2002

Informal Groups (appointed by RBI) on Micro Finance which studied issues relating

to (i) Structure & Sustainability, ii) Funding (iii) Regulations and (iv) Capacity

Building, 2003

Advisory Committee (appointed by RBI) on flow of credit to agriculture and related

activities from the Banking System, 2004

To address the issue of need for a differential regulatory framework, the latest

committee sought answers to the following questions and concerns facing private

MFIs in the Country:


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(i) Is non-existence of a separate differential regulatory framework a critical

bottleneck hindering the growth of the sector?

(ii)Will MFIs be sustainable in medium term? If so, will they continue to focus on the

poor?

(iii)Is access to public / member deposit the key issue for their sustainability?

(iv)Can MFIs finance loans for income generation at interest rates, which are

sustainable by the rural poor?

(v)Is it possible to evolve commonly agreed standards for MFI sector covering

performance, accounting and governance issues,

which can open up possibilities of self-regulation?

(vi)Has the sector reached a critical mass where regulation becomes important?

An Effective Poverty Reduction Strategy

Microfinance is often considered one of the most effective and flexible strategies in

the fight against global poverty. It is sustainable and can be implemented on the

massive scale necessary to respond to the urgent needs of those living on less than $1a day, the Worlds poorest.

Microfinance consists of making small loans, usually less than $200, to individuals,

usually women, to establish or expand a small, self-sustaining business.For example,

a woman may borrow $50 to buy chickens so she can sell eggs. As the chickens

multiply, she will have more eggs to sell. Soon she can sell the chicks. Each

expansion pulls her further from the devastation of poverty.

Microfinance, the Garmin way, includes several support systems that contribute

greatly to its success.Microfinance institutions offer business advice and counseling,

while clients provide peer support for each other through solidarity circles. For

example, if a client falls ill, her circle helps with her business until she is well. If a

client gets discouraged, the support group pulls her through. This contributes

substantially to the extremely high repayment rate of loans made to microfinance

entrepreneurs.


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An equally important part of microfinance is the recycling of funds . As loans are

repaid, usually in six months to a year, they are re-loaned. This continual reinvestment

multiplies the impact of each dollar loaned.

Microfinance has a positive impact far beyond the individual client.The vast majority

of the loans go to women because studies have shown that women are more likely to

reinvest their earnings in the business and in their families. As families cross the

poverty line and micro-businesses expand, their communities benefit. Jobs are

created, knowledge is shared, civic participation increases, and women are recognized

as valuable members of their families and communities.

Microfinance is often considered one of the most effective and flexible strategies in

the fight against global poverty. It is sustainable and can be implemented on the

massive scale necessary to respond to the urgent needs of those living on less than $1

a day, the Worlds poorest.

Microfinance consists of making small loans, usually less than $200, to individuals,

usually women, to establish or expand a small, self-sustaining business. For example,

a woman may borrow $50 to buy chickens so she can sell eggs. As the chickens

multiply, she will have more eggs to sell. Soon she can sell the chicks. Eachexpansion pulls her further from the devastation of poverty.

Microfinance, the Garmin way, includes several support systems that contribute

greatly to its success.Microfinance institutions offer business advice and counseling,

while clients provide peer support for each other through solidarity circles. For

example, if a client falls ill, her circle helps with her business until she is well. If a

client gets discouraged, the support group pulls her through. This contributes

substantially to the extremely high repayment rate of loans made to microfinance

entrepreneurs.

An equally important part of microfinance is the recycling of funds. As loans are

repaid, usually in six months to a year, they are re-loaned. This continual reinvestment

multiplies the impact of each dollar loaned.

Microfinance has a positive impact far beyond the individual client.The vast majority

of the loans go to women because studies have shown that women are more likely to

reinvest their earnings in the business and in their families. As families cross the


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poverty line and micro-businesses expand, their communities benefit. Jobs are

created, knowledge is shared, civic participation increases, and women are recognized

as valuable members of their families and communities.

What is microfinance?

To most, microfinance means providing very poor families with very small

loans (microcredit) to help them engage in productive activities or grow their tiny

businesses. Over time, microfinance has come to include a broader range of services

(credit, savings, insurance, etc.) as we have come to realize that the poor and the very

poor who lack access to traditional formal financial institutions require a variety of

financialproducts.

Microcredit came to prominence in the 1980s, although early experiments date back

30 years in Bangladesh, Brazil and a few other countries. The important difference of

microcredit was that it avoided the pitfalls of an earlier generation of targeted

development lending, by insisting on repayment, by charging interest rates that could

cover the costs of credit delivery, and by focusing on client groups whose alternative

source of credit was the informal sector. Emphasis shifted from rapid disbursement of

subsidized loans to prop up targeted sectors towards the building up of local,

sustainable institutions to serve the poor. Microcredit has largely been a private (non-

profit) sector initiative that avoided becoming overtly political, and as a consequence,

has outperformed virtually all other forms of development lending.

Traditionally, microfinance was focused on providing a very standardized credit

product. The poor, just like anyone else, need a diverse range of financial instruments

to be able to build assets, stabilize consumption and protect themselves against risks.

Thus, we see a broadening of the concept of microfinance--our current challenge is to

find efficient and reliable ways of providing a richer menu of microfinance products.

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 are typically 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


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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.

Access to conventional formal financial institutions, for many reasons, is directly

related to income: the poorer you are, the less likely that you have access. On the

other hand, the chances are that, the poorer you are, the more expensive or onerous

informal financial arrangements. Moreover, informal arrangements may not suitably

meet certain financial service needs or may exclude you anyway. Individuals in this

excluded and under-served market segment are the clients of microfinance.

As we broaden the notion of the types of services microfinance encompasses, the

potential market of microfinance clients also expands. For instance, microcredit 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.

How does microfinance help the poor?

Experience shows that microfinance can help the poor to increase income,

build viable businesses, and reduce their vulnerability to external shocks. It can also

be a powerful instrument for self-empowerment by enabling the poor, especially

women, to become economic agents of change.

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.

.


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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 microloan. 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.

The microfinance institution could subsidize the loans to make the credit more

"affordable" to the poor. Many do. However, the institution then depends on

permanent subsidy. Subsidy-dependent programs are always fighting to maintain their

levels of activity against budget cuts, and seldom grow significantly.

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. Many of the

economic activities in which the poor engage are relatively low return on labor, and

access to liquidity and capital can enable the poor to obtain higher returns, or to take

advantage of economic opportunities. The return received on such investments maywell be many times greater than the interest rate charged.

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


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dwelling-burial-weddings.

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 cycle. Most often, the poor not only have low income, but also

irregular income flows. Thus, to maximize the savings propensity of the poor,

institutions must provide flexible opportunities--- both in terms of amounts deposited

and the frequency of pay ins and pay outs. This represents an important challenge for

the microfinance industry that has not yet made a concerted attempt to profitably

capture deposits.

What is a Microfinance Institution (MFI)?

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 microcredit NGOs are not

allowed to capture savings deposits from the general public. This group of a few

hundred NGOs have led the development of microcredit, and subsequently

microfinance, the world over. Most of these constitute a group that is commonly


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referred to as "best practice" organizations, ones that employ the newest lending

techniques to generate efficient outreach that permit them to reach down far into poor

sectors of the economy on a sustainable basis. 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

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

offer 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

themselves 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 down market as far as the financial NGOs.

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.


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

clients perform less well as a group than those who reach out to a somewhat 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.

Are commercial banks involved in microfinance?

Yes. Increasingly, formal financial institutions are recognizing the benefits of serving

poorer clients. For more information, see the following documents in the

Microfinance Gateway Library:

CGAP: 227 Formal Financial Institutions

http://microfinancegateway.org/content/article/detail/18156

Thirty Global Examples of Commercial Banks and Formal Financial Institutions

(FFIs) with Established Microfinance Service

http://microfinancegateway.org/content/article/detail/21504

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 sporadically (unwillingness to be tough on defaulters). In urban areas,

governments never really got into the act, and subsidized microenterprise credit is still

relatively rare when compared 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
http://microfinancegateway.org/content/article/detail/18156http://microfinancegateway.org/content/article/detail/21504http://microfinancegateway.org/content/article/detail/21504http://microfinancegateway.org/content/article/detail/21504http://microfinancegateway.org/content/article/detail/18156


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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.

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.

What is the role of the financial regulator in supporting the

developmenttofmicrofinance?

Many feel that the most important role of a financial regulator in supporting the

development of microfinance is to create an alternative institutional type that allows

sound financial NGOs, credit unions, and other community-based intermediaries to

obtain a license to offer deposit services to the general public and obtain funds

through apex organizations. In a few countries, this may be an appropriate strategy. In

most countries, however, the general level of development of the microfinance

industry does not yet warrant the licensing of a separate class of financial institutions

to serve the poor. And, in most countries, budgetary restrictions faced by bank

regulators make it very unlikely that they will be able to supervise a whole host of

small institutions; these institutions' total assets may make up a tiny percent of the

total financial system, but the cost of adequate supervision could eat up between 25

and 50% of the total budget of the agency. Rather, regulators can work with the

nascent microfinance industries of most countries on issues such as modifying usury

limits as stated in the commercial code to allow appropriate levels of interest,

generating credit information clearinghouses to share information on defaulting

borrowers to limit their ability to go from one MFI to another, working with civil

authorities to ensure that private loan contracts can be recognized by courts in those

transition economies that lack even basic legislative infrastructure, and reporting

requirements that will prepare MFIs to eventually become regulated. Regulators can

also examine the laws, executive decrees, and internal regulations that limit the ability


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of traditional banking institutions to do microfinance. These regulations include limits

on the percent of a loan portfolio that can be lent on an unsecured basis, limits on

group guarantee mechanisms, reporting requirements, limits on branch office

operations (scheduling and security), and requirements for the contents of loan files.

When is microfinance not an appropriate tool?

Microfinance increasingly refers to a host of financial servicessavings, loans,

insurance, remittances from abroad, and other products. 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 microcredit. Microcredit 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

Often times governments and aid agencies wish to use microfinance as a tool to

compensate for some other social problem such as flooding, relocation of refugees

from civil strife, recent graduates from vocational training, and redundant workers

who have been laid off. Since microcredit has been sold as a poverty reduction tool, it

is often expected to respond to these situations where whole classes of individualshave been made poor. Microcredit programs directed at these types of situations

rarely work. Credit requires a 98% hit rate to be successful. This means that 98% of

recent vocational school graduates or returning refugees would need to be successful

in establishing a microenterprise for repayment rates to be high enough to allow for a

program's overall sustainability. This is simply unrealistic. Running a program with

substantial default rates undermines the very notion of credit and destroys credit

discipline among those who could repay promptly but who look foolish given that

many do not. Microcredit 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 microcredit.


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What is Micro Credit?

Micro Credit is defined as provision of thrift, credit and other financial services and

products of very small amount to the poor in rural, semi-urban and urban areas for

enabling them to raise their income levels and improve living standards. Micro Credit

Institutions are those which provide these facilities.

What are the interest rates applicable?

The reform of the interest rate regime has constituted an integral part of the financial

sector reforms initiated in our country in 1991. In consonance with this reform

process, interest rates applicable to loans given by banks to micro credit organizations

or by the micro credit organizations to Self-Help Groups/member-beneficiaries has

been left to their discretion. The interest rate ceiling applicable to direct small loans

given by banks to individual borrowers, however, continues to remain in force.

What are the terms & conditions for accessing micro credit?

Banks have been given freedom to formulate their own lending norms keeping in

view ground realities. They have been asked to devise appropriate loan and savings

products and the related terms and conditions including size of the loan, unit cost, unit

size, maturity period, grace period, margins, etc. Such credit covers not only

consumption and production loans for various farm and non-farm activities of the

poor but also include their other credit needs such as housing and shelter

improvements.

What is the difference between microfinance and microcredit?

Microfinance refers to loans, savings, insurance, transfer services and other financialproducts 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

collateral, to an individual or through group lending.


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What role does a Non-Governmental Organization (NGO) play in

provision of Micro Credit?

A Non-Governmental Organization (NGO) is a voluntary organization established to

undertake social intermediation like organizing SHGs of micro entrepreneurs and

entrusting them to banks for credit linkage or financial intermediation like borrowing

bulk funds from banks for on-lending to SHGs.

What are the latest Micro Credit disbursement indicators?

With a view to facilitating smoother and more meaningful banking with the poor, A

pilot project for purveying micro credit by linking Self-Help Groups (SHGs) with

banks was launched by NABARD in 1991-92 with a view to facilitating smoother and

more meaningful banking with the poor. RBI had then advised commercial banks to

actively participate in this linkage programmed. The scheme has since been extended

to RRBs and co-operative banks. The number of SHGs linked to banks aggregated

4,61,478 as on March 31, 2002. This translates into an estimated 7.87 million very

poor families brought within the fold of formal banking services as on March 31,

2002. More than 90 per cent of the groups linked with banks are exclusive women

groups. Cumulative disbursement of bank loans to these SHGs stood at Rs. 1026.34

crores as on March 31, 2002 with an average loan of Rs. 22,240=00 per SHG and Rs.

1,316=00 per family. As regards model-wise linkage, while Model I, viz. directly to

SHGs without intervention/facilitation of any NGO now accounts for 16%, Model II,

viz. directly to SHGs with facilitation by NGOs and other formal agencies amounts to

75% and Model III, viz. through NGO as facilitator and financing agency represents

09% of the total linkage. While 488 districts in all the states/UTs have been covered

under this programmed, 444 banks including 44 commercial banks (including 17 in

the private sector), 191 RRBs and 209 co-operative banks along with 2,155 NGOs are

now associated with the SHG-bank linkage programmed.

While the SHG-bank linkage programmed has surely emerged as the dominant micro

finance dispensation model in India, other models too have evolved as significant

micro finance purveying channels.

The other successful models that have emerged are:


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(a) An Intermediate Model that works on banking principles with focus on both

savings and credit activities and where banking services are provided to the clients

either directly or through SHGs;

(b)There is also a Wholesale banking Model where the clients comprise NGOs, MFIs

and SHG Federations. This Model involves a unique package of providing both loans

and capacity building support to its partners; and

(c) Further, there is an Individual Banking-based Model that has its clients as

individuals or joint liability groups. While programmed management and client

appraisal in this Model may be a challenge, it is best suited to lending to enterprises.

Keeping these validated models for delivery of credit to the poor and the unorganized

sector in view, RBI is moving towards a systems perspective for providing effective

policy support not only because a number of different institutions, viz. banks, MFIs,

NGOs & SHGs are involved, but also because these institutions have very different

institutional goals. With this in view, a series of initiatives is being planned in the

coming months for putting in place a more vibrant micro finance dispensation

environment in the country where complementary and competitive models of micro

finance delivery would be encouraged to co-exist.

Is Foreign Investment allowed in Micro Credit projects?

Govt. of India vide their notification dated August 29, 2011 have included Micro

Credit/Rural Credit in the list of permitted non-banking financial company (NBFC)

Activities for being considered for Foreign Direct Investment (FDI)/Overseas

Corporate Bodies (OCB)/Non-Resident Indians (NRI) investment to encourage

foreign participation in micro credit projects. This covers credit facility at micro levelfor providing finance to small producers and small micro enterprises in rural and

urban areas.

What is the Micro Finance Development Fund?

There is an urgent need for micro credit providers to shift from a minimalist approach

that is offering only financial intermediation to an integrated approach to poverty

alleviation taking a more holistic view of the client including provision of enterprise

development services like marketing infrastructure, introduction of technology and


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design development. In this context, the setting up of the Micro Finance Development

Fund marks an important step. Pursuant to the announcement of Union Finance

Minister in his budget speech for the year 2011-01, this Rs. 100 crore Fund has been

created in NABARD to support broadly the following activities: (a) giving training

and exposure to self-help group (SHG) members, partner NGOs, banks and govt.

agencies; (b)providing start-up funds to micro finance institutions and meeting their

initial operational deficits; (c)meeting the cost of formation and nurturing of SHGs;

(d)designing new delivery mechanisms; and (e)promoting research, action research,

management information systems and dissemination of best practices in micro

finance. This Fund is thus expected to address institutional and delivery issues like

institutional growth and transformation, governance, accessing new sources of

funding, building institutional capacity and increasing volumes. RBI and NABARD

have contributed Rs. 40 crore each to this Fund. The balance Rs. 20 crore were

contributed by 11 public sector banks.

How many types of micro credit providers are there in India and

what is the present legal framework governing them ?

The position is as under:

Categories of Providers Legal Framework governing their activities

(a) Domestic Commercial Banks:

Public Sector Banks;

Private Sector Banks &

Local Area Banks

(i) RBI Act 1934/

(ii) BR Act 1949

(iii) SBI Act

(iv) SBI Subsidiaries Act

(v) Acquisition & Transfer of Undertakings Act

1970 & 1980

(b) Regional Rural Banks RRB Act 1976

RBI Act 1934

BR Act 1949

(c) Co-operative Banks Co-operative Societies Act

BR Act 1949 (AACS)

RBI Act 1934 (for sch. banks)


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(d) Co-operative Societies (i) State legislation like MACS

(e) Registered NBFCs (i) RBI Act 1934

(ii) Companies Act 1956

(f) Unregistered NBFCs (i) NBFCs carrying on the business of a FI prior to

the coming into force of RBI Amendment Act 1997

whose application for CoR has not yet been rejected

by the Bank

(ii) Sec. 25 of Companies Act

(g) Other providers like Societies,

Trusts, etc.

(i) Societies Registration Act 60

(ii) Indian Trusts Act

(iii) Chapter IIIC of RBI Act 34

(iv) State Moneylenders Act.

ASSESSING A SELF HELP GROUP

What is Self-Help Group (SHG)?

A Self-Help Group (SHG) is a registered or unregistered group of micro entrepreneurs

having homogenous social and economic background voluntarily, coming together to

save small amounts regularly, to mutually agree to contribute to a common fund and

to meet their emergency needs on mutual help basis. The group members use

collective wisdom and peer pressure to ensure proper end-use of credit and timely

repayment thereof. In fact, peer pressure has been recognized as an effective

substitute for collaterals.

What are the advantages of financing through SHGs?

An economically poor individual gain strength as part of a group. Besides, financing

through SHGs reduces transaction costs for both lenders and borrowers. While lenders

have to handle only a single SHG account instead of a large number of small-sized

individual accounts, borrowers as part of a SHG cut down expenses on travel (to &


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from the branch and other places) for completing paper work and on the loss of

workdays in canvassing for loans.

The norms for SHGs in a particular place may have to be developed keeping in view

the local conditions. The above pattern is only a model and indicative one and could

be used as the basis for developing suitable norms for financing SHGs be it banks or

any other financing institution. A few proactive commercial banks, Regional Rural

Banks and Cooperative Banks have already introduced their own norms and the same

is being followed by the financing units.

This note may be read with NABARD circular letter dated February 2011, which also

shares different formats for appraising a SHG for finance.

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

loan and repayment of the loan. Bankers generally appraise the project and the

borrower. In case of SHG financing, most of the project appraisal norms

like assessing the cost benefit and profits will not be workable due to the peculiarities

of SHG financing. For considering a loan application for financing the Financer has to

evaluate the capacity and character of the prospective borrower. SHGs also

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

assessment of creditworthiness of a SHG is very different from that of an individual.SHGs are not to be assessed in terms of their ability to provide collateral or

guarantees of net worth. The SHGs have to be assessed in terms of Group dynamics

like cohesion, vibrancy, goal-oriented action, participation of members, democratic

decision and collective leadership. The appraiser has to see whether the group is

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

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

discipline and whether it is sustainable.

The basic principles on which the SHGs function are:

The members of the groups should be residents of the same area and musthave an affinity. Homogeneity of relationship could be in terms of

caste/occupation/gender or economic status (which is critical).

Savings first, credit thereafter SHGs should hold regular meetings SHGs should maintain record of financial and other transactions They should have norms regarding membership, meetings etc.


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Group leaders should be elected by members and rotated periodically. Transparency in operations of the group and participatory decision making. Rates of interest on loans should be decided by the group Group liability and peer pressure to act as substitutes for traditional collateral.

For assessing a Self Help Group the important aspects that a financer should

look into include.

Norms for functioning:

The SHG should have developed some kind of norms for its functioning the norms

should be covering major areas of its functioning as well as the decision making

processes, leadership etc., Norms generally relate to-

Membership

Meetings - time, periodicity

Savings - amount, periodicity, rate of interest (return)

Credit - procedure for sanction, ceiling amount, purposes, rate of interest to be

charged, repayment period etc.

Fines - in case of default in attending meetings, savings and credit repayment. Group

may also levy fines for any deviant behavior etc

Leadership - election or nomination of leaders, rotation of leaders etc.

Personal/Social improvement - minimum literacy level to be achieved, social work to

be done etc.

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

or they may evolve over a period of time depending upon the need of the group. The

important aspect to be looked into are:

How norms evolved, whether by the consensus of the whole group. Whether the members are aware of the norms (even if they are oral) and

understand them.

Whether the norms are implemented.Meetings

The group decides the periodicity of the meetings i.e., weekly, fortnightly or monthly.

They also decide on the time of the meeting. Decision on time and periodicity helps in

regular conduct of meetings. The regularity in the holding of the meeting and the


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attendance during meeting gives an indication bout groups functioning. Therefore a

Financer should see whether.

The meetings have been held regularly.

The attendance in the meetings. The members are punctual and stay till the end of the meeting. Are there any sanctions for the delinquent members ?

The Financier can use his observations during the meetings and the meeting register

to get data on this appraisal aspect.

Maintenance of Books

Whether group is maintaining the basic books that will give details of its functioningand accounts of the group is an important criterion to be judged. The books should

give the details of number of meetings held, decisions taken in the meetings, amount

of savings of the members and credit availed, the total savings of the group and

repayments. Who maintains these books is another important criteria for judging the

group. Do members maintain it, if not are they making efforts to achieve basic

numeracy or literacy so that they can start doing it themselves.

Financer has to verify:

Whether details of meetings, proceedings, and attendance are maintained.

Whether member-wise record of saving and credit are maintained.

Whether the records are up to date.

Whether all members are kept informed of their savings and credit balances from time

to time.

In case of illiterate groups whether what is the system followed, does the group verify

the books maintained by NGO/outsider.

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


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Leadership

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

leaders may be the leaders and over a period of time they are expected to be take

turns. The group leaders are expected to a) regularly convene and conduct the

meetings, b) help the group members in taking decisions, c) resolve conflicts, d)

maintain books of account and e) approach bank branch for operation of accounts.The

aspects that are to be seen are :

Whether the leaders have been elected and rotated.

Whether they help in democratic functioning of the group.

Whether there is a conscious attempt to groom other members to take up leadership

Are they marginalizing the benefits (especially loans)

Participation and Awareness of Group Members

Are the Members aware of the purpose of group formation, the operations and

activities of the group viz. The savings and the credit of the group as well as the

individual members savings and credit details.

Do they participate in group discussions and decision making? Do they help solve the problem that are raised in the meetings? Do they work cohesively and have transparent dealings?

The democratic character of the group may be judged by attending one or two

meetings and talking to individual members. The awareness level of members helps

in healthy functioning of the group and resolution of conflicts within the group.

Savings :

The group decides on the amount of savings as also its periodicity. It has to be seen

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

with and whether the system is modified as per the requirements of the members.

Credit:

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

The decision making process of selecting loanees


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The system followed in assessing credit requirement of individual membersand the amount to be sanctioned.

The system of monitoring the credit.

The repayment performance of members and incidence of defaults besides theeffectiveness to deal with such defaults; whether the concept of `peer pressure

is working.

Self Reliance of the Group

Can the group function on its own without the support of the NGO is an important

criterion for assessment? The level of dependency on the NGO/promoter of the group

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

What is Unique about the SHGs and Linkage Programmed?

Decision

making

Members make decisions collectively. SHG concept offers

opportunity for participative decision making on conduct of

meetings, thrift and credit decisions. The participative process

makes the group a responsible borrower.

Financial

services

SHGs provide the needed financial services to the members at

their doorstep. The rural poor needs different types of

financial services, viz. Savings, consumption credit,

production credit, insurance, remittance facilities etc. The

platform of SHG provides the possibility to converge these

services.

Supplement

ary to

formal

banking

SHG linkage does not supplant the existing banking system,

but it supplements it thus taking full advantage of the

resources and other advantages of the banking system.


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Cutting

costs

SHG linkage cuts costs for both banks and borrowers. In a

study sponsored by FDC, Australia, it was observed that the

reduction in costs for the bankers is around 40 % as

compared to IRDP loans. The poor have a net advantage of 85

% as compared to individual borrowing. Similar finding was

also observed in a NABARD study.

NPA Savvy The Linkage mechanism has proved that the repayments are

as high as 95% - 100 %

Peerpressue

as collateral

The SHG linkage emphasizes peer pressure within the group

as collateral substitute.

Quality

clients

The SHGs are turning out to be quality clients in view of

better credit management, mobilization of thrift, low

transaction costs and near full repayments.

Client

preparation

The members of the SHGs could over a period of time, very

selectively graduate to the stage of micro entrepreneurship

and have been prepared with requisite credit discipline.

Social

agenda

Available statistics indicate dependency of 35%-40% of rural

households on non-institutional sources for credit needs. SHG

Linkage offers a better way of dealing with the magnitude of

social agenda. Many NGOs/ Governments have recognized

the SHG as a vehicle for carrying and deepening of their

developmental agenda/ delivery of services.

Exclusive

poor focus

SHGs have exclusive focus on absolute have-nots, who have

been bypassed by the banking system. Social banking does

not have any meaning if the lowest strata and the unreachedss

are not focused.


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No-subsidy-

dependence

syndrome

The programme does not envisage any subsidy support from

the government in the matter of credit. The issue is to build

capabilities and enterprise of the individual members,

blending with group cohesion and solidarity through training

provided by a SHPI to set the ball rolling for the SHG.

India Advisory Council

Vikram Gandhi, Chair

Vikram Gandhi is Head of the Global Financial Institutions Group (FIG) at CreditSuisse. In addition to significant client responsibilities, Mr. Gandhi is responsible for

the coordination and integration of CSFBs financial institutions capabilities acrossa

wide range of advisory and financing products, including derivatives and structure

products.

Before joining CSFB, Mr. Gandhi spent 16 years at Morgan Stanley where he held

various positions including the Co-Head of the Financial Institutions Practice; Head

of Institutional Strategy and Business Development; Chief Operating Officer for the

Firms E-Commerce Steering Committee; and President, Morgan Stanley India.

Mr. Gandhi has a wealth of experience in being involved in various Financial

Institutions high-profile M&A transactions and financings across the globe; such as

Bank of Americas acquisition of Fleet, the sale of National Processing Company to

Bank of America, merger of Chase Manhattan and Chemical Bank, the sale of First

Fidelity to First Union, and Bank of Bostons acquisition to Bay Bank.

Mr. Gandhi received his B. Com from the University of Bombay and an MBA from

the Harvard Business School, where he was designed a Baker Scholar. He is also a

qualified Chartered Accountant.

Susan Davis, Member

Susan serves as the Vice President and Director of Global Academy for Social

Entrepreneurship. She oversees expansion to the Middle East and Central Asia region.


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Susan also acts as an advisor to the International Labor Organization and

Environmental Defense. In 1997, she helped to found and now chairs the board of the

Grameen Foundation. She also serves on the boards of Project Enterprise and Aid to

Artisans. Susan is a member of the Positive Futures Network and serves on the

Human Rights Advisory Council of the Ethical Globalization Initiative. Susan lived in

Bangladesh from 1987-1991 where she worked for the Ford Foundation and was

responsible for the organizing the donor consortia to scale up Grameen Bank, BRAC

and Proshika. She also started Ashoka's program in Bangladesh and was its first

volunteer representative. She was educated at Georgetown, Harvard and Oxford

universities.

RobertEichfeld,Member

During a 33-year career with Citigroup, Mr. Eichfeld managed many of

Citibank's country and regional activities in postings throughout the Caribbean,

Brazil, India, Indonesia, New Zealand, Pakistan and Saudi Arabia. While abroad, he

also served on the boards of several business and community affairs organizations

including chairing various school boards. Since 2011, he has continued to use the

unique business and cultural awareness skills that arise from having lived in or

traveled to over 100 countries. He has advised a de-novo venture capital fund inDubai, and with other investors, helped to set up a new Islamic bank in Bahrain. He

advised Harvard Business School when it established its executive training program

for the Middle East and he is currently a member of the Global Advisory Council at

his alma mater, the Garvin School of International Management at Thunderbird. He

also remains active in Rotary, particularly with Rotarys international microfinance

and other social development programs and is a member of the International

Executive Services Corps and the Financial Services Volunteer Corps. . Bobs other

interests include international current affairs, tennis, hiking, rafting, extensive travel.

Jim Greenberg, Member

Chairman and CEO of DevCorp International, Greenberg developed and

managed two large joint venture companies in Saudi Arabia as General Manager. In

1995 he became the founding partner of DevCorp International E.C., a GCC based

venture development and investment company with active projects spanning shrimp

farming, petrochemicals, light manufacturing, and telecoms/IT. Jim is a 1968


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Graduate of West Point and holds advanced degrees from Harvard Business School,

the University of Southern California, and the Industrial College of the Armed Forces.

Elke Ward-Smith, Member

Elke Ward-Smith, a multilingual German citizen, started her 20 year banking

career at Citibank NY with assignments in Latin America, Europe and Asia.

Documents

Micro Finance in India