A Critical Analysis of Micro Finance in India

Aditi707 · Sep 5, 2014

Description
Microfinance is defined as any activity that includes the provision of financial services such as credit, savings, and insurance to low income individuals which fall just above the nationally defined poverty line, and poor individuals which fall below that poverty line, with the goal of creating social value.

Project Report on
“A critical analysis of Micro finance in India”
SUBMITTED BY:
ARVIND KUMAR PANDEY
Master of Business Administration
(Finance)
S!"ine Business Sc#oo"
$ur%aon
&'())')**+,
1
Tale of !ontents
!"apter #$Introd%ction&&&&&&&&&&&&&&&&&&&&&&&'''''''''''''''''''''(
)-) Microfinance Definition...........................,
)-/ Strate%ic Po"ic! Initiati0es..........................-1
)-, Acti0ities in Microfinance..........................-1
)-1 2e%a" Re%u"ations.............................--+
!"apter )$Micro$*inance in India'''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''+
/-) Distri3ution of Inde3ted Rura" 4ouse#o"ds5 A%enc! 6ise..............*
/-/ Re"ati0e s#are of Borro6in% of 7u"ti0ator 4ouse#o"ds...............-(
/-, Distri3ution 3ased on Asset si8e of Rura" 4ouse#o"ds...............--'
/-1 Banin% E9:ansion............................--)&
/-+ Microfinance Socia" As:ects..............--------------------------------------------))
!"apter ($ Self ,elp -ro%ps.........................--)/
,-) 4o6 se"f;#e": %rou:s 6or.........................-)/
,-/ Sources of ca:ita" and "ins 3et6een S4$s and Bans..............---),
,-, 4o6 S4$s sa0e.............................---),
,-1 S4$s;Ban 2ina%e Mode".........................-)1
,-+ 2ife insurances for se"f;#e": %rou: mem3ers..................--)*
!"apter .$Microfinance Models........................-)<
!"apter /$ Role0 *%nctions and 1or2in3 Mec"anis4 of *inancial Instit%tions....---/&
+-) I7I7I Ban...............................---/&
+-/ Band#an................................---/1
+-, $rameen Ban..............................-/*
+-1 SKS Microfinance............................./<
!"apter +$ Mar2etin3 of Microfinance Prod%cts.................-/'
2
!"apter 5$ S%ccess *actors of Microfinance in India...............---,)
!"apter 6$ Iss%es related to Microfinance in India................--,+
References.................................-,'
!"apter #: Introd%ction
3
Microfinance is defined as an! acti0it! t#at inc"udes t#e :ro0ision of financia" ser0ices suc# as
credit= sa0in%s= and insurance to "o6 income indi0idua"s 6#ic# fa"" >ust a3o0e t#e nationa""!
defined

0ert! "ine= and

or indi0idua"s 6#ic# fa"" 3e"o6 t#at

0ert! "ine= 6it# t#e %oa" of
creatin% socia" 0a"ue- ?#e creation of socia" 0a"ue inc"udes

0ert! a""e0iation and t#e 3roader
im:act of im:ro0in% "i0e"i#ood o:

rtunities t#rou%# t#e :ro0ision of ca:ita" for micro
enter:rise= and insurance and sa0in%s for ris miti%ation and consum:tion smoot#in%- A "ar%e
0ariet! of actors :ro0ide microfinance in India= usin% a ran%e of microfinance de"i0er! met#ods-
Since t#e I7I7I Ban in India= 0arious actors #a0e endea0ored to :ro0ide access to financia"
ser0ices to t#e

or in creati0e 6a!s- $o0ernments a"so #a0e :i"oted nationa" :ro%rams= N$@s
#a0e undertaen t#e acti0it! of raisin% donor funds for on;"endin%= and some 3ans #a0e
:artnered 6it# :u3"ic or%ani8ations or made sma"" inroads t#emse"0es in :ro0idin% suc# ser0ices-
?#is #as resu"ted in a rat#er 3road definition of microfinance as an! acti0it! t#at tar%ets

or and
"o6;income indi0idua"s for t#e :ro0ision of financia" ser0ices- ?#e ran%e of acti0ities undertaen
in microfinance inc"ude %rou: "endin%= indi0idua" "endin%= t#e :ro0ision of sa0in%s and
insurance= ca:acit! 3ui"din%= and a%ricu"tura" 3usiness de0e"o:ment ser0ices- A#ate0er t#e form
of acti0it! #o6e0er= t#e o0erarc#in% %oa" t#at unifies a"" actors in t#e :ro0ision of microfinance
is t#e creation of socia" 0a"ue-
#'# Microfinance Definition
Accordin% to Internationa" 2a3or @r%ani8ation (I2@)= BMicrofinance is an economic
development approach that involves providing financial services through institutions to low
income clientsC-
In India= Microfinance #as 3een defined 3! B?#e Nationa" Microfinance ?asforce= )'''C as
Bprovision of thrift, credit and other financial services and products of very small amounts to the
poor in rural, semi-urban or urban areas for enabling them to raise their income levels and
improve living standardsC-
D?#e

or sta!

or= not 3ecause t#e! are "a8! 3ut 3ecause t#e! #a0e no access to ca:ita"-D
?#e dictionar! meanin% of EfinanceF is mana%ement of mone!- ?#e mana%ement of mone!
denotes acGuirin% H usin% mone!- Micro Finance is 3u88in% 6ord= used 6#en financin% for
4
micro entre:reneurs- 7once:t of micro finance is emer%ed in need of meetin% s:ecia" %oa" to
em

6er under;:ri0i"e%ed c"ass of societ!= 6omen= and

or= do6ntrodden 3! natura" reasons or
men madeI caste= creed= re"i%ion or ot#er6ise- ?#e :rinci:"es of Micro Finance are founded on
t#e :#i"oso:#! of coo:eration and its centra" 0a"ues of eGua"it!= eGuit! and mutua" se"f;#e":- At
t#e #eart of t#ese :rinci:"es are t#e conce:t of #uman de0e"o:ment and t#e 3rot#er#ood of man
e9:ressed t#rou%# :eo:"e 6orin% to%et#er to ac#ie0e a 3etter "ife for t#emse"0es and t#eir
c#i"dren-
?raditiona""! micro finance 6as focused on :ro0idin% a 0er! standardi8ed credit :roduct- ?#e

or= >ust "ie an!one e"se= (in fact need "ie t#irst) need a di0erse ran%e of financia" instruments
to 3e a3"e to 3ui"d assets= sta3i"i8e consum:tion and :rotect t#emse"0es a%ainst riss- ?#us= 6e
see a 3roadenin% of t#e conce:t of micro finance;;; our current c#a""en%e is to find efficient and
re"ia3"e 6a!s of :ro0idin% a ric#er menu of micro finance :roducts- Micro Finance is not mere"!
e9tendin% credit= 3ut e9tendin% credit to t#ose 6#o reGuire most for t#eir and fami"!Fs sur0i0a"- It
cannot 3e measured in term of Guantit!= 3ut due 6ei%#ta%e to Gua"it! measurement- 4o6 credit
a0ai"ed is used to sur0i0e and %ro6 6it# "imited means-
1"o are t"e clients of 4icro finance7
?#e t!:ica" micro finance c"ients are "o6;income :ersons t#at do not #a0e access to forma"
financia" institutions- Micro finance c"ients are t!:ica""! se"f;em:"o!ed= often #ouse#o"d;3ased
entre:reneurs- In rura" areas= t#e! are usua""! sma"" farmers and ot#ers 6#o are en%a%ed in sma""
income;%eneratin% acti0ities suc# as food :rocessin% and :ett! trade- In ur3an areas= micro
finance acti0ities are more di0erse and inc"ude s#o:ee:ers= ser0ice :ro0iders= artisans= street
0endors= etc- Micro finance c"ients are

or and 0u"nera3"e non;

or 6#o #a0e a re"ati0e"!
unsta3"e source of income-
Access to con0entiona" forma" financia" institutions= for man! reasons= is in0erse"! re"ated to
income5 t#e

orer !ou are= t#e "ess "ie"! t#at !ou #a0e access- @n t#e ot#er #and= t#e c#ances
are t#at= t#e

orer !ou are= t#e more e9:ensi0e or onerous informa" financia" arran%ements-
Moreo0er= informa" arran%ements ma! not suita3"! meet certain financia" ser0ice needs or ma!
5
e9c"ude !ou an!6a!- Indi0idua"s in t#is e9c"uded and under;ser0ed maret se%ment are t#e
c"ients of micro finance-
As 6e 3roaden t#e notion of t#e t!:es of ser0ices micro finance encom:asses= t#e

tentia"
maret of micro finance c"ients a"so e9:ands- It de:ends on "oca" conditions and

"itica"
c"imate= acti0eness of coo:erati0es= S4$ H N$@s and su:

rt mec#anism- For instance= micro
credit mi%#t #a0e a far more "imited maret sco:e t#an sa! a more di0ersified ran%e of financia"
ser0ices= 6#ic# inc"udes 0arious t!:es of sa0in%s :roducts= :a!ment and remittance ser0ices= and
0arious insurance :roducts- For e9am:"e= man! 0er!

or farmers ma! not rea""! 6is# to 3orro6=
3ut rat#er= 6ou"d "ie a safer :"ace to sa0e t#e :roceeds from t#eir #ar0est as t#ese are consumed
o0er se0era" mont#s 3! t#e reGuirements of dai"! "i0in%- 7entra" %o0ernment in India #as
esta3"is#ed a stron% H e9tensi0e "in 3et6een NABARD (Nationa" Ban for A%ricu"ture H Rura"
De0e"o:ment)= State 7oo:erati0e Ban= District 7oo:erati0e Bans= Primar! A%ricu"ture H
Maretin% Societies at nationa"= state= district and 0i""a%e "e0e"-
T"e 8eed in India
• India is said to 3e t#e #ome of one t#ird of t#e 6or"dFs

orI officia" estimates ran%e from
/* to +& :ercent of t#e more t#an one 3i""ion

:u"ation-
• A3out (< :ercent of t#e

orest #ouse#o"ds do not #a0e access to credit-
• ?#e demand for microcredit #as 3een estimated at u: to J,& 3i""ionI t#e su::"! is "ess
t#an J/-/ 3i""ion com3ined 3! a"" in0o"0ed in t#e sector-
Due to t#e s#eer si8e of t#e

:u"ation "i0in% in

0ert!= India is strate%ica""! si%nificant in t#e
%"o3a" efforts to a""e0iate

0ert! and to ac#ie0e t#e Mi""ennium De0e"o:ment $oa" of #a"0in%
t#e 6or"dFs

0ert! 3! /&)+- Microfinance #as 3een :resent in India in one form or anot#er since
t#e )'<&s and is no6 6ide"! acce:ted as an effecti0e

0ert! a""e0iation strate%!- @0er t#e "ast
fi0e !ears= t#e microfinance industr! #as ac#ie0ed si%nificant %ro6t# in :art due to t#e
:artici:ation of commercia" 3ans- Des:ite t#is %ro6t#= t#e

0ert! situation in India continues
to 3e c#a""en%in%-
6
Some :rinci:"es t#at summari8e a centur! and a #a"f of de0e"o:ment :ractice 6ere enca:su"ated
in /&&1 3! 7onsu"tati0e $rou: to Assist t#e Poor (7$AP) and endorsed 3! t#e $rou: of Ei%#t
"eaders at t#e $( Summit on Kune )&= /&&15
• Poor :eo:"e need not >ust "oans 3ut a"so sa0in%s= insurance and mone! transfer
ser0ices-
• Microfinance must 3e usefu" to

or #ouse#o"ds5 #e":in% t#em raise income= 3ui"d u:
assets andLor cus#ion t#emse"0es a%ainst e9terna" s#ocs-
• BMicrofinance can :a! for itse"f-C

Su3sidies from donors and %o0ernment are scarce
and uncertain= and so to reac# "ar%e num3ers of

or :eo:"e= microfinance must :a!
for itse"f-
• Microfinance means 3ui"din% :ermanent "oca" institutions-
• Microfinance a"so means inte%ratin% t#e financia" needs of

or :eo:"e into a
countr!Fs mainstream financia" s!stem-
• B?#e >o3 of %o0ernment is to ena3"e financia" ser0ices= not to :ro0ide t#em-C
• BDonor funds s#ou"d com:"ement :ri0ate ca:ita"= not com:ete 6it# it-C
• B?#e e! 3ott"enec is t#e s#orta%e of stron% institutions and mana%ers-C Donors
s#ou"d focus on ca:acit! 3ui"din%-
• Interest rate cei"in%s #urt

or :eo:"e 3! :re0entin% microfinance institutions from
co0erin% t#eir costs= 6#ic# c#oes off t#e su::"! of credit-
• Microfinance institutions s#ou"d measure and disc"ose t#eir :erformance M 3ot#
financia""! and socia""!-
Microfinance can a"so 3e distin%uis#ed from c#arit!- It is 3etter to :ro0ide %rants to fami"ies 6#o
are destitute= or so

or t#e! are un"ie"! to 3e a3"e to %enerate t#e cas# f"o6 reGuired to re:a! a
"oan- ?#is situation can occur for e9am:"e= in a 6ar 8one or after a natura" disaster-
*inancial needs and *inancial ser9ices
In de0e"o:in% economies and :articu"ar"! in t#e rura" areas= man! acti0ities t#at 6ou"d 3e
c"assified in t#e de0e"o:ed 6or"d as financia" are not moneti8ed5 t#at is= mone! is not used to
7
carr! t#em out- A"most 3! definition=

or :eo:"e #a0e 0er! "itt"e mone!- But circumstances
often arise in t#eir "i0es in 6#ic# t#e! need mone! or t#e t#in%s mone! can 3u!-
In Stuart Rut#erfordFs recent 3oo The Poor and Their Money= #e cites se0era" t!:es of needs5
• Lifecycle Needs5 suc# as 6eddin%s= funera"s= c#i"d3irt#= education= #ome3ui"din%=
6ido6#ood= o"d a%e-
• Personal Emergencies5 suc# as sicness= in>ur!= unem:"o!ment= t#eft= #arassment or
deat#-
• Disasters5 suc# as fires= f"oods= c!c"ones and man;made e0ents "ie 6ar or 3u""do8in% of
d6e""in%s-
• nvestment !pportunities5 e9:andin% a 3usiness= 3u!in% "and or eGui:ment= im:ro0in%
#ousin%= securin% a >o3 (6#ic# often reGuires :a!in% a "ar%e 3ri3e)= etc-
Poor :eo:"e find creati0e and often co""a3orati0e 6a!s to meet t#ese needs= :rimari"! t#rou%#
creatin% and e9c#an%in% different forms of non;cas# 0a"ue- 7ommon su3stitutes for cas# 0ar!
from countr! to countr! 3ut t!:ica""! inc"ude "i0estoc= %rains= >e6e""er! and :recious meta"s-
As Mar%uerite Ro3inson descri3es in ?#e Microfinance Re0o"ution= t#e )'(&s demonstrated t#at
Bmicrofinance cou"d :ro0ide "ar%e;sca"e outreac# :rofita3"!=C and in t#e )''&s= Bmicrofinance
3e%an to de0e"o: as an industr!C- In t#e /&&&s= t#e microfinance industr!Fs o3>ecti0e is to satisf!
t#e unmet demand on a muc# "ar%er sca"e= and to :"a! a ro"e in reducin%

0ert!- A#i"e muc#
:ro%ress #as 3een made in de0e"o:in% a 0ia3"e= commercia" microfinance sector in t#e "ast fe6
decades= se0era" issues remain t#at need to 3e addressed 3efore t#e industr! 6i"" 3e a3"e to
satisf! massi0e 6or"d6ide demand-
?#e o3stac"es or c#a""en%es to 3ui"din% a sound commercia" microfinance industr! inc"ude5
N Ina::ro:riate donor su3sidies
N Poor re%u"ation and su:er0ision of de

sit;tain% MFIs
N Fe6 MFIs t#at mo3i"i8e sa0in%s
N 2imited mana%ement ca:acit! in MFIs
N Institutiona" inefficiencies
8
N Need for more dissemination and ado:tion of rura"= a%ricu"tura" microfinance
met#odo"o%ies
Role of Microfinance:
?#e micro credit of microfinance :ro%amme 6as first initiated in t#e !ear )'<* in Ban%"ades#
6it# :romise of :ro0idin% credit to t#e

or 6it#out co""atera" = a""e0iatin%

0ert! and
un"eas#in% #uman creati0it! and endea0or of t#e

or :eo:"e- Microfinance im:act studies #a0e
demonstrated t#at
O Microfinance #e":s

or #ouse#o"ds meet 3asic needs and :rotects t#em a%ainst riss-
O ?#e use of financia" ser0ices 3! "o6;income #ouse#o"ds "eads to im:ro0ements in #ouse#o"d
economic 6e"fare and enter:rise sta3i"it! and %ro6t#-
O B! su:

rtin% 6omens economic :artici:ation= microfinance em

6ers 6omen= t#ere3!
:romotin% %ender;eGuit! and im:ro0in% #ouse#o"d 6e"" 3ein%-
O ?#e "e0e" of im:act re"ates to t#e "en%t# of time c"ients #a0e #ad access to financia" ser0ices-
T"e :ri3in of Microfinance
A"t#ou%# neit#er of t#e terms microcredit or microfinance 6ere used in t#e academic "iterature
nor 3! de0e"o:ment aid :ractitioners 3efore t#e )'(&s or )''&s= res:ecti0e"!= t#e conce:t of
:ro0idin% financia" ser0ices to "o6 income :eo:"e is muc# o"der-
A#i"e t#e emer%ence of informa" financia" institutions in Ni%eria dates 3ac to t#e )+
t#
centur!=
t#e! 6ere first esta3"is#ed in Euro:e durin% t#e )(t# centur! as a res

nse to t#e enormous
increase in

0ert! since t#e end of t#e e9tended Euro:ean 6ars ()*)( M )*1()- In )</& t#e first
"oan fund tar%etin%

or :eo:"e 6as founded in Ire"and 3! t#e aut#or Konat#an S6ift- After a
s:ecia" "a6 6as :assed in )(/,= 6#ic# a""o6ed c#arit! institutions to 3ecome forma" financia"
intermediaries a "oan fund 3oard 6as esta3"is#ed in )(,* and a 3i% 3oom 6as initiated- ?#eir
outreac# :eaed >ust 3efore t#e %o0ernment introduced a ca: on interest rates in )(1,- At t#is
time= t#e! :ro0ided financia" ser0ices to a"most /&P of Iris# #ouse#o"ds- ?#e credit coo:erati0es
created in $erman! in )(1< 3! Friedric# Ai"#e"m Raiffeisen ser0ed )-1 mi""ion :eo:"e 3! )')&-
9
4e stated t#at t#e main o3>ecti0es of t#ese coo:erati0es Bs#ou"d 3e to contro" t#e use made of
mone! for economic im:ro0ements= and to im:ro0e t#e mora" and :#!sica" 0a"ues of :eo:"e and
a"so= t#eir 6i"" to act 3! t#emse"0es-C
In t#e )((&s t#e Britis# contro""ed %o0ernment of Madras in Sout# India= tried to use t#e $erman
e9:erience to address

0ert! 6#ic# resu"ted in more t#an nine mi""ion

or Indians 3e"on%in% to
credit coo:erati0es 3! )'1*- Durin% t#is same time t#e Dutc# co"onia" administrators constructed
a coo:erati0e rura" 3anin% s!stem in Indonesia 3ased on t#e Raiffeisen mode" 6#ic# e0entua""!
3ecame Ban Ra!at Indonesia (BRI)= no6 no6n as t#e "ar%est MFI in t#e 6or"d-
Microfinance Today
In t#e )'<&s a :aradi%m s#ift started to tae :"ace- ?#e fai"ure of su3sidi8ed %o0ernment or
donor dri0en institutions to meet t#e demand for financia" ser0ices in de0e"o:in% countries "et to
se0era" ne6 a::roac#es- Some of t#e most :rominent ones are :resented 3e"o6-
Ban Da%an Ba"i (BDB) 6as esta3"is#ed in Se:tem3er )'<& to ser0e "o6 income :eo:"e in
Indonesia 6it#out an! su3sidies and is no6 B6e"";no6n as t#e ear"iest 3an to institute
commercia" microfinanceC- A#i"e t#is is not true 6it# re%ard to t#e ac#ie0ements made in
Euro:e durin% t#e )'t# centur!= it sti"" can 3e seen as a turnin%

int 6it# an e0er increasin%
im:act on t#e 0ie6 of

"iticians and de0e"o:ment aid :ractitioners t#rou%#out t#e 6or"d- In
)'<, A77I@N Internationa"= a United States of America (USA) 3ased non %o0ernmenta"
or%ani8ation (N$@) dis3ursed its first "oan in Bra8i" and in )'<1 Professor Mu#ammad Yunus
started 6#at "ater 3ecame no6n as t#e $rameen Ban 3! "endin% a tota" of J/< to 1/ :eo:"e in
Ban%"ades#- @ne !ear "ater t#e Se"f;Em:"o!ed AomenFs Association started to :ro0ide "oans of
a3out J)-+ to

or 6omen in India- A"t#ou%# t#e "atter e9am:"es sti"" 6ere su3sidi8ed :ro>ects=
t#e! used a more 3usiness oriented a::roac# and s#o6ed t#e 6or"d t#at

or :eo:"e can 3e %ood
credit riss 6it# re:a!ment rates e9ceedin% '+P= e0en if t#e interest rate c#ar%ed is #i%#er t#an
t#at of traditiona" 3ans- Anot#er mi"estone 6as t#e transformation of BRI startin% in )'(1- @nce
a "oss main% institution c#anne"in% %o0ernment su3sidi8ed credits to in#a3itants of rura"
Indonesia it is no6 t#e "ar%est MFI in t#e 6or"d= 3ein% :rofita3"e e0en durin% t#e Asian financia"
crisis of )''< M )''(-
In Fe3ruar! )''< more t#an /='&&

"ic!maers= microfinance :ractitioners and re:resentati0es
of 0arious educationa" institutions and donor a%encies from ),< different countries %at#ered in
Aas#in%ton D-7- for t#e first Micro 7redit Summit- ?#is 6as t#e start of a nine !ear "on%
10
cam:ai%n to reac# )&& mi""ion of t#e 6or"d

orest #ouse#o"ds 6it# credit for se"f em:"o!ment
3! /&&+- Accordin% to t#e Microcredit Summit 7am:ai%n Re

rt *<=*&*=&(& c"ients #a0e 3een
reac#ed t#rou%# /+/< MFIs 3! t#e end of /&&/= 6it# 1)=+'1=<<( of t#em 3ein% amon%st t#e

orest 3efore t#e! too t#eir first "oan- Since t#e cam:ai%n started t#e a0era%e annua" %ro6t#
rate in reac#in% c"ients #as 3een a"most 1& :ercent- If it #as continued at t#at s:eed more t#an
)&& mi""ion :eo:"e 6i"" #a0e access to microcredit 3! no6 and 3! t#e end of /&&+ t#e %oa" of t#e
microcredit summit cam:ai%n 6ou"d 3e reac#ed- As t#e :resident of t#e Aor"d Ban Kames
Ao"fenso#n #as

inted out= :ro0idin% financia" ser0ices to )&& mi""ion of t#e

orest
#ouse#o"ds means #e":in% as man! as +&& M *&& mi""ion

or :eo:"e-
#') Strate3ic Policy Initiati9es
Some of t#e most recent strate%ic

"ic! initiati0es in t#e area of Microfinance taen 3! t#e
%o0ernment and re%u"ator! 3odies in India are5
? Aorin% %rou: on credit to t#e

or t#rou%# S4$s= N$@s= NABARD= )''+
? ?#e Nationa" Microfinance ?asforce= )'''
? Aorin% $rou: on Financia" F"o6s to t#e Informa" Sector (set u: 3! PM@)= /&&/
? Microfinance De0e"o:ment and EGuit! Fund= NABARD= /&&+
? Aorin% %rou: on Financin% NBF7s 3! Bans; RBI
#'( Acti9ities in Microfinance
Microcredit: It is a sma"" amount of mone! "oaned to a c"ient 3! a 3an or ot#er institution-
Microcredit can 3e offered= often 6it#out co""atera"= to an indi0idua" or t#rou%# %rou: "endin%-
Micro sa9in3s: ?#ese are de

sit ser0ices t#at a""o6 one to sa0e sma"" amounts of mone! for
future use- @ften 6it#out minimum 3a"ance reGuirements= t#ese sa0in%s accounts a""o6
#ouse#o"ds to sa0e in order to meet une9:ected e9:enses and :"an for future e9:enses-
11
Micro ins%rance: It is a s!stem 3! 6#ic# :eo:"e= 3usinesses and ot#er or%ani8ations mae a
:a!ment to s#are ris- Access to insurance ena3"es entre:reneurs to concentrate more on
de0e"o:in% t#eir 3usinesses 6#i"e miti%atin% ot#er riss affectin% :ro:ert!= #ea"t# or t#e a3i"it! to
6or-
Re4ittances: ?#ese are transfer of funds from :eo:"e in one :"ace to :eo:"e in anot#er= usua""!
across 3orders to fami"! and friends- 7om:ared 6it# ot#er sources of ca:ita" t#at can f"uctuate
de:endin% on t#e

"itica" or economic c"imate= remittances are a re"ati0e"! stead! source of
funds-
#'. ;e3al Re3%lations
12
Bans in India are re%u"ated and su:er0ised 3! t#e Reser0e Ban of India (RBI) under t#e RBI
Act of )',1= Banin% Re%u"ation Act= Re%iona" Rura" Bans Act= and t#e 7oo:erati0e Societies
Acts of t#e res:ecti0e state %o0ernments for coo:erati0e 3ans-
NBF7s are re%istered under t#e 7om:anies Act= )'+* and are %o0erned under t#e RBI Act-
?#ere is no s:ecific "a6 caterin% to N$@s a"t#ou%# t#e! can 3e re%istered under t#e Societies
Re%istration Act= )(*&= t#e Indian ?rust Act= )((/= or t#e re"e0ant state acts- ?#ere #as 3een a
stron% re"iance on se"f;re%u"ation for N$@ MFIs and as t#is a::"ies to N$@ MFIs mo3i"i8in%
de

sits from c"ients 6#o a"so 3orro6- ?#is tendenc! is a concern due to enforcement :ro3"ems
t#at tend to arise 6it# se"f;re%u"ator! or%ani8ations- In Kanuar! /&&&= t#e RBI essentia""! created
a ne6 "e%a" form for :ro0idin% microfinance ser0ices for NBF7s re%istered under t#e 7om:anies
Act so t#at t#e! are not su3>ect to an! ca:ita" or "iGuidit! reGuirements if t#e! do not %o into t#e
de

sit tain% 3usiness- A3sence of "iGuidit! reGuirements is concern to t#e safet! of t#e sector-
13
14
15
!"apter ): Microfinance in India
At :resent "endin% to t#e economica""! acti0e

or 3ot# rura" and ur3an is :e%%ed at around Rs
<&&& crores in t#e Indian 3ansF credit outstandin%- As a%ainst t#is= accordin% to e0en t#e most
conser0ati0e estimates= t#e tota" demand for credit reGuirements for t#is :art of Indian societ! is
some6#ere around Rs /=&&=&&& crores-
Microfinance c"an3in3 t"e face of poor India
Micro;Finance is emer%in% as a

6erfu" instrument for

0ert! a""e0iation in t#e ne6 econom!-
In India= micro;Finance scene is dominated 3! Se"f 4e": $rou:s (S4$s) ; Bans "ina%e
Pro%ramme= aimed at :ro0idin% a cost effecti0e mec#anism for :ro0idin% financia" ser0ices to
t#e Qunreac#ed

orQ- In t#e Indian conte9t terms "ie Dsma"" and mar%ina" farmersD= D rura"
artisansD and Deconomica""! 6eaer sectionsD #a0e 3een used to 3road"! define micro;finance
customers- Researc# across t#e %"o3e #as s#o6n t#at= o0er time= microfinance c"ients increase
t#eir income and assets= increase t#e num3er of !ears of sc#oo"in% t#eir c#i"dren recei0e= and
im:ro0e t#e #ea"t# and nutrition of t#eir fami"ies-
A more refined mode" of micro;credit de"i0er! #as e0o"0ed "ate"!= 6#ic# em:#asi8es t#e
com3ined de"i0er! of financia" ser0ices a"on% 6it# tec#nica" assistance= and a%ricu"tura" 3usiness
de0e"o:ment ser0ices- A#en com:ared to t#e 6ider S4$ 3an "ina%e mo0ement in India=
:ri0ate MFIs #a0e #ad "imited outreac#- 4o6e0er= 6e #a0e seen a recent trend of "ar%er
microfinance institutions transformin% into Non;Ban Financia" Institutions (NBF7s)- ?#is
c#an%in% face of microfinance in India a::ears to 3e

siti0e in terms of t#e a3i"it! of
microfinance to attract more funds and t#erefore increase outreac#-
In terms of demand for micro;credit or micro;finance= t#ere are t#ree se%ments= 6#ic# demand
funds- ?#e! are5
• At t#e 0er! 3ottom in terms of income and assets= are t#ose 6#o are landless and
en3a3ed in a3ric%lt%ral <or2 on a seasonal asis0 and 4an%al lao%rers in forestry0
16
4inin30 "o%se"old ind%stries0 constr%ction and transport' ?#is se%ment reGuires= first
and foremost= consum:tion credit durin% t#ose mont#s 6#en t#e! do not %et "a3our 6or=
and for contin%encies suc# as i""ness- ?#e! a"so need credit for acGuirin% sma""
:roducti0e assets= suc# as "i0estoc= usin% 6#ic# t#e! can %enerate additiona" income-
• ?#e ne9t maret se%ment is s4all and 4ar3inal far4ers and r%ral artisans0 <ea9ers
and t"ose self$e4ployed in t"e %ran infor4al sector as "a<2ers0 9endors0 and
<or2ers in "o%se"old 4icro$enterprises' ?#is se%ment main"! needs credit for 6orin%
ca:ita"= a sma"" :art of 6#ic# a"so ser0es consum:tion needs- ?#is se%ment a"so needs
term credit for acGuirin% additiona" :roducti0e assets= suc# as irri%ation :um:sets=
3ore6e""s and "i0estoc in case of farmers= and eGui:ment ("ooms= mac#iner!) and
6ors#eds in case of non;farm 6orers-
• ?#e t#ird maret se%ment is of s4all and 4edi%4 far4ers <"o "a9e 3one in for
co44ercial crops suc# as sur:"us :add! and 6#eat= cotton= %roundnut= and ot#ers
en%a%ed in dair!in%=

u"tr!= fis#er!= etc- Amon% non;farm acti0ities= t#is se%ment
inc"udes t#ose in 0i""a%es and s"ums= en%a%ed in :rocessin% or manufacturin% acti0it!=
runnin% :ro0ision stores= re:air 6ors#o:s= tea s#o:s= and 0arious ser0ice enter:rises-
?#ese :ersons are not a"6a!s

or= t#ou%# t#e! "i0e 3are"! a3o0e t#e

0ert! "ine and
a"so suffer from inadeGuate access to forma" credit-
Ae"" t#ese are t#e :eo:"e 6#o reGuire mone! and 6it# Microfinance it is

ssi3"e- Ri%#t no6 t#e
:ro3"em is t#at= it is S4$sQ 6#ic# are doin% t#is and efforts s#ou"d 3e made so t#at t#e 3i%
financia" institutions a"so turn u: and start su::"!in% funds to t#ese :eo:"e- ?#is 6i"" "ead to a
3etter India and 6i"" definite"! fu"fi"" t#e dream of our "ate Pri4e Minister0 Mrs' Indira
-and"i0 i'e' Po9erty'
@ne of t#e statement is rea""! a::ro:riate #ere= 6#ic# is as5
“Money0 says t"e pro9er 4a2es 4oney' 1"en yo% "a9e 3ot a little0 it is often easy to 3et
4ore' T"e 3reat diffic%lty is to 3et t"at little'”Adams Smith.
17
?oda! India is facin% ma>or :ro3"em in reducin%

0ert!- A3out /+ mi""ion :eo:"e in India are
under 3e"o6

0ert! "ine- Ait# "o6 :er ca:ita income= #ea0!

:u"ation :ressure= :re0a"ence of
massi0e unem:"o!ment and underem:"o!ment = "o6 rate of ca:ita" formation = misdistri3ution of
6ea"t# and assets = :re0a"ence of "o6 tec#no"o%! and

or economics or%ani8ation and
insta3i"it! of out:ut of a%ricu"ture :roduction and re"ated sectors #a0e made India one of t#e

or countries of t#e 6or"d-
Present Scenario of India:
India fa""s under "o6 income c"ass accordin% to Aor"d Ban- It is second

:u"ated countr! in
t#e 6or"d and around <& P of its

:u"ation "i0es in rura" area- *&P of :eo:"e de:end on
a%ricu"ture= as a resu"t t#ere is c#ronic underem:"o!ment and :er ca:ita income is on"! J ,/*/-
?#is is not enou%# to :ro0ide food to more t#an one indi0idua" - ?#e o30ious resu"t is a3>ect

0ert! = "o6 rate of education= "o6 se9 ratio= e9:"oitation- ?#e ma>or factor account for #i%#
incidence of rura"

0ert! is t#e "o6 asset 3ase- Accordin% to Reser0e Ban of India= a3out +) P
of :eo:"e #ouse

ssess on"! )&P of t#e tota" asset of India -?#is #as resu"ted "o6 :roduction
ca:acit! 3ot# in a%ricu"ture (6#ic# contri3ute around //;/+P of $DP ) and Manufacturin%
sector- Rura" :eo:"e #a0e 0er! "o6 access to institutiona"i8ed credit( from commercia" 3an)-
Po9erty alle9iation pro3ra44es and concep%alisation of Microfinance:
?#ere #as 3een continuous efforts of :"anners of India in addressin% t#e

0ert! - ?#e! 4a0e
come u: 6it# de0e"o:ment :ro%rammes "ie Inte%rated Rura" De0e"o:ment :ro%amme (IRDP)=
Nationa" Rura" Em:"o!ment Pro%ramme (NREP) = Rura" 2a3our Em:"o!ment $uarantee
Pro%ramme (R2E$P) etc- But t#ese :ro%amme #a0e not 3een a3"e to create massi0e im:act in

0ert! a""e0iation- ?#e :roduction oriented a::roac# of :"annin% 6it#out a"terin% t#e mode of
:roduction cou"d not 3ut resu"t of t#e %ains of de0e"o:ment 3! o6ners of instrument of
:roduction- ?#e mode of :roduction does remain same as t#e o6ner of t#e instrument #a0e "o6
access to credit 6#ic# is t#e ma>or factor of :roduction- ?#us in Nineties Nationa" 3an for
a%ricu"ture and rura" de0e"o:ment(NABARD) "aunc#es :i"ot :ro>ects of Microfinance to 3rid%e
t#e %a: 3et6een demand and su::"! of funds in t#e "o6er run%s of rura" econom!- Microfinance
- t#e 3u88in% 6ord of t#is decade 6as meant to cure t#e i""ness of rura" econom!- Ait# t#is
18
conce:t of Se"f Re"iance= Se"f Sufficienc! and Se"f 4e": %ained momentum- ?#e Indian
microfinance is dominated 3! Se"f 4e": $rou:s (S4$s) and t#eir "ina%e to Bans-
De:ri0ed of t#e 3asic 3anin% faci"ities= t#e rura" and semi ur3an Indian masses are sti"" re"!in%
on informa" financin% intermediaries "ie mone! "enders= fami"! mem3ers= friends etc-
)'# Distri%tion of Indeted R%ral ,o%se"olds: A3ency <ise
!redit A3ency Percenta3e of R%ral ,o%se"olds
-o9ern4ent +'#
!ooperati9e Societies )#'+
!o44ercial an2s and RRBs (('5
Ins%rance ='(
Pro9ident *%nd ='5
:t"er Instit%tional So%rces #'+
All Instit%tional A3encies +.'=
;andlord .'=
A3ric%lt%ral Moneylenders 5'=
Professional Moneylenders #='/
Relati9es and *riends /'/
:t"ers >'=
All 8on Instit%tional A3encies (+'=
All A3encies #=='=
So%rce: Det and In9est4ent S%r9ey0 -oI #>>)
Seein% t#e fi%ures from t#e a3o0e ta3"e= it is e0ident t#at t#e s#are of institutiona" credit is muc#
more no6-
?#e a3o0e sur0e! resu"t s#o6s t#at ti"" )'')= institutiona" credit accounted for around t6o;t#irds
of t#e credit reGuirement of rura" #ouse#o"ds- ?#is s#o6s a com:arati0e"! 3etter :enetration of
t#e 3anin% and financia" institutions in rura" India-
Percenta3e distri%tion of det a4on3 indeted R%ral ;aor ,o%se"olds y so%rce of det
Sr' 8o' So%rce of det ,o%se"olds
Ait#
cu"ti0ated
"and
Ait#out
cu"ti0ated
"and
A""
19
# $o0ernment 1-'' +-<* +-,<
) 7o;o:erati0e Societies )*-<( '-1* ),-&'
( Bans )'-') )1-++ )<-)'
. Em:"o!ers +-,+ (-,, *-(*
/ Mone! "enders /(-)/ ,+-/, ,)-<&
+ S#o:;ee:ers *-<* <-1< <-),
5 Re"ati0esLFriends )1-+( )+-*( )+-)1
6 @t#er Sources ,-+) ,-+/ ,-+/
?ota" )&&-&& )&&-&& )&&-&&
So%rce: R%ral laor en?%iry report on indetedness a4on3 r%ral laor "o%se"olds @//
t"
Ro%nd of 8'S'S'A #>>>$)===
?#e ta3"e a3o0e re0ea"s t#at most of t#e rura" "a3our #ouse#o"ds :refer to raise "oan from t#e
non;institutiona" sources- A3out *1P of t#e tota" de3t reGuirement of t#ese #ouse#o"ds 6as met
3! t#e non;institutiona" sources durin% )''';/&&&- Mone! "enders a"one :ro0ided de3t
(Rs-)')() to t#e tune of ,/P of t#e tota" de3t of t#ese #ouse#o"ds as a%ainst /(P durin% )'',;
'1- Re"ati0es and friends and s#o:ee:ers #a0e 3een t6o ot#er sources 6#ic# to%et#er
accounted for a3out //P of t#e tota" de3t at a"";India "e0e"-
?#e institutiona" sources cou"d meet on"! ,*P of t#e tota" credit reGuirement of t#e rura"
"a3our #ouse#o"ds durin% )''';/&&& 6it# on"! one :ercent increase o0er t#e :re0ious sur0e! in
)'',;'1- Amon% t#e institutiona" sources of de3t= t#e 3ans continued to 3e t#e sin%"e "ar%est
source of de3t meetin% a3out )< :ercent of t#e tota" de3t reGuirement of t#ese #ouse#o"ds- In
com:arison to t#e :re0ious enGuir!= t#e de:endence on co;o:erati0e societies #as increased
considera3"! in )''';/&&&- Durin% )''';/&&& as muc# as ),P of t#e de3t 6as raised from t#is
source as a%ainst (P in )'',;'1- 4o6e0er= in t#e case of t#e 3ans and t#e %o0ernment
a%encies it decreased mar%ina""! from )(-((P and (-/<P to )<-)'P and +-,<P res:ecti0e"!
durin% )''';/&&& sur0e!-
)') Relati9e s"are of Borro<in3 of !%lti9ator ,o%se"olds (in :er cent)
So%rces of !redit #>/# #>+# #>5# #>6# #>># )==)
B
8on Instit%tional '/-< ()-, *(-, ,*-( ,&-* ,(-'
Of which:
Moneylenders *'-< 1'-/ ,*-) )*-) )<-+ /*-(
Instit%tional <-, )(-< ,)-< *,-/ **-, *)-)
Of which:
20
!ooperati9e
Societies0etc
,-, /-* //-& /'-( ,&-& ,&-/
!o44ercial an2s &-' &-* /-1 /(-( ,+-/ /*-,
Unspecified ; ; ; ; ,-) ;
Total )&&-& )&&-& )&&-& )&&-& )&&-& )&&-&
B All India Det and In9est4ent S%r9ey0 8SS:0 />
t"
ro%nd0 )==(
So%rce: All India Det and In9est4ent S%r9eys
?a3"e s#o6s t#e increasin% inf"uence of mone!"enders in t#e "ast decade- ?#e s#are of
mone!"enders in t#e tota" non institutiona" credit 6as dec"inin% ti"" )'()= started :icin% u: from
t#e )''&s and reac#ed /< :er cent in /&&)-
At t#e same time t#e s#are of commercia" 3ans in institutiona" credit #as come do6n 3! a"most
t#e same :ercenta%e

ints durin% t#is :eriod- ?#ou%#= t#e s#are of coo:erati0e societies is
increasin% continuous"!= t#e %ro6t# #as f"attened durin% t#e "ast t#ree decades-
)'( Distri%tion ased on Asset siCe of R%ral ,o%se"olds (in :er cent)
,o%se"old Assets @Rs D===A Instit%tional A3ency 8on$Instit%tional
A3ency
All
;ess t"an / 1/ +( )&&
/$#= 1< +, )&&
#=$)= 11 +* )&&
)=$(= *( ,/ )&&
(=$/= ++ 1+ )&&
/=$5= +, 1< )&&
5=$#== *) ,' )&&
#==$#/= *) ,' )&&
#/=$)/= *( ,/ )&&
)/= and ao9e () )' )&&
All classes ** ,1 )&&
So%rce: Det and In9est4ent S%r9ey0 -oI0 #>>)
21
?#e #ouse#o"ds 6it# a "o6er asset si8e 6ere una3"e to find financin% o:tions from forma" credit
dis3ursement sources- ?#is 6as due to t#e reGuirement of :#!sica" co""atera" 3! 3anin% and
financia" institutions for dis3ursin% credit- For #ouse#o"ds 6it# "ess t#an Rs /&=&&& 6ort# of
:#!sica" assets= t#e most con0enient source of credit 6as non institutiona" a%encies "ie
"and"ords= mone!"enders= re"ati0es= friends= etc-
2ooin% at t#e findin%s of t#e stud! commissioned 3! Asia tec#nica" De:artment of t#e Aor"d
Ban ()''+)= t#e :ur

se or t#e reason 3e#ind tain% credit 3! t#e rura"

or 6as consum:tion
credit= sa0in%s= :roduction credit and insurance-
7onsum:tion credit constituted t6o;t#irds of t#e credit usa%e 6it#in 6#ic# a"most t#ree;fourt#s
of t#e demand 6as for s#ort :eriods to meetin% emer%ent needs suc# as i""ness and #ouse#o"d
e9:enses durin% t#e "ean season- A"most entire demand for t#e consum:tion credit 6as met 3!
informa" sources at #i%# to e9:"oiti0e interest rates t#at 0aried from ,& to '& :er cent :er annum-
A"most <+ :er cent of t#e :roduction credit (6#ic# accounted for a3out one;t#ird of t#e tota"
credit a0ai"ed of 3! t#e rura" masses) 6as met 3! t#e forma" sector= main"! 3ans and
coo:erati0es-
)'. Ban2in3 EEpansion
Startin% in t#e "ate )'*&s= India 6as t#e #ome to one of t#e "ar%est state inter0entions in t#e rura"
credit maret- ?#is :#ase is no6n as t#e BSocia" Banin%C :#ase-
It 6itnessed t#e nationa"i8ation of e9istin% :ri0ate commercia" 3ans= massi0e e9:ansion of
3ranc# net6or in rura" areas= mandator! directed credit to :riorit! sectors of t#e econom!=
su3sidi8ed rates of interest and creation of a ne6 set of re%iona" rura" 3ans (RRBs) at t#e district
"e0e" and a s:ecia"i8ed a:e9 3an for a%ricu"ture and rura" de0e"o:ment (NABARD) at t#e
nationa" "e0e"-
?#e Net State Domestic Product (NSDP) is a measure of t#e economic acti0it! in t#e state and
com:arin% it 6it# t#e uti"i8ation of 3an credit or 3an de

sits indicates #o6 muc# economic
22
acti0it! is 3ein% financed 3! t#e 3ans and 6#et#er t#ere e9ists unta::ed

tentia" for increasin%
de

sits in t#at state-
E.g. In the year 2003-2004 the percentage of ban deposits to !S"# is pretty high at aro$nd
%&'-(0' in )ihar and *harhand or these states are not as $nder baned as tho$ght to be.
)'/ Microfinance Social Aspects
Micro financin% institutions si%nificant"! contri3uted to %ender eGua"it! and 6omenFs
em

6erment as 6e"" as

or de0e"o:ment and ci0i" societ! stren%t#enin%- 7ontri3ution to
6omenFs a3i"it! to earn an income "ed to t#eir economic em

6erment= increased 6e"" 3ein% of
6omen and t#eir fami"ies and 6ider socia" and

"itica" em

6erment-
Microfinance :ro%rams tar%etin% 6omen 3ecame a ma>or :"an of

0ert! a""e0iation and %ender
strate%ies in t#e )''&s- Increasin% e0idence of t#e centra"it! of %ender eGua"it! to

0ert!
reduction and 6omenFs #i%#er credit re:a!ment rates "ed to a %enera" consensus on t#e
desira3i"it! of tar%etin% 6omen-
!"apter

Self ,elp -ro%ps @S,-sA
Se"f; #e": %rou:s (S4$s) :"a! toda! a ma>or ro"e in

0ert! a""e0iation in rura" India- A %ro6in%
num3er of

or :eo:"e (most"! 6omen) in 0arious :arts of India are mem3ers of S4$s and
acti0e"! en%a%e in sa0in%s and credit (SL7)= as 6e"" as in ot#er acti0ities (income %eneration=
natura" resources mana%ement= "iterac!= c#i"d care and nutrition= etc-)- ?#e SL7 focus in t#e S4$
is t#e most :rominent e"ement and offers a c#ance to create some contro" o0er ca:ita"= a"3eit in
0er! sma"" amounts- ?#e S4$ s!stem #as :ro0en to 3e 0er! re"e0ant and effecti0e in offerin%
6omen t#e

ssi3i"it! to 3rea %radua""! a6a! from e9:"oitation and iso"ation-
('# ,o< self$"elp 3ro%ps <or2
NABARD ()''<) defines S4$s as Dsma""= economica""! #omo%enous affinit! %rou:s of rura"

or= 0o"untari"! formed to sa0e and mutua""! contri3ute to a common fund to 3e "ent to its
mem3ers as :er t#e %rou: mem3ersQ decisionD-
23
Most S4$s in India #a0e )& to /+ mem3ers= 6#o can 3e eit#er on"! men= or on"! 6omen= or
on"! !out#= or a mi9 of t#ese- As 6omenQs S4$s or san%#a #a0e 3een :romoted 3! a 6ide ran%e
of %o0ernment and non; %o0ernmenta" a%encies= t#e! no6 mae u: '&P of a"" S4$s-
?#e ru"es and re%u"ations of S4$s 0ar! accordin% to t#e :references of t#e mem3ers and t#ose
faci"itatin% t#eir formation- A common c#aracteristic of t#e %rou:s is t#at t#e! meet re%u"ar"!
(t!:ica""! once :er 6ee or once :er fortni%#t) to co""ect t#e sa0in%s from mem3ers= decide to
6#ic# mem3er to %i0e a "oan= discuss >oint acti0ities (suc# as trainin%= runnin% of a communa"
3usiness= etc-)= and to miti%ate an! conf"icts t#at mi%#t arise- Most S4$s #a0e an e"ected
c#air:erson= a de:ut!= a treasurer= and sometimes ot#er office #o"ders-
Most S4$s start 6it#out an! e9terna" financia" ca:ita" 3! sa0in% re%u"ar contri3utions 3! t#e
mem3ers- ?#ese contri3utions can 3e 0er! sma"" (e-%- )& Rs :er 6ee)- After a :eriod of
consistent sa0in%s (e-%- * mont#s to one !ear) t#e S4$s start to %i0e "oans from sa0in%s in t#e
form of sma"" interna" "oans for micro enter:rise acti0ities and consum:tion- @n"! t#ose S4$s
t#at #a0e uti"i8ed t#eir o6n funds 6e"" are assisted 6it# e9terna" funds t#rou%# "ina%es 6it#
3ans and ot#er financia" intermediaries-
4o6e0er= it is %enera""! acce:ted t#at S4$s often do not inc"ude t#e

orest of t#e

or= for
reasons suc# as5
@aA Social factors (t#e

orest are often t#ose 6#o are socia""! mar%ina"i8ed 3ecause of caste
affi"iation and t#ose 6#o are most se:tica" of t#e

tentia" 3enefits of co""ecti0e action)-
@A Econo4ic factors (t#e

orest often do not #a0e t#e financia" resources to contri3ute to t#e
sa0in%s and :a! mem3ers#i: feesI t#e! are often t#e ones 6#o mi%rate durin% t#e "ean season=
t#us main% %rou: mem3ers#i: difficu"t)-
@cA Intrinsic iases of t"e i4ple4entin3 or3aniCations (as t#e

orest of t#e

or are t#e most
difficu"t to reac# and moti0ate= im:"ementin% a%encies tend to "ea0e t#em out= :referrin% to focus
on t#e ne9t 6ea"t# cate%or!)-
(') So%rces of capital and lin2s et<een S,-s and Ban2s
24
S4$s can on"! fu"fi"" a ro"e in t#e rura" econom! if %rou: mem3ers #a0e access to financia"
ca:ita" and marets for t#eir :roducts and ser0ices- A#i"e t#e %rou:s initia""! %enerate t#eir o6n
sa0in%s t#rou%# t#rift (6#ere3! t#rift im:"ies sa0in%s created 3!

st

nin% a"most necessar!
consum:tion= 6#i"e sa0in%s im:"! t#e e9istence of sur:"us 6ea"t#)= t#eir aim is often to "in u:
6it# financia" institutions in order to o3tain furt#er "oans for in0estments in rura" enter:rises-
N$@s and 3ans are %i0in% "oans to S4$s eit#er as Dmatc#in% "oansD (6#ereas t#e "oan amount
is :ro

rtionate to t#e %rou:Qs sa0in%s) or as fi9ed amounts= de:endin% on t#e %rou:Qs record of
re:a!ment= recommendations 3! %rou: faci"itators= co""atera"s :ro0ided= etc-
('( ,o< S,-s sa9e
Se"f;#e": %rou:s mo3i"i8e sa0in%s from t#eir mem3ers= and ma! t#en on;"end t#ese funds to one
anot#er= usua""! at a::arent"! #i%# rates of interest 6#ic# ref"ect t#e mem3ersF understandin% of
t#e #i%# returns t#e! can earn on t#e sma"" sums in0ested in t#eir micro;enter:rises= and t#e e0en
#i%#er cost of funds from mone! "enders- If t#e! do not 6is# to use t#e mone!= t#e! ma! de

sit
it in a 3an- If t#e mem3ersF need for funds e9ceeds t#e %rou:Fs accumu"ated sa0in%s= t#e! ma!
3orro6 from a 3an or ot#er or%ani8ation= suc# as a micro;finance non;%o0ernment or%ani8ation=
to au%ment t#eir o6n fund-
?#e s!stem is 0er! f"e9i3"e- ?#e %rou: a%%re%ates t#e sma"" indi0idua" sa0in% and 3orro6in%
reGuirements of its mem3ers= and t#e 3an needs on"! to maintain one account for t#e %rou: as a
sin%"e entit!- ?#e 3aner must assess t#e com:etence and inte%rit! of t#e %rou: as a micro;3an=
3ut once #e #as done t#is #e need not concern #imse"f 6it# t#e indi0idua" "oans made 3! t#e
%rou: to its mem3ers= or t#e uses to 6#ic# t#ese "oans are :ut- 4e can treat t#e %rou: as a sin%"e
customer= 6#ose tota" 3usiness and transactions are :ro3a3"! simi"ar in amount to t#e a0era%e for
#is norma" customers= 3ecause t#e! re:resent t#e com3ined 3anin% 3usiness of some t6ent!
Emicro;customersF- An! 3an 3ranc# can #a0e a sma"" or a "ar%e num3er of suc# accounts=
6it#out #a0in% to c#an%e its met#ods of o:eration-
Un"ie man! customers= demand from S4$s is not :rice;sensiti0e- I""iterate 0i""a%e 6omen are
sometimes 3etter 3aners t#an some 6it# more :rofessiona" Gua"ifications- ?#e! no6 t#at ra:id
access to funds is more im

rtant t#an t#eir cost= and t#e! a"so no6= e0en t#ou%# t#e! mi%#t
not 3e a3"e to ca"cu"ate t#e fi%ures= t#at t#e t!:ica" micro;enter:rise earns 6e"" o0er +&&P return
25
on t#e sma"" sum in0ested in it (4ar:er= M= )''<= :- )+)- ?#e %rou:s t#us c#ar%e t#emse"0es #i%#
rates of interestI t#e! are #a::! to tae ad0anta%e of t#e %enerous s:read t#at t#e NABARD
su3sidi8ed 3an "endin% rate of )/P a""o6s t#em= 3ut t#e! are a"so 6i""in% to 3orro6 from
N$@LMFIs 6#ic# on;"end funds from SIDBI at )+P= or from Ene6 %enerationF institutions suc#
as Basi9 Finance at )(-+P or /)P-
('. S,-s$Ban2 ;in2a3e Model
NABARD is :resent"! o:eratin% t#ree mode"s of "ina%e of 3ans 6it# S4$s and N$@s5
Model F #: In t#is mode"= t#e 3an itse"f acts as a Se"f 4e": $rou: Promotin% Institution (S4PI)-
It taes initiati0es in formin% t#e %rou:s= nurtures t#em o0er a :eriod of time and t#en :ro0ides
credit to t#em after satisf!in% itse"f a3out t#eir maturit! to a3sor3 credit- A3out )*P of S4$s
and ),P of "oan amounts are usin% t#is mode" (as of Marc# /&&/)-
Model F ): In t#is mode"= %rou:s are formed 3! N$@s (in most of t#e cases) or 3! %o0ernment
a%encies- ?#e %rou:s are nurtured and trained 3! t#ese a%encies- ?#e 3an t#en :ro0ides credit
direct"! to t#e S4$s= after o3ser0in% t#eir o:erations and maturit! to a3sor3 credit- A#i"e t#e
3an :ro0ides "oans to t#e %rou:s direct"!= t#e faci"itatin% a%encies continue t#eir interactions
6it# t#e S4$s- Most "ina%e e9:eriences 3e%in 6it# t#is mode" 6it# N$@s :"a!in% a ma>or ro"e-
?#is mode" #as a"so 3een

:u"ar and more acce:ta3"e to 3ans= as some of t#e difficu"t
functions of socia" d!namics are e9terna"i8ed- A3out <+P of S4$s and <(P of "oan amounts are
usin% t#is mode"-
Model F

Due to 0arious reasons= 3ans in some areas are not in a

sition to e0en finance
S4$s :romoted and nurtured 3! ot#er a%encies- In suc# cases= t#e N$@s act as 3ot# faci"itators
and micro; finance intermediaries- First= t#e! :romote t#e %rou:s= nurture and train t#em and
t#en a::roac# 3ans for 3u" "oans for on;"endin% to t#e S4$s- A3out 'P of S4$s and ),P of
"oan amounts are usin% t#is mode"-
!o4parati9e Analysis of Micro$finance Ser9ices offered to t"e poor
26
Source5 R- Arunac#a"am ; A"ternati0e ?ec#no"o%ies in t#e Indian Micro; finance Industr!
('/ ;ife ins%rances for self$"elp 3ro%p 4e4ers
?#e United India Insurance 7om:an! #as desi%ned t6o P22Is

ersona" "ine "ife insurances) for
6omen in rura" areas- ?#e com:an! 6i"" 3e tar%etin% se"f;#e": %rou:s= of 6#ic# t#ere are around
/&&=&&& in t#e countr!= 6it# )+;/& 6omen in a %rou:- ?#e t6o

"icies are
()) t#e Mot#er ?eresa Aomen H 7#i"dren Po"ic!= 6it# t#e aim of %i0in% to t#e 6oman in t#e
e0ent of accidenta" deat# of #er #us3and and to su:

rt #er minor c#i"dren in t#e e0ent of #er
deat#= and
(/) ?#e Unimicro 4ea"t# Sc#eme= %i0in% :ersona" accident and #os:ita"i8ation co0ers 3esides
co0er for dama%e to d6e""in% due to fire and a""ied :eri"s-
!"apter .: Micro *inance Models
27
#' Micro *inance Instit%tions @M*IsA:
MFIs are an e9treme"! #etero%eneous %rou: com:risin% NBF7s= societies= trusts and
coo:erati0es- ?#e! are :ro0ided financia" su:

rt from e9terna" donors and a:e9 institutions
inc"udin% t#e Ras#tri!a Ma#i"a Kos# (RMK)= SIDBI Foundation for micro;credit and NABARD
and em:"o! a 0ariet! of 6a!s for credit de"i0er!-
Since /&&&= commercia" 3ans inc"udin% Re%iona" Rura" Bans #a0e 3een :ro0idin% funds to
MFIs for on "endin% to

or c"ients- ?#ou%# initia""!= on"! a #andfu" of N$@s 6ere BintoC
financia" intermediation usin% a 0ariet! of de"i0er! met#ods= t#eir num3ers #a0e increased
considera3"! toda!- A#i"e t#ere is no :u3"is#ed data on :ri0ate MFIs o:eratin% in t#e countr!=
t#e num3er of MFIs is estimated to 3e around (&&-
;e3al *or4s of M*Is in India
Types of M*Is Esti4ated
8%4erB
;e3al Acts %nder <"ic" Re3istered
)- 8ot for Profit M*Is
a-) N$@ ; MFIs
1&& to +&& Societies Re%istration Act= )(*& or
simi"ar Pro0incia" Acts
Indian ?rust Act= )((/
3-) Non;:rofit 7om:anies )& Section /+ of t#e 7om:anies Act= )'+*
/- M%t%al Benefit M*Is
a-) Mutua""! Aided 7oo:erati0e
Societies (MA7S) and simi"ar"!
set u: institutions
/&& to /+& Mutua""! Aided 7oo:erati0e Societies
Act enacted 3! State $o0ernment
,- *or Profit M*Is
a-) Non;Banin% Financia"
7om:anies (NBF7s)
* Indian 7om:anies Act= )'+*
Reser0e Ban of India Act= )',1
?ota" <&& ; (&&
Source5 NABARD 6e3site
28
)' Ban2 Partners"ip Model
?#is mode" is an inno0ati0e 6a! of financin% MFIs- ?#e 3an is t#e "ender and t#e MFI acts as
an a%ent for #and"in% items of 6or re"atin% to credit monitorin%= su:er0ision and reco0er!- In
ot#er 6ords= t#e MFI acts as an a%ent and taes care of a"" re"ations#i:s 6it# t#e c"ient= from first
contact to fina" re:a!ment- ?#e mode" #as t#e

tentia" to si%nificant"! increase t#e amount of
fundin% t#at MFIs can "e0era%e on a re"ati0e"! sma"" eGuit! 3ase-
A su3 ; 0ariation of t#is mode" is 6#ere t#e MFI= as an NBF7= #o"ds t#e indi0idua" "oans on its
3oos for a 6#i"e 3efore securiti8in% t#em and se""in% t#em to t#e 3an- Suc# refinancin%
t#rou%# securiti8ation ena3"es t#e MFI en"ar%ed fundin% access- If t#e MFI fu"fi"s t#e Btrue sa"eC
criteria= t#e e9

sure of t#e 3an is treated as 3ein% to t#e indi0idua" 3orro6er and t#e :rudentia"
e9

sure norms do not t#en in#i3it suc# fundin% of MFIs 3! commercia" 3ans t#rou%# t#e
securiti8ation structure-
(' Ban2in3 !orrespondents
?#e :ro

sa" of B3anin% corres

ndentsC cou"d tae t#is mode" a ste: furt#er e9tendin% it to
sa0in%s- It 6ou"d a""o6 MFIs to co""ect sa0in%s de

sits from t#e

or on 3e#a"f of t#e 3an- It
6ou"d use t#e a3i"it! of t#e MFI to %et c"ose to

or c"ients 6#i"e re"!in% on t#e financia"
stren%t# of t#e 3an to safe%uard t#e de

sits- ?#is re%u"ation e0o"0ed at a time 6#en t#ere 6ere
%enuine fears t#at f"!;3!;ni%#t a%ents :ur

rtin% to act on 3e#a"f of 3ans in 6#ic# t#e :eo:"e
#a0e confidence cou"d mo3i"i8e sa0in%s of %u""i3"e :u3"ic and t#en 0anis# 6it# t#em- It remains
to 3e seen 6#et#er t#e mec#anics of suc# re"ations#i:s can 3e 6ored out in a 6a! t#at
minimi8es t#e ris of misuse-
.' Ser9ice !o4pany Model
Under t#is mode"= t#e 3an forms its o6n MFI= :er#a:s as an NBF7= and t#en 6ors #and in
#and 6it# t#at MFI to e9tend "oans and ot#er ser0ices- @n :a:er= t#e mode" is simi"ar to t#e
:artners#i: mode"5 t#e MFI ori%inates t#e "oans and t#e 3an 3oos t#em- But in fact= t#is mode"
#as t6o 0er! different and interestin% o:erationa" features5
29
@aA ?#e MFI uses t#e 3ranc# net6or of t#e 3an as its out"ets to reac# c"ients- ?#is a""o6s t#e
c"ient to 3e reac#ed at "o6er cost t#an in t#e case of a standMa"one MFI- In case of 3ans 6#ic#
#a0e "ar%e 3ranc# net6ors= it a"so a""o6s ra:id sca"e u:- In t#e :artners#i: mode"= MFIs ma!
contract 6it# man! 3ans in an arms "en%t# re"ations#i:- In t#e ser0ice com:an! mode"= t#e MFI
6ors s:ecifica""! for t#e 3an and de0e"o:s an intensi0e o:erationa" coo:eration 3et6een t#em
to t#eir mutua" ad0anta%e-
@A T"e Partners"ip 4odel uses 3ot# t#e financia" and infrastructure stren%t# of t#e 3an to
create "o6er cost and faster %ro6t#- ?#e Ser0ice 7om:an! Mode" #as t#e

tentia" to tae t#e
3urden of o0erseein% microfinance o:erations off t#e mana%ement of t#e 3an and :ut it in t#e
#ands of MFI mana%ers 6#o are focused on microfinance to introduce additiona" :roducts= suc#
as indi0idua" "oans for S4$ %raduates= remittances and so on 6it#out disru:tin% 3an o:erations
and :ro0ide a more ad0anta%eous cost structure for microfinance-
!"apter /
Role0 *%nctions and 1or2in3 Mec"anis4 of *inancial Instit%tions
/'# I!I!I Ban2
"## $an% is one ban% that has developed a very clear strategy to e&pand the provision of
financial products and services to the poor in ndia as a profitable activity'
$ ,ar%"i2o G%roda0 President0 Asian De9elop4ent Ban2'
30
I7I7IFs microfinance

rtfo"io #as 3een increasin% at an im:ressi0e s:eed- From )&=&&&
microfinance c"ients in /&&)= I7I7I Ban is no6 (/&&<) "endin% to )-( mi""ion c"ients t#rou%# its
:artner microfinance institutions= and its outstandin%

rtfo"io #as increased from Rs- &-/&
3i""ion (USJ1-+ mi""ion) to Rs- '-'( 3i""ion (USJ//< mi""ion)- A fe6 !ears a%o= t#ese c"ients #ad
ne0er 3een ser0ed 3! a forma" "endin% institution-
?#ere is an increasin% s#ift in t#e microfinance sector from %rant;%i0in% to in0estment in t#e
form of de3t or eGuit!= and I7I7I 3e"ie0es %rant mone! s#ou"d 3e "imited to t#e creation of
faci"itati0e infrastructure- BAe need to sto: sendin% %o0ernment and fundin% a%encies t#e si%na"
t#at microfinance is not a commercia""! 0ia3"e s!stemC= sa!s 8ac"i2et Mor0 EEec%ti9e Director
of I!I!I Ban2'
As a resu"t of 3ans enterin% t#e %ame= t#e sector #as c#an%ed ra:id"!- B?#ere is no deart# of
funds toda!= as 3ans are "ooin% into MFIs fa0ora3"!= un"ie a fe6 !ears a%oC= sa!s Pad4aja
Reddy0 t"e !E: of one of I!I!I Ban2Hs 4ajor M*I partners0 Spandana-
Ban2 ;ed Model
?#e 3an "ed mode" 6as deri0ed from t#e S4$;Ban "ina%e :ro%ram of NABARD- ?#rou%#
t#is :ro%ram= 3ans financed Se"f 4e": $rou:s (S4$s) 6#ic# #ad 3een :romoted 3! N$@s and
%o0ernment a%encies-
I7I7I Ban dre6 u: a%%ressi0e :"ans to :enetrate rura" areas t#rou%# its S4$ :ro%ram-
4o6e0er= rat#er t#an s:endin% time in de0e"o:in% rura" infrastructure of its o6n= in /&&&= I7I7I
Ban announced mer%er of Ban of Madura (BoM)= 6#ic# #ad si%nificant :resence in t#e rura"
areas of Sout# India= es:ecia""! ?ami" Nadu= 6it# a customer 3ase of )-' mi""ion and (<
3ranc#es-
Ban of MaduraQs S4$ de0e"o:ment :ro%ram 6as initiated in )''+- ?#rou%# t#is :ro%ram= it
#ad formed= trained and initiated sma"" %rou:s of 6omen to undertae financia" acti0ities "ie
3anin%= sa0in% and "endin%- B! /&&&= it #ad created around )/&& S4$s across ?ami" Nadu and
:ro0ided credit to t#em-
31
Partners"ip Models
A mode" of microfinance #as emer%ed in recent !ears in 6#ic# a microfinance institution (MFI)
3orro6s from 3ans and on;"ends to c"ientsI fe6 MFIs #a0e 3een a3"e to %ro6 3e!ond a certain

int- Under t#is mode"= MFIs are una3"e to :ro0ide ris ca:ita" in "ar%e Guantities= 6#ic# "imits
t#e ad0ances from 3ans- In addition= t#e ris is 3ein% entire"! 3orne 3! t#e MFI= 6#ic# "imits its
ris;tain%-
?#is mode" aimed at s!ner%i8in% t#e com:arati0e ad0anta%es and financia" stren%t# of t#e 3an
6it# socia" intermediation= mo3i"i8ation

6er and infrastructure of MFIs and N$@s- ?#rou%#
t#is mode"= I7I7I Ban cou"d sa0e on t#e initia" costs of de0e"o:in% rura" infrastructure and
micro credit distri3ution c#anne"s and cou"d tae ad0anta%e of t#e e9:ertise of t#ese institutions
in rura" areas- Initia""!= I7I7I Ban started off 3! "endin% to MFIs and N$@s in order to :ro0ide
t#e necessar! financia" su:

rt to t#eir acti0ities- 2ater= I7I7I Ban came u: 6it# a :"an 6#ere
t#e N$@LMFI continued to :romote t#eir microfinance sc#emes= 6#i"e t#e 3an met t#e
financia" reGuirements of t#e 3orro6ers-
:t"er Microfinance Initiati9es
As a :art of microfinance initiati0es in t#e a%ricu"ture sector= I7I7I Ban de0e"o:ed Farmer
Ser0ice 7enters (FS7)- An FS7 6as mana%ed 3! an a%ricu"tura" in:ut su::"! com:an! 6#ic#
su::"ied in:uts "ie seeds and tec#nica" no6#o6 to t#e farmers-
FS7s 6ere a"so mana%ed 3! an e9tension ser0ice or%ani8ation 6#ic# :ro0ided in:uts= credit and
tec#no"o%! or 3! an N$@ t#at :ro0ided a"" t#e ser0ices t#at farmers needed for t#eir a%ricu"tura"
needs- Aorin% in c"ose association 6it# farmers= FS7s :ro0ided t#em 6it# ser0ices "ie ad0ice
on seeds= so6in% tec#niGues= :est contro"= 6eed contro"= usa%e and dosa%e of #er3icides=
:esticides and ferti"i8ers and ot#er ser0ices associated 6it# a%ricu"ture- ?#e FS7s a"so :ro0ided
cro:;re"ated information and ser0ices to farmers= a:art from faci"itatin% t#e sa"e of a%ricu"tura"
:roduce- ?#e FS7s arran%ed to :rocure t#e :roduce t#rou%# a%ents and so"d it in or%ani8ed
a%ricu"tura" marets t#us %ettin% 3etter rea"i8ation-
T"e *%t%re
32
?#ese a%ents contact se0era" 3orro6ers= t#us e9:andin% t#e reac# of I7I7I Ban at a "o6 cost-
?ain% t#e FS7 initiati0e furt#er= I7I7I Ban :"ans to :ro0ide farmers credit from su%ar
com:anies= seed com:anies= dair! com:anies= N$@s= micro;credit institutions and food
:rocessin% industries-
SI$ #as 3een in0o"0ed in a :ro>ect in t#e sout#ern state of ?ami" Nadu to find out #o6 6ire"ess
tec#no"o%! can 3e a::"ied in t#e de0e"o:ment of "o6 cost mode"s of 3anin%- Anot#er :"an to
increase t#e reac# in rura" areas is to "aunc# mo3i"e A?M ser0ices- I7I7I Ban 3randed trucs
#a0e started carr!in% A?Ms t#rou%# a num3er of 0i""a%es
So4e Articles of 8e<s Paper:
#' I!I!I Ban2 to offer 4icro$finance to seE$<or2ers
M%4ai0 Marc" #.: In a no0e" 6a! to #e": se9;6orers to "i0e more meanin%fu""!= countr!Qs
"ar%est :ri0ate sector 3an= I7I7I Ban is :"annin% to offer financia" assistance to t#em t#ou%#
t#e micro;finance route-
For starters= t#e 3an :"ans to "aunc# t#e :ro%ramme in Ko"ata 3! enterin% into a tie;u: 6it#
Dur3ar Ma#i"a Sam6ana!a Samitee= an N$@ 6orin% for t#e 6e"fare of around *+=&&& se9;
6orers in and around t#e cit!-
Source5 (Press ?rust of India) Posted on"ine5 Aednesda!= Marc# )1= /&&< at /&5+1 #ours IS?
)' I!I!I Ban2 la%nc"es ne< initiati9e in 4icro$finance
I7I7I Ban #as taen a stae of under /& :er cent in Financia" Information Net6or and
@:erations Pri0ate 2td (FIN@)= 6#ic# 6as "aunc#ed on ?#ursda!= Ku"! ),= /&&)-
FIN@ 6ou"d :ro0ide tec#no"o%ica" so"utions as 6e"" as ser0ices to finance :ro0iders to reac# t#e
underser0ed in t#e countr!- I7I7I Ban is t#e "ead faci"itator-
Accordin% to Mr 8ac"i2et Mor= De:ut! Mana%in% Director= I7I7I Ban= FIN@ is an
inde:endent entit!- DAe 6ou"d reduce our stae in t#e com:an! 6#en reGuired=D #e said-
33
I7I7I Ban e9:ects to tar%et /&& micro;finance institutions (MFIs) 3! Marc# /&&<= #e said=
s:eain% on t#e side"ines of t#e :ress conference to "aunc# FIN@- At :resent= t#e 3an #as tie;
u:s 6it# )&& MFIs-
FIN@ is an initiati0e in t#e micro;finance sector- It 6ou"d tar%et ,&&;1&& mi""ion :eo:"e 6#o do
not #a0e access to 3asic financia" ser0ices= said Mr Manis# K#era= 7E@= FIN@- ?#e com:an!
#as an aut#orised ca:ita" of Rs +& crore- MFIs= NBF7s= RRBs= co;o:erati0e 3ans= etc 6ou"d
direct"! or indirect"! tie u: 6it# FIN@ to use its ser0ices= #e said- FIN@ 6ou"d c#ar%e Rs /+;,&
:er account e0er! !ear-
!ore an2in3 prod%cts
FIN@ #as :artnered 6it# IBM and i;f"e9 to offer core 3anin% :roducts- It 6ou"d a"so :ro0ide
credit 3ureau ser0ices= 6#ic# inc"udes indi0idua" customer credit ratin% and ana"!tics 3ased on
transaction #istor!- It a"so "aunc#ed 3iometric cards for customers= 6#ic# 6ou"d 3e a :roof of
identit! and %i0e co""atera" to t#em- ?#e card 6ou"d a"so offer mu"ti:"e :roducts inc"udin%
sa0in%s= "oans= insurance= recurrin% de

sits= fi9ed de

sits and remittances- ?#e com:an! 6ou"d
a"so 3ui"d;u: customer data3ase= t#us 3rin%in% t#em into mainstream 3anin%-
D?#ere 6as a need for automated structured data s!stem "ie FIN@=D said Mr Mor- DEssentia"
:ieces of infrastructure are missin% in India- Ae "ac credit;tracin% mec#anismI t#erefore t#ere
6as a need for an inter0ention "ie FIN@-D
?#e com:an! e9:ects to reac# /+ mi""ion customers in fi0e !ears and t6o mi""ion customers 3!
t#e end of /&&<-
FIN@ aims 3rin%in% sca"e to DmicroD 3usiness "eadin% to "o6erin% of costs for t#e "oca" financia"
institutions (2FIs) and act as an interna" tec#no"o%! de:artment for t#e 2FIs= said Mr G"era-
?#e com:an! is 6orin% on :ro0idin% tec#no"o%ica" so"utions in insurance= es:ecia""! t#e #ea"t#
insurance sector to t#e under;:ri0i"e%ed=D #e said- It is interactin% 6it# Na3ard= SIDBI and ot#er
3ans to %i0e s#a:e to 6#at FIN@ does= said Mr K#era-
(' I!I!I Ban2Is t"r%st on 4icro$finance
34
74ENNAI= MAR74 '- I7I7I Ban #as entered into :artners#i:s 6it# 0arious microfinance
institutions (MFI) and non;$o0ernment or%anisations (N$@s) to sca"e u: its micro "endin%
3usiness- Addressin% :ress:ersons #ere= toda!= Nac#iet Mor= E9ecuti0e Director= I7I7I Ban=
said= t#e :artners#i: mode" 6ou"d :ro0ide assured source of fundin% to N$@s and MFIs- ?#e
3an #ad e9tended ad0ances to t#e tune of Rs- )+& crores as on Fe3ruar! /'= t#is !ear= under t#is
sc#eme= Mr' Mor said-
?#e 3an #ad acGuired a net6or of se"f;#e": %rou:s (S4$s) de0e"o:ed 3! t#e erst6#i"e Ban of
Madura after its mer%er 6it# I7I7I Ban- Since t#en t#e S4$ :ro%ramme #ad %ro6n
su3stantia""! and )&=)<+ %rou:s #ad 3een :romoted reac#in% out to /-&, "a# 6omen s:read
across /=,'( 0i""a%es= t#e E9ecuti0e Director said-
@ne of t#e micro finance institutions= RMicrocredit Foundation of IndiaQ= esta3"is#ed 3! K- M-
?#ia%ara>an= former 7#airman of Ban of Madura in /&&/= #ad initiated a :ro%ramme for
microcredit t#rou%# se"f;#e": %rou:s-
I7I7I Ban #as entered into a memorandum of understandin% 6it# Microcredit Foundation to
outsource S4$ de0e"o:ment= maintenance of %rou:s= credit "ina%e and reco0er! of "oans-
T"e M*I as !ollection A3ent
?o address t#ese constraints= I7I7I Ban initiated a :artners#i: mode" in /&&/ in 6#ic# t#e MFI
acts as a co""ection a%ent instead of a financia" intermediar!- ?#is mode" is uniGue in t#at it
com3ines de3t as me88anine finance to t#e MFI (Me88anine finance com3ines de3t and eGuit!
financin%5 it is de3t t#at can 3e con0erted 3! t#e "ender into eGuit! in t#e e0ent of a defau"t-
?#is source of financin% is ad0anta%eous for MFIs 3ecause it is treated "ie eGuit! in t#e 3a"ance;
s#eet and ena3"es it to raise mone! 6it#out additiona" eGuit!= 6#ic# is an e9:ensi0e financin%
source-)-?#e "oans are contracted direct"! 3et6een t#e 3an and t#e 3orro6er= so t#at t#e ris for
t#e MFI is se:arated from t#e ris in#erent in t#e

rtfo"io- ?#is mode" is t#erefore "ie"! to #a0e
0er! #i%# "e0era%in% ca:acit!= as t#e MFI #as an assured source of funds for e9:andin% and
35
dee:enin% credit- I7I7I c#ose t#is mode" 3ecause it e9:ands t#e retai" o:erations of t#e 3an 3!
"e0era%in% com:arati0e ad0anta%es of MFIs= 6#i"e a0oidin% costs associated 6it# enterin% t#e
maret direct"!-
Sec%ritiCation
Anot#er 6a! to enter into :artners#i: 6it# MFIs is to securiti8e microfinance

rtfo"ios- In /&&1=
t#e "ar%est e0er securiti8ation dea" in microfinance 6as si%ned 3et6een I7I7I Ban and S4ARE
Microfinance 2td= a "ar%e MFI o:eratin% in rura" areas of t#e state of Andra Prades#- ?ec#nica"
assistance and t#e co""atera" de

sit of USJ,/+=&&& (',P of t#e %uarantee reGuired 3! I7I7I)
6ere su::"ied 3! $rameen Foundation USA- Under t#is a%reement= I7I7I :urc#ased a :art of
S4AREFs microfinance

rtfo"io a%ainst a consideration ca"cu"ated 3! com:utin% t#e Net
Present Va"ue of recei0a3"es amountin% to Rs- /)+ mi""ion (USJ1-' mi""ion) at an a%reed
discount rate- ?#e interest :aid 3! S4ARE is a"most 1P "ess t#an t#e rate :aid in commercia"
"oans- Partia" credit :ro0ision 6as :ro0ided 3! S4ARE in t#e form of a %uarantee amountin% to
(P of t#e recei0a3"es under t#e

rtfo"io= 3! 6a! of a "ien on fi9ed de

sit- ?#is dea" frees u:
eGuit! ca:ita"= a""o6in% S4ARE to sca"e u: its "endin%- @n t#e ot#er #and= it a""o6s I7I7I Ban
to reac# ne6 marets- And 3! tradin% t#is #i%# Gua"it! asset in ca:ita" marets= t#e 3an can
#ed%e its o6n riss-
Beyond Microcredit
Microfinance does not on"! mean microcredit= and I7I7I does not "imit itse"f to "endin%- I7I7IFs
Socia" Initiati0e $rou:= a"on% 6it# t#e Aor"d Ban and I7I7I 2om3ard= t#e insurance com:an!
set u: 3! I7I7I and 7anada 2om3ard= #a0e de0e"o:ed IndiaFs first inde9;3ased insurance
:roduct- ?#is insurance

"ic! com:ensates t#e insured a%ainst t#e "ie"i#ood of diminis#ed
a%ricu"tura" out:utL!ie"d resu"tin% from a s#ortfa"" in t#e antici:ated norma" rainfa"" 6it#in t#e
district= su3>ect to a ma9imum of t#e sum insured- ?#e insurance

"ic! is "ined to a rainfa""
inde9-
Tec"nolo3y
36
@ne of t#e main c#a""en%es to t#e %ro6t# of t#e microfinance sector is accessi3i"it!- ?#e Indian
conte9t= in 6#ic# <&P of t#e

:u"ation "i0es in rura" areas= reGuires ne6= in0enti0e c#anne"s of
de"i0er!- ?#e use of tec#no"o%ies suc# as ioss and smart cards 6i"" considera3"! reduce
transaction costs 6#i"e im:ro0in% access- ?#e I7I7I Ban tec#no"o%! team is de0e"o:in% a
series of inno0ati0e :roducts t#at can #e": reduce transaction costs considera3"!- For e9am:"e= it
is :i"otin% t#e usa%e of smart cards 6it# Se6a Ban in A#meda3ad- ?o ma9imi8e t#e 3enefits of
t#ese inno0ations= t#e de0e"o:ment of a #i%# Gua"it! s#ared 3anin% tec#no"o%! :"atform 6#ic#
can 3e used 3! MFIs as 6e"" as 3! coo:erati0es 3ans and re%iona" rura" 3ans is needed- I7I7I
is stron%"! encoura%in% suc# an effort to tae :"ace- Ai:ro and Infos!s= I;F"e9= ,iInfotec#= some
of t#e 3est Indian information tec#no"o%! com:anies s:ecia"i8ed in financia" ser0ices= and ot#ers=
are in t#e :rocess of de0e"o:in% e9act"! suc# a :"atform- At a recent tec#no"o%! 6ors#o: at t#e
Institute for Financia" Mana%ement Researc# in 7#ennai= t#e I7I7I Ban A"ternate 7#anne"s
?eam :resented t#e 3enefits of in0estin% in a common tec#no"o%! :"atform simi"ar to t#ose used
in mainstream 3anin% to some of t#e most :romisin% MFIs-
T"e !entre for Microfinance Researc"
I7I7I 3an #as created t#e 7entre for Microfinance Researc# (7MFR) at t#e Institute for
Financia" Mana%ement Researc# (IFMR) in 7#ennai- ?#rou%# researc#= researc#;3ased
ad0ocac!= #i%# "e0e" trainin% and strate%! 3ui"din%= it aims to s!stematica""! esta3"is# t#e "ins
3et6een increased access to financia" ser0ices and t#e :artici:ation of

or :eo:"e in t#e "ar%er
econom!- ?#e 7MFR Researc# Unit su:

rts initiati0es aimed at understandin% and ana"!8in%
t#e fo""o6in% issues5 im:act of access to financia" ser0icesI contract and :roduct desi%nsI
constraints to #ouse#o"d :roducti0it!I com3ination of microfinance and ot#er de0e"o:ment
inter0entionsI e0idence of credit constraintsI costs and :rofita3i"it! of microfinance
or%ani8ationsI im:act of MFI

"icies and strate%iesI :eo:"eFs 3e#a0ior and :s!c#o"o%! 6it#
res:ect to financia" ser0icesI economics of micro;enter:risesI and t#e effect of re%u"ations-
Fina""!= t#e 7MFR reco%ni8es t#at 6#i"e MFIs aim to meet t#e credit needs of

or #ouse#o"ds=
t#ere are ot#er missin% marets and constraints facin% #ouse#o"ds= suc# as #ea"t#care=
infrastructure= and %a:s in no6"ed%e- ?#ese #a0e im:"ications in terms of t#e sca"e and
:rofita3i"it! of c"ient enter:rises and efficienc! of #ouse#o"d 3ud%et a""ocation= 6#ic# in turn
37
im:acts #ouse#o"d 6e"";3ein%- ?#e 7MFR Microfinance Strate%! Unit 6i"" address t#ese issues
t#rou%# a series of 6ors#o:s 6#ic# 6i"" 3rin% to%et#er MFI :ractitioners and sectora" e9:erts
(in ener%!= 6ater= roads= #ea"t#= etc)- ?#e "atter 6i"" 3rin% to t#e ta3"e no6"ed%e of 3est :ractices
in t#eir s:ecific areas= and eac# consu"tation 6ors#o: 6i"" resu"t in "on%;term co""a3oration
3et6een 6it# MFIs for im:"ementin% s:ecific :i"ots-
/') Band"an
@Ran2ed )
nd
y *ores Ma3aCine in Dece4er )==5A
Band#an is 6orin% to6ards t#e t6in o3>ecti0e of

0ert! a""e0iation and 6omen em

6erment-
It started as a 7a:acit! Bui"din% Institution (7BI) in No0em3er /&&& under t#e "eaders#i: of Mr-
7#andra S#e#ar $#os#- Durin% suc# time= it 6as %i0in% ca:acit! 3ui"din% su:

rt to "oca"
microfinance institutions 6orin% in Aest Ben%a"-
Band#an o:ened its first microfinance 3ranc# at Ba%nan in 4o6ra# district of Aest Ben%a" in
Ku"! /&&/- Band#an started 6it# / 3ranc#es in t#e !ear /&&/;&, on"! in t#e state of Aest Ben%a"
and toda! it #as %ro6n as stron% as 1)/ 3ranc#es across * states of t#e countr!S ?#e or%ani8ation
#ad recorded a %ro6t# rate of +&&P in t#e !ear /&&,;&1 and *))P in t#e !ear /&&1;&+- ?i"" date=
it #as dis3ursed a tota" of Rs- +(< crores amon% a"most < "a#

or 6omen- 2oan outstandin%
stands at Rs- //) crores- ?#e re:a!ment rate is recorded at ''-''P- Band#an #as staff stren%t# of
more t#an /),& em:"o!ees-
38
As on J%ly )==6
Column1 Column2
No- of states 5 (
No- of 3ranc#es 5 +/(
No- of mem3ers 5 )=)(/=<1)
No- of staff 5 ,=)')
7umu"ati0e "oan dis3ursed 5 Rs-)=/1' crores
2oan outstandin% 5 Rs- 1)< crores

erational Met"odolo3y
Band#an fo""o6s a %rou: formation= indi0idua" "endin% a::roac#- A %rou: of )&;/+ mem3ers are
formed- ?#e c"ients #a0e to attend t#e %rou: meetin%s for / successi0e 6ees- / 6ees #ence=
t#e! are entit"ed to recei0e "oans- ?#e "oans are dis3ursed indi0idua""! and direct"! to t#e
mem3ers-
Econo4ic and Social Bac23ro%nd of !lients
? 2and"ess and asset "ess 6omen
? Fami"! of + mem3ers 6it# mont#"! income "ess t#an Rs- /=+&& in rura" and Rs-
,=+&& in ur3an
? ?#ose 6#o do not o6n more t#an +& decima" ()L/acre) of "and or ca:ita" of its
eGui0a"ent 0a"ue
;oan SiCe
?#e first "oan is 3et6een Rs- )=&&& M Rs- <=&&& for t#e rura" areas and 3et6een Rs- )=&&& M Rs-
)&=&&& for t#e ur3an areas- After t#e re:a!ment= t#e! are entit"ed to recei0e a su3seGuent "oan
6#ic# is Rs )=&&& ; +=&&& more t#an t#e :re0ious "oan-
Ser9ice !"ar3e
Band#an c#ar%es a ser0ice c#ar%e of )/-+&P f"at on "oan amount- Band#an initia""! c#ar%ed
)<-+&P- 4o6e0er from )st Ku"! /&&+= it #as s"as#ed do6n its "endin% rate to )+-&&P- ?#en it
39
6as furt#er reduced to )/-+&P in Ma! /&&*- ?#e reason is o30ious- As o0era"" :roducti0it!
increased= o:erationa" costs decreased- Band#an= 3ein% a non :rofit or%ani8ation 6anted t#e
3enefit of "o6 costs to u"timate"! tric"e do6n to t#e

or-
Monitorin3 Syste4
?#e 0arious features of t#e monitorin% s!stem are5
? A , tier monitorin% s!stem M Re%ion= Di0ision and 4ead @ffice
? Eas! re

rtin% s!stem 6it# a :rescri3ed c#ec"ist format
? Accounta3i"it! at a"" "e0e"s

st monitorin% :#ase
? 7ross; c#ecin% at a"" t#e "e0e"s
? ?#e mana%ement team of Band#an s:ends '&-&&P of time at t#e fie"d
;iaility str%ct%re for ;oans
A#en a mem3er 6ants to >oin Band#an= s#e at first #as to %et inducted into a %rou:- After s#e
%ets inducted into t#e %rou:= t#e entire %rou: :ro

ses #er name for a "oan in t#e Reso"ution
Boo- ?6o mem3ers of t#e %rou: a"on% 6it# t#e mem3erFs #us3and #a0e to si%n as %uarantors in
#er "oan a::"ication form- If s#e fai"s to :a! #er 6ee"! insta""ment= t#e %rou: inserts :eer
:ressure on #er- ?#e so"e :ur

se of t#e a3o0e structure is sim:"! to create :eer :ressure-
/'( -ra4een Ban2
?#e $rameen Mode" 6#ic# 6as :ioneered 3! Prof Mu#ammed Yunus of $rameen Ban is
:er#a:s t#e most 6e"" no6n= admired and :ractised mode" in t#e 6or"d- ?#e mode" in0o"0es t#e
fo""o6in% e"ements-
• 4omo%eneous affinit! %rou: of fi0e
• Ei%#t %rou:s form a 7entre
• 7entre meets e0er! 6ee
• Re%u"ar sa0in%s 3! a"" mem3ers
40
• 2oan :ro

sa"s a::ro0ed at 7entre meetin%
• 2oan dis3ursed direct"! to indi0idua"s
• A"" "oans re:aid in +& insta"ments
?#e $rameen mode" fo""o6s a fair"! re%imented routine- It is 0er! cost intensi0e as it in0o"0es
3ui"din% ca:acit! of t#e %rou:s and t#e customers :assin% a test 3efore t#e "endin% cou"d start-
?#e %rou: mem3ers tend to 3e se"ected or at "east stron%"! 0etted 3! t#e 3an- @ne of t#e reasons
for t#e #i%# cost is t#at staff mem3ers can conduct on"! t6o meetin%s a da! and t#us are
occu:ied for on"! a fe6 #ours= usua""! ear"! mornin% or "ate in t#e e0enin%- ?#e! 6ere used
additiona""! for accountin% 6or= 3ut t#at can no6 3e done more cost effecti0e"! usin%
com:uters- ?#e mode" is a"so rat#er meetin% intensi0e 6#ic# is fine as "on% as t#e mem3ers #a0e
no a"ternati0e use for t#eir time 3ut can 3e a :ro3"em as mem3ers %o u: t#e income "adder-
?#e %reatness of t#e $rameen mode" is in t#e sim:"icit! of desi%n of :roducts and de"i0er!- ?#e
:rocess of de"i0er! is sca"a3"e and t#e mode" cou"d 3e re:"icated 6ide"!- ?#e focus on t#e

orest= 6#ic# is a 0a"ue attri3ute of $rameen= #as a"so made t#e mode" a fa0ourite amon% t#e
donor communit!-
4o6e0er= t#e $rameen mode" 6ors on"! under certain assum:tions- As a"" t#e "oans are on"! for
enter:rise :romotion= it assumes t#at a"" t#e

or 6ant to 3e se"f;em:"o!ed- ?#e re:a!ment of
"oans starts t#e 6ee after t#e "oan is dis3ursed M t#e in#erent assum:tion 3ein% t#at t#e
3orro6ers can ser0ice t#eir "oan from t#e e9;ante income-
/'. SGS Microfinance
@!E:$Ki2ra4 A2%laA
Man! com:anies sa! t#e! :rotect t#e interests of t#eir customers- Ver! fe6 actua""! sit in dirt
6it# t#em= usin% stones= f"o6ers= stics= and c#a"

6der to fi%ure out if t#e! 6i"" 3e a3"e to
re:a! a J/& "oan at J) a mont#- Ait# t#is a::roac#= t#is com:an! #as created its o6n "o!a" %an%
of o0er / mi""ion customers-
Its 3orro6ers inc"ude a%ricu"tura" "a3orers= mom;and;

: entre:reneurs= street 0endors= #ome
3ased artisans= and sma"" sca"e :roducers= eac# "i0in% on "ess t#an J/ a da!- It 6ors on a mode"
41
t#at 6ou"d a""o6 micro;finance institutions to sca"e u: Guic"! so t#at t#e! 6ou"d ne0er #a0e to
turn

or :erson a6a!-
Its mode" is 3ased on , :rinci:"es;
1. Adopt a profit$oriented approac" in order to access co44ercial capital$ Startin%
6it# t#e :itc# t#at t#ere is a #i%# entre:reneuria" s:irit amon%st t#e

or to raise t#e
funds= SKS con0erted itse"f to for;:rofit status as soon as it %ot 3rea e0en and %ot
:#i"ant#ro:ist Ra0i Redd! to 3e a foundin% in0estor- ?#en it secured mone! from :arties
suc# as Unitus= a Seatt"e 3ased N$@ t#at #e":s :romote micro;financeI SIDBII and
tec#no"o%! entre:reneur Vinod K#os"a- 2ater= it 6as a3"e to attract mu"timi""ion do""ar
"ines of credit from 7iti3an= ABN Amro= and ot#ers-
2. StandardiCe prod%cts0 trainin30 and ot"er processes in order to oost capacity$ ?#e!
co""ect standard re:a!ments in round num3ers of /+ or ,& ru:ees- Interna""!= t#e! #a0e
factor! st!"e trainin% mode"s- ?#e! enro"" a3out +&& "oan officers e0er! mont#- ?#e!
:artici:ate in t#eor! c"asses on Saturda!s and :ractice 6#at t#e! #a0e "earned in t#e fie"d
durin% t#e 6ee- ?#e! #a0e s#ortened t#e trainin% time for a "oan officer to / mont#s
t#ou%# t#e a0era%e time taen 3! ot#er industr! :"a!ers is 1;* mont#s-
3. Use Tec"nolo3y to red%ce costs and li4it errors$ It cou"d not find t#e soft6are t#at
suited its reGuirements= so it t#e! 3ui"t t#eir o6n sim:"e and user friend"! a::"ications
t#at a com:uter;i""iterate "oan officer 6it# a )/
t#
%rade education can easi"! understand-
?#e s!stem is a"so internet ena3"ed- $i0en t#at e"ectricit! is unre"ia3"e in man! areas t#e!
#a0e insta""ed car 3atteries or %as

6ered %enerators as 3ac;u:s in man! areas-
Scalin3 %p !%sto4er ;oyalty
Instead of asin% i""iterate 0i""a%ers to descri3e t#eir seasona" :attern of cas# f"o6s= t#e!
encoura%e t#em to use co"ored c#a"

6der and f"o6ers to ma: out t#e 0i""a%e on t#e
%round and te"" 6#ere t#e

orest :eo:"e "i0ed= 6#at ind of financia" :roducts t#e! needed=
6#ic# areas 6ere "orded o0er 3! 6#ic# "oan s#ars= etc- ?#e! set :eo:"eFs tin! 6ee"!
re:a!ments as "o6 as J) :er 6ee and #ea"t# and 6#o"e "ife insurance :remiums to 3e J)& a
!ear and /+ cents :er 6ee res:ecti0e"!- ?#e! a"so offer interest free emer%enc! "oans- ?#e
42
sa"aries of "oan officers are not tied to re:a!ment rates and t#e! >ourne! on mo:eds to
3orro6ersF 0i""a%es and sc#edu"e "oan meetin%s as ear"! as <-&& A-M- Dee: customer "o!a"t!
u"timate"! resu"ts in a re:a!ment rate of ''-+P-
;e9era3in3 t"e SGS rand
Its :a!off comes from #i%# 0o"umes- ?#e! are %ro6in% at /&&P annua""!= addin% +&
3ranc#es and )=*&=&&& ne6 customers a mont#- ?#e! are a"so usin% t#eir dee: distri3ution
c#anne"s for se""in% soa:= c"ot#es= consumer e"ectronics and ot#er :aca%ed %oods-
!"apter +
Mar2etin3 of Microfinance Prod%cts
#' !ontract *ar4in3 and !redit B%ndlin3
Bans and financia" institutions #a0e 3een :artners in contract farmin% sc#emes= set u: to
en#ance credit- Basica""!= t#is is a doa3"e mode"- Under suc# an arran%ement= cro: "oans can 3e
e9tended under tie;u: arran%ements 6it# cor

rate for :roduction of #i%# Gua"it! :roduce 6it#
sta3"e maretin% arran%ements :ro0ided M and on"!= :ro0ided M t#e :rice settin% mec#anism for
t#e farmer is a::ro:riate and fair-
)' A3ri Ser9ice !entre F Rao India
Ra3o India Finance P0t 2td- #as esta3"is#ed a%ri;ser0ice centres in rura" areas in coo:eration
6it# a num3er of a%ri;in:ut and farm ser0ices com:anies- ?#e ser0ices :ro0ided are simi"ar to
t#ose in contract farmin%= 3ut 6it# additiona" f"e9i3i"it! and a 6ider ran%e of :roducts inc"udin%
in0entor! finance- Besides :ro0idin% stora%e faci"ities= eac# centre rents out farm mac#iner!=
:ro0ides a%ricu"tura" in:uts and information to farmers= arran%es credit= se""s ot#er ser0ices and
:ro0ides a forum for farmers to maret t#eir :roducts-
(' 8on Traditional Mar2ets
Simi"ar"!= Mot#er Dair! Foods Processin%= a 6#o""! o6ned su3sidiar! of Nationa" Dair!
De0e"o:ment Board (NDDB) #as esta3"is#ed auction marets for #orticu"ture :roducers in
43
Ban%a"ore- ?#e o:erations and maintenance of t#e maret is done 3! NDDB- ?#e :ro>ect= 6it#
an out"a! of Rs-)+ "a#= co0ers /&& #orticu"tura" farmers associations 6it# +&=&&& %ro6er
mem3ers for 6#o"esa"e maretin%- ?#eir :roduce is :"anned 6it# :roduction and su::"!
assurance and :ro0ides 3ot# %ro6ers and 3u!ers a common :"atform to ne%otiate 3etter rates-
.' Apni Mandi
Anot#er inno0ation is t#at of ?#e Pun>a3 Mandi Board= 6#ic# #as e9:erimented 6it# a EfarmersF
maretF to :ro0ide sma"" farmers "ocated in :ro9imit! to ur3an areas= direct access to consumers
3! e"imination of midd"emen- ?#is e9:eriment no6n as DA:ni MandiD 3e"on%s to 3ot# farmers
and consumers= 6#o mutua""! #e": eac# ot#er- Under t#is arran%ement a sum of Rs- +-/ "a# is
s:ent for :ro0idin% :"astic crates to )&&& farmers- Eac# farmer %ets + crates at a su3sidi8ed rate-
At t#e mandi site= t#e Board :ro0ides 3asic infrastructure faci"ities- At t#e farm "e0e"= e9tension
ser0ices of different a%encies are

o"ed in- ?#ese inc"ude in:uts su3sidies= 3etter Gua"it! seeds
and "oans from Bans- A:ni Mandi sc#eme :ro0ides se"f;em:"o!ment to :roducers and #as
e"iminated socia" in#i3itions amon% t#em re%ardin% t#e retai" sa"e of t#eir :roduce-
44
!"apter 5
S%ccess *actors of Micro$*inance in India
@0er t#e "ast ten !ears= successfu" e9:eriences in :ro0idin% finance to sma"" entre:reneur and
:roducers demonstrate t#at

or :eo:"e= 6#en %i0en access to res

nsi0e and time"! financia"
ser0ices at maret rates= re:a! t#eir "oans and use t#e :roceeds to increase t#eir income and
assets- ?#is is not sur:risin% since t#e on"! rea"istic a"ternati0e for t#em is to 3orro6 from
informa" maret at an interest muc# #i%#er t#an maret rates- 7ommunit! 3ans= N$@s and
%rass root sa0in%s and credit %rou:s around t#e 6or"d #a0e s#o6n t#at t#ese microenter:rise
"oans can 3e :rofita3"e for 3orro6ers and for t#e "enders= main% microfinance one of t#e most
effecti0e

0ert! reducin% strate%ies-
A' *or 8-:s
)- ?#e fie"d of de0e"o:ment itse"f e9:ands and s#ifts em:#asis 6it# t#e :u"" of ideas= and
N$@s :er#a:s more readi"! ado:t ne6 ideas= es:ecia""! if t#e resources reGuired are
sma""= entr! and e9it are eas!= tass are

ercei0ed to 3e) sim:"e and :eo:"eFs acce:tance
is #i%# M a"" c#aracteristics (rea" or :resumed) of microfinance-
/- 7an0assin% 3! 0arious actors= inc"udin% t#e Nationa" Ban for A%ricu"ture and Rura"
De0e"o:ment (NABARD)= Sma"" Industries De0e"o:ment Ban of India (SIDBI)= Friends
of AomenFs Aor"d Banin% (FAAB)= Ras#tri!a Ma#i"a Kos# (RMK)= 7ounci" for
Ad0ancement of Peo:"eFs Action and Rura" ?ec#no"o%ies (7APAR?)= Ras#tri!a $ramin
Vias Nid#i (R$VN)= 0arious donor funded :ro%rammes es:ecia""! 3! t#e Internationa"
45
Fund for A%ricu"tura" De0e"o:ment (IFAD)= United Nations De0e"o:ment Pro%ramme
(UNDP)= Aor"d Ban and De:artment for Internationa" De0e"o:ment= UK (DFID)T= and
"ate"! commercia" 3ans= #as %reat"! added to t#e idea :u""- Induced 3! t#e 6or"d6ide
focus on microfinance= donor N$@s too #a0e 3een fundin% microfinance :ro>ects- @ne
mi%#t ca"" it t#e su::"! :us#-
3. A"" inds of t#in%s from #adi s:innin% to Nade: com

st to 3a"6adis do not :roduce
suc# concrete resu"ts and sustained interest amon% 3eneficiaries as microfinance- Most
N$@;"ed microfinance is 6it#

or 6omen= for 6#om access to sma"" "oans to meet dire
emer%encies is a 0a"ued outcome- ?#us= Guic and #i%# Ecustomer satisfactionF is t#e USP
t#at #as attracted N$@s to t#is trade-
1- ?#e idea a::ears sim:"e to im:"ement- ?#e most common route fo""o6ed 3! N$@s is
:romotion of S4$s- It is im:"icit"! assumed t#at no Etec#nica" si""F is in0o"0ed- Besides=
e9terna" resources are not needed as S4$s 3e%in 6it# t#eir o6n sa0in%s- ?#ose N$@s
t#at #a0e access to re0o"0in% funds from donors do not #a0e to 6orr! a3out financia"
:erformance an! 6a!- ?#e c#icens 6i"" e0entua""! come #ome to roost 3ut in t#e first
f"us#= it seems a"" so eas!-
+- For man! N$@s t#e idea of Eor%anisin%F M formin% a samu#a M #as in#erent a::ea"-
$rou:s connote em

6erment and or%anisin% 6omen is a dou3"e 3onus-
*- Fina""!= to man! N$@s= microfinance is a 6a! to financia" sustaina3i"it!- Es:ecia""! for
t#e medium;to;"ar%e N$@s t#at are a3"e to access 3u" funds for on;"endin%= for e9am:"e
from SIDBI= t#e interest rate s:read cou"d 3e an attracti0e source of re0enue t#an an
uncertain= #i%#"! com:etiti0e and increasin%"! difficu"t;to;raise donor fundin%-
B' *or *inancial Instit%tions and an2s
46
Microfinance #as 3een attracti0e to t#e "endin% a%encies 3ecause of demonstrated sustaina3i"it!
and of "o6 costs of o:eration- Institutions "ie SIDBI and NABARD are #ard nosed 3aners and
6ou"d not 6or 6it# t#e idea if t#e! did not see a "on% term en%a%ement M 6#ic# on"! comes out
of sustaina3i"it! (t#at is economic attracti0eness)-
@n t#e su::"! side= it is a"so true t#at it #as a"" t#e tra::in%s of a 3usiness enter:rise= its out:ut is
tan%i3"e and it is easi"! understood 3! t#e mainstream- ?#is a"so seems to sound nice to t#e
%o0ernment= 6#ic# in t#e

st "i3era"isation era is tr!in% to e9:"ain t#e "o%ic of e0er! ru:ee
s:ent- ?#at is t#e reason 6#! microfinance #as attracted mainstream institutions "ie no ot#er
de0e"o:menta" :ro>ect-
Per#a:s t#e most im

rtant factor t#at %ot 3ans in0o"0ed is 6#at one mi%#t ca"" t#e

"ic! :us#-
$i0en t#at most of our 3ans are in t#e :u3"ic sector= :u3"ic

"ic! does #a0e some inf"uence on
6#at t#e! 6i"" or 6i"" not do- In t#is case=

"ic! 6as fo""o6ed 3! di"i%ent= if meanderin%=
:romotiona" 6or 3! NABARD- ?#e

"ic! c#an%e a3out a decade a%o 3! RBI to a""o6 3ans to
"end to S4$s 6as initia""! fo""o6ed 3! a se0en;:a%e memo 3! NABARD to a"" 3an c#airmen=
and "ater 3! sensitisation and trainin% :ro%rammes for 3an staff across t#e countr!- Se0era"
#undred suc# :ro%rammes 6ere conducted 3! N$@s a"one= eac# in0o"0in% )+ to /& 3an staff=
a"" :aid for 3! NABARD- ?#e

"ic! :us# 6as s6eetened 3! t#e NABARD refinance sc#eme
t#at offers muc# more fa0oura3"e terms ()&&P refinance= 6ider s:read) t#an for ot#er rura"
"endin% 3! 3ans- NABARD a"so did some s!stem settin% 6or and 3ans "ate"! #a0e 3een
%i0en tar%ets- ?#e can0assin%= trainin%= refinance and c"ose fo""o6 u: 3! NABARD #as resu"ted
in 6ides:read 3an in0o"0ement-
Moreo0er= for 3ans t#e o:eratin% cost of microfinance is :er#a:s muc# "ess t#an for :ure MFIs-
?#e 3ans a"read! #a0e a 0ast net6or of 3ranc#es- ?o t#e e9tent t#at an N$@ #as a"read!
:romoted S4$s and t#e S4$

rtfo"io is :erformin% 3etter t#an t#e rest of t#e rura" (if not t#e
entire)

rtfo"io= microfinance 0ia S4$s in t#e 6orst case 6ou"d re:resent mar%ina" addition to
cost and 6ou"d often reduce mar%ina" cost t#rou%# 3etter ca:acit! uti"isation- In t#e :rocess t#e
3an a"so earns 3ro6nie

ints 6it#

"ic! maers and meets its :riorit! sector tar%ets-
47
It does not tae muc# ana"!sis to fi%ure out t#at t#e maret for financia" ser0ices for t#e +&;*&
mi""ion

or #ouse#o"ds of India= cou:"ed 6it# a3out t#e same num3er 6#o are tec#nica""!
a3o0e t#e

0ert! "ine 3ut are se0ere"! under;ser0ed 3! t#e financia" sector= is a 0er! "ar%e one-
Moreo0er= as in an! emer%in% maret= t#ou%# t#e :ercei0ed riss are #i%#er= t#e s:reads are
muc# %reater- ?#e traditiona" commercia" marets of cor

rates= 3usiness= trade= and no6 e0en
#ousin% and consumer finance are 3ein% sou%#t 3! a"" t#e 3ans= "eadin% to :rice com:etition
and 6afer t#in s:reads-
Furt#er= 3an;%rou:s are moti0ated 3! a num3er of cross;se""in% o:

rtunities in t#e maret= for
de

sits= insurance= remittances and e0entua""! mutua" funds- Since t#e "ar%er 3ans are offerin%
a"" t#ese ser0ices no6 t#rou%# t#eir %rou: com:anies= it 3ecomes im:erati0e for t#em to e9:and
t#eir distri3ution c#anne"s as far and dee: as

ssi3"e= in t#e #o:e of ca:turin% t#e entire
financia" ser0ices 3usiness of a #ouse#o"d-
Fina""!= 3ot# a%ri;in:ut and :rocessin% com:anies suc# as EID Parr!= fast;mo0in% consumer
%oods (FM7$) com:anies suc# as 4industan 2e0ers= and consumer dura3"e com:anies suc# as
P#i"i:s #a0e rea"ised t#e

tentia" of t#is 3i% maret and are acti0e"! usin% S4$s as entr!

ints-
Some amount of free;ridin% is tain% :"ace #ere 3! com:anies= for t#e! are usin% c#anne"s 6#ic#
6ere 3ui"t at a si%nificant cost to N$@s= fundin% a%encies andLor t#e %o0ernment-
@n t#e 6#o"e= t#e economic attracti0eness of microfinance as a 3usiness is %ettin% esta3"is#ed
and t#is is a sure ste: to6ards mainstreamin%- Ae no6 t#at mainstreamin% is a mi9ed 3"essin%=
and one tends to e9c#an%e sca"e at t#e cost of o3>ecti0es- So it needs to 3e 6atc#ed carefu""!-
A real life EEa4ples :
2as#mi= a //;!ear;o"d sc#oo" dro

ut= "i0ed in a remote 0i""a%e of ?ami" Nadu- Instead of
%ettin% married and startin% a fami"! "ie an! ot#er 0i""a%e %ir" of #er a%e in India= s#e 6anted to
set u: on #er o6n 3usiness-
48
2as#mi started an Internet ios in #er 0i""a%e= offerin% ser0ices "ie e;mai"= Internet c#at and
ti:s on #ea"t# and education- ?#e ios 6as :artia""! financed 3! I7I7I Ban and 6as set u: in
association 6it# n;2o%ue 7ommunications- 2at#a= a /';!ear;o"d married 6oman 6it# t#ree
c#i"dren 3orro6ed Rs-)(=&&& to set u: a sma"" :ro0ision store in Kot#ai:a""i= a sma"" 0i""a%e= in
t#e nort# of And#ra Prades#- Ait#in a !ear= s#e started earnin% Rs-,+&& a mont# from t#e store-
Ait# t#is mone!= s#e 6as a3"e to :ro0ide #er c#i"dren a %ood education at a "oca" :ri0ate sc#oo"-
S#e 6as a :art of a se"f #e": %rou: in And#ra Prades# 6#ic# recei0ed financia" assistance from
I7I7I Ban- ?#ese are rea";"ife e9am:"es to i""ustrate #o6 t#e micro;"endin% initiati0es of I7I7I
Ban affected t#e "i0es of

or 6omen in India-
B! 3ecomin% a :art of se"f;#e": %rou:s= se0era" rura" 6omen 6ere a3"e to mo0e out of

0ert!-
A:art from financia" 3enefits= t#e initiati0es #e":ed t#e 6omen to de0e"o: se"f confidence=
im:ro0e t#eir communication si""s and raise t#eir

sition in societ!-
B! 3ecomin% a :art of se"f;#e": %rou:s= se0era" rura" 6omen 6ere a3"e to mo0e out of

0ert!-
A:art from financia" 3enefits= t#e initiati0es #e":ed t#e 6omen to de0e"o: se"f confidence=
im:ro0e t#eir communication si""s and raise t#eir

sition in societ!-
49
!"apter 6
Iss%es in Microfinance
#' S%stainaility
?#e first c#a""en%e re"ates to sustaina3i"it!- MFI mode" is com:arati0e"! cost"ier in terms of
de"i0er! of financia" ser0ices- An ana"!sis of ,* "eadin% MFIs 3! Kinda" H S#arma s#o6s t#at
('P MFIs sam:"e 6ere su3sid! de:endent and on"! ' 6ere a3"e to co0er more t#an (&P of
t#eir costs- ?#is is :art"! e9:"ained 3! t#e fact t#at 6#i"e t#e cost of su:er0ision of credit is
#i%#= t#e "oan 0o"umes and "oan si8e is "o6- It #as a"so 3een commented t#at MFIs :ass on
t#e #i%#er cost of credit to t#eir c"ients 6#o are Einterest insensiti0eF for sma"" "oans 3ut ma!
not 3e so as "oan si8es increase- It is= t#erefore= necessar! for MFIs to de0e"o: strate%ies for
increasin% t#e ran%e and 0o"ume of t#eir financia" ser0ices-
)' ;ac2 of !apital
?#e second area of concern for MFIs= 6#ic# are on t#e %ro6t# :at#= is t#at t#e! face a
:aucit! of o6ned funds- ?#is is a critica" constraint in t#eir 3ein% a3"e to sca"e u:- Man! of
t#e MFIs are socia""! oriented institutions and do not #a0e adeGuate access to financia"
ca:ita"- As a resu"t t#e! #a0e #i%# de3t eGuit! ratios- Present"!= t#ere is no re"ia3"e
mec#anism in t#e countr! for meetin% t#e eGuit! reGuirements of MFIs-
?#e IP@ issue 3! Me9ico 3ased E7om:artamosF 6as not acce:ted 3! :urists as t#e! t#ou%#t
it defied t#e mission of an MFI- ?#e IP@ a"so 3rou%#t fort# t#e issue of 0a"uation of an MFI-
?#e 3oo 0a"ue mu"ti:"e is current"! t#e dominant 0a"uation met#odo"o%! in microfinance
in0estments- In t#e case of start u: MFIs= usin% a 3oo 0a"ue mu"ti:"e does not do >ustice to
t#e under"!in% 0a"ue of t#e 3usiness- ?!:ica""!= start u:s are "oss main% and #ence t#e 3oo
50
0a"ue continua""! reduces o0er time unti" t#e! #it 3rea e0en

int- A 3oo 0a"ue mu"ti:"ier
to 0a"ue start u:s 6ou"d decrease t#e 0a"ue as t#e or%ani8ation uses u: ca:ita" to 3ui"d its
3usiness= t#us accentuatin% t#e ne%ati0e rat#er t#an t#e

siti0e-
(' *inancial ser9ice deli9ery
Anot#er c#a""en%e faced 3! MFIs is t#e ina3i"it! to access su::"! c#ain- ?#is c#a""en%e can
3e o0ercome 3! e9:"orin% s!ner%ies 3et6een microfinance institutions 6it# e9:ertise in
credit de"i0er! and communit! mo3i"i8ation and 3usinesses o:eratin% 6it# :roduction su::"!
c#ains suc# as a%ricu"ture- ?#e "atter :"a!ers 6#o 3rin% 6it# t#em an understandin% of
simi"ar c"ient se%ments= a3i"it! to create microenter:rise o:

rtunities and 6i""in%ness to
nurture t#em= 6ou"d 3e een on directin% microfinance to suc# o:

rtunities- ?#is ena3"es
MFIs to increase t#eir c"ient 3ase at no additiona" costs-
?#ose 3usinesses t#at :rocure from rura" India suc# as a%ricu"ture and dair! often identif!
finance as a constraint to 0a"ue creation- Suc# 3usinesses ma! find com:"ementarities
3et6een an MFIFs si""s in mana%ement of credit :rocesses and t#eir o6n stren%t#s in su::"!
c#ain mana%ement-
I?7 2imited= 6it# its stron% su::"! c#ain "o%istics= rura" :resence and an inno0ati0e
transaction :"atform= t#e e;c#ou:a"= #as started e9:"orin% s!ner%ies 6it# financia" ser0ice
:ro0iders inc"udin% MFIs t#rou%# :i"ots 6it# 0e%eta3"e 0endors and farmers- Simi"ar"!= "ar%e
FIs suc# as S:andana foresee a "ar%er ro"e for t#emse"0es in t#e rura" econom! a3"!
su:

rted 3! 0a"ue creatin% :artners#i:s 6it# :"a!ers suc# as Ma#indra and Aestern Union
Mone! ?ransfer-
I?7 #as initiated a :i"ot :ro>ect ca""ed E:us#carts sc#emeF a"on% 6it# BASIU (a microfinance
or%ani8ation in 4!dera3ad)- Under t#is :i"ot= it 6ors 6it# t6ent! 6omen #ead "oad 0endors
se""in% 0e%eta3"es of around )&; )+ %s :er da!- BASIU e9tends 6orin% ca:ita" "oans of
Rs-)&=&&&L; = ca:acit! 3ui"din% and 3usiness de0e"o:ment su:

rt to t#e 6omen- I?7
:ro0ides su:

rt t#rou%# su::"! c#ain inno0ations 3!5
)- Main% t#e 7#ou:a" Fres# stores a0ai"a3"e to t#e 0endors= t#is a0oids t#e #ass"e of
3ar%ainin% and unre"ia3i"it! at t#e traditiona" mandis ("oca" 0e%eta3"e marets)- ?#e
51
6omen are a3"e to re:"enis# t#e stoc from t#e stores as man! times in t#e da! as
reGuired- ?#is #as

siti0e im:"ications for Gua"it! of t#e :roduce so"d to t#e end
consumer-
/- 7ontinuous"! e9:erimentin% to increase efficienc!= au%mentin% incomes and reducin%
ener%! usa%e across t#e 0a"ue c#ain- For instance= it #as for%ed a :artners#i: 6it#
Nationa" Institute of Desi%n (NID)= a :ioneer in t#e fie"d of desi%n education and
researc#= to desi%n user;friend"! :us#carts t#at can reduce t#e :#!sica" 3urden-
,- ?ain% "essons from t#e :#armaceutica" and te"ecom sector to identif! tec#no"o%ies t#at
can sa0e ener%! and ensure tem:erature contro" in :us# carts in order to maintain Gua"it!
of t#e 0e%eta3"es t#rou%#out t#e da!- ?#e mode" au%ments t#e incomes of t#e 0endors
from around Rs-,&;1& :er da! to an a0era%e of Rs-)+& :er da!- From an en0ironmenta"

int of 0ie6= :us# carts are muc# more ener%! efficient as o:

sed to fi9ed format retai"
out"ets-
.' ,R Iss%es
Recruitment and retention is t#e ma>or c#a""en%e faced 3! MFIs as t#e! stri0e to reac# more
c"ients and e9:and t#eir %eo%ra:#ica" sco:e- Attractin% t#e ri%#t ta"ent :ro0es difficu"t
3ecause candidates must #a0e= as a :rereGuisite= a mindset t#at fits 6it# t#e or%ani8ationFs
mission-
Man! mainstream commercia" 3ans are no6 enterin% microfinance= 6#o are

ac#in% staff
from MFIs and MFIs are una3"e to retain t#em for ot#er >o3 o:

rtunities-
(+P of t#e

orest c"ients ser0ed 3! microfinance are 6omen- 4o6e0er= 6omen mae u:
"ess t#an #a"f of a"" microfinance staff mem3ers= and fi"" e0en fe6er of t#e senior
mana%ement ro"es- ?#e c#a""en%e in most countries stems from cu"tura" notions of 6omenFs
ro"es= for e9am:"e= 6#i"e 6omen are sin%"e t#ere mi%#t 3e a %reater 6i""in%ness on t#e :art of
6omenFs fami"ies to "et t#em 6or as front "ine staff= 3ut as soon as t#e! marr! and certain"!
once t#e! start #a0in% c#i"dren= it 3ecomes unacce:ta3"e- 2on% distances and "on% #ours
a6a! from t#e fami"! are difficu"t for 6omen to accommodate and for t#eir fami"ies to
understand-
52
/' Microins%rance
First 3i% issue in t#e microinsurance sector is de0e"o:in% :roducts t#at rea""! res

nd to t#e
needs of c"ients and in a 6a! t#at is commercia""! 0ia3"e-
Second"!= t#ere is stron% need to en#ance de"i0er! c#anne"s- ?#ese de"i0er! c#anne"s #a0e
3een re"ati0e"! 6ea so far- Microinsurance com:anies offer minima" :roducts and do not
6ant to %o for6ard and offer com:"e9 :roducts t#at ma! res

nd 3etter- Microinsurance
needs a de"i0er! c#anne" t#at #as eas! access to t#e "o6;income maret= and :refera3"! one
t#at #as 3een en%a%ed in financia" transactions so t#at t#e! #a0e contro"s for mana%in% cas#
and t#e a3i"it! to trac different indi0idua"s-
?#ird"!= t#ere is a need for maret education- Peo:"e eit#er #a0e no information a3out
microinsurance or t#e! #a0e a ne%ati0e attitude to6ards it- Ae #a0e to counter t#at- Ae #a0e
to some#o6 %et :eo:"e ; 6it#out #a0in% to sit do6n at a ta3"e ; to understand 6#at insurance
is= and 6#! it 3enefits t#em- ?#at 6i"" #e": to dem!stif! microinsurance so t#at 6#en a%ents
come= :eo:"e are 6i""in% to en%a%e 6it# t#em-
+' Ad9erse selection and 4oral "aCard
?#e >oint "ia3i"it! mec#anism #as 3een re"ied u

n to o0ercome t#e t6in issues of ad0erse
se"ection and mora" #a8ard- ?#e %rou: "endin% mode"s are contin%ent on t#e a0ai"a3i"it! of
si""ed resources for %rou: :romotion and entai" a %estation :eriod of si9 mont#s to one !ear-
4o6e0er= t#ere is not sufficient understandin% of t#e dri0ers of defau"t and credit ris at t#e
"e0e" of t#e indi0idua"- ?#is #as constrained t#e de0e"o:ment of indi0idua" mode"s of micro
finance- ?#e %rou: mode" 6as an inno0ation to o0ercome t#e s:ecific issue of t#e Gua"it! of
t#e

rtfo"io= %i0en t#e ina3i"it! of t#e

or to offer co""atera"- 4o6e0er= from t#e :ers:ecti0e
of sca"in% u: micro financia" ser0ices= it is im

rtant to :roacti0e"! disco0er mode"s t#at 6i""
ena3"e direct finance to indi0idua"s-
53
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1. de A%#ion= Beatri8 ArmendVri8 H Konat#an Morduc#- The Economics of Microfinance=
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0ert! a""e0iation t#rou%# do0etai"in% t#e

tentia" of microfinance
:ractices 6it# non;tim3er forest :roducts from di:terocar:s5 2essons from India 3! B-P-
Pet#i!a-
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$o"d3er%= $ene0ie0e Me"ford= 4ind ?a8i and S#ane ?om"onson-
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54
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@:

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t#e

or in IndiaC= Pa%e ),= Microfinance Matters= Issue )<= @cto3er /&&+
55

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A Critical Analysis of Micro Finance in India

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