A GRAND PROJECT ON

PROBLEMS FACED BY MICRO FINANCE INSTITUTIONS AND MEASURES TO SOLVE IT

By

Brijesh G. Rupapara (Roll No. 46) Jitendra V. Patoliya (Roll No. 36)

PGDM Program

Batch 2008-2010

Parul Institute of Management Vadodara

January 2010

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PREFACE
Our grand project is on In-depth Study on Problems faced by Micro Finance Institutions has provided us a golden opportunity for exploring our knowledge of classroom teaching to real life of corporate. It is rightly said that student without practical knowledge is just like a bird without wings.

In this project, we have studied various aspects considered as pillars before starting Micro Finance Institutions. There are number of factor considered by Micro Finance Institutions for its development. We have studied on the services provided by SHGs and NGOs. We have also covered various schemes of Grameen Bank.

At the end of the study we have mentioned about the findings of the study. This primarily includes the credit access to the poor people of India. We have also suggested about various improvements to be made in credit assessment of Micro Finance Institutions and speedier access to the credit. This project has guided us in aligning our career as a techno commercial person. Any admirable things, which one can see, are due to the efforts made by our teachers in the academic and corporate world. We take sole responsibility of any mistake, fault or misconception, you may find in this project.

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ACKNOWLEDGEMENT
We are very thankful to our PIM-PGDM and Director N.K.Kapoor who has given us an opportunity to get practical knowledge in the field of finance and also for helping us to undergo this grand project. The learning during this project has been a great experience.

We are also indebted towards our project guide Prof. N.K.Kapoorfor their invaluable guidance throughout this project.

We are also very much grateful towards other faculty members for his noble help and motivation, which has enhanced our level of satisfaction for this project.

We are also indebted towards our institute for giving us an opportunity to get the grass route realities of the financial world. Finally we are thankful to all those who have directly or indirectly help in this project.

Thus, it was because of all these people, we were motivated to achieve successful completion of our project.

________________ (JitendraPatoliya)

_________________ (BrijeshRupapara)

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EXECUTIVE SUMMARY
Microfinance emerged as a noble substitute for informal credit and an effective and powerful instrument for poverty reduction among people who are economically active but financially constrained and vulnerable in various countries.It covers a broad range of financial services including loans, deposits and payment services, and insurance to the poor and low-income households and their micro enterprises.Persuaded with the potential role of micro financing in alleviating poverty, the South Asian countries especially India & Bangladesh have been actively pursuing the policy of setting up formal network of microfinance institutions. These institutions include NGOs/NBFCs and government sponsored programs. Some leading MFIs, e.g. Grameen Bank in Bangladesh, have created financial modes that serve increasing number of poor. They also lead to repayment rates positively comparable with the performance of many commercial banks. Whenever we think about microfinance services, the name of country comes in our mind is Bangladesh. India is second most populated country in the world. If we see the condition of India, more than 60% people lives below poverty line. It means out of total population of 1.20 billion, 70 crore people are poor. This section of society cant borrow fund from commercial bank due to their inability of meeting requirement of collateral security for taking loan from these banks. This shows scope of development of MFIs in India. If we have seen the scenario of MFIs in India then there are very few MFIs and cover only fraction of its total potential. In India MFIs are facing some challenges

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which we will discuss in this report. If we can overcome these challenges then there is no doubt in making India as market leader in providing microfinance.

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CONTENT TABLE

CH.

TITLE

Page No.

1 2

INTRODUCTION METHODOLOGY 2.1Objective of Report 2.2 Research Design 2.3 Research Methodology 2.4 Implication of this study 2.5 Limitation of the study

8 10 10 10 10 11 11 12 14 14 15 16 18 20 21 24 27

3 4

HISTORY OF MICRO FINANCE WHAT IS MICRO FINANCE 4.1 Utilizaiton of Micro Finance credit 4.2 Approach to MFIs 4.3 Demand for Micro Finance Services 4.4 Supply of Micro Finance Services 4.5 Major Achievements of Micro Finance 4.6 Challenges 4.7 Lessons learned

DATA ANLAYSIS AND INTERPRETATION

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BUSINESS MODEL FOR KALPTARU MFI 6.1 Sources of income for MFIs 6.2 Reward and recognition to borrower 6.3 Product & services offered by P&R MFI

40 41 42 44 47 48 50 51

7 8 9 10

SUGGESTIONS CONCLUSION BIBLIOGRAPHY ANNEXURES

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1. INTRODUCTION
The age old saying, India is a rich country where poor people live, still holds well. In the present era there is a need for practical and workable solutions to improve the socioeconomic conditions of the poor in India, thereby helping in wiping out the deep-rooted problem of poverty. Globalization has brought substantial benefits around the world, but in many developing countries it is contributing to a growing disparity between the rich and the poor. In a country like India, The structure of the economy is dualistic. We can see the Growing Companies, booming stock market and soaring profits, making the rich, richer on the one hand while faltering incomes and wages in the field of agriculture and allied activities is making the poor, poorer on the other. This worsens the access of the poor to the economic opportunities through which they could build up their assets and enhance income in order to come out of poverty cycle.The potentials to avail such economic opportunities mainly depends on the degree of access to financial services. The commercial banking sector does not consider the poor bankable owing mainly to their inability to meet the eligibility criteria, including collateral. Thus the poor in most countries have had no access to formal financial services. The more rational way to help the poor could be the provision of sustainable economic opportunities at grass-root level especially provision of required financial services at competitive rates to support their investments and viable business activities. So, micro finance is one of the most effective solutions of this problem. India is perhaps the largest emerging market for micro finance. Over the past decade, the Micro finance sector has been growing in India at a fairly steady pace.
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Though no micro finance institution (MFI) in India has yet reached anywhere near the scale of the well-known Bangladeshi MFIs, the sector in India is characterized by a wide diversity of methodologies and legal forms. Micro finance phenomenon is one of the most remarkable socio-economic developments of recent times. Because of their economic circumstances, poor for a long time were considered non-bankable. However, the evolution of the phenomenon of micro-credit has proved that the poor are creditworthy if organized in small groups. Over the period micro-credit has had profound impact not only from finance perspective but, more importantly, from the perspective of poverty alleviation. In the recent years Micro-Finance has been recognized as an effective development intervention and thereby a lot of Micro-Finance institutions and programs targeted to the poor have emerged. In India there are a wide range of Micro-Finance institutions active in this sector, each with its own way of going about the task of making financial services accessible to the poor. Till recent times most of the micro-finance institutions and programs have been only focusing on providing saving and credit services to the non-bankable. However a growing number of MFIs have recognized that providing credit is not enough for the sustainable development of the people and are thus is now providing a range of other financial services including insurance and other support services along with savings and credit services. The poor are vulnerable to different types of risks and adopt various strategies to reduce the impact of the losses. Micro Finance services are very essential for the low income households to cope with uncertainties and emergencies like illness or injury, Death, Natural disasters, theft and life cycle needs.

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2. METHODOLOGY
2.1 Objective of Report 1) Current MFIs activities of India 2) Limitation of MFIs 3) Scope of MFIs in India 4) To develop a business model for MFIs 2.2 Research Design Inductive studies were done. This method is practically useful when the researcher has a clear idea of the problems. The research is aimed at collecting information from the various sources like Internet and Business Magazine, which will assist us to analyze the micro finance sector as our macro part and to develop a business model for MFIs at micro level. Therefore, the most appropriate research design is an inductive one.

2.3 Research Methodology Research methodology consists of the subject coverage, data collection, data analysis and interpretation. Various methods are used to supplement the research: 1. Coverage: it includes location, population study, population size and units of observations, which are very essential for this report. Location: LIMDA, ISHWARPURA, PREMPARA and PIPALIYA Population study: We have taken a sample study of the above mentioned villages. Units of observation: We have observed in total 500 people from the above mentioned villages.

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2. Data collection: The method of data collection is informal. Sources: Following two sources were used: a) Primary Sources: Primary data was collected by Informal talk with the MD of Deepak Foundation, faculty members and the survey of 500 people from the different villages. b) Secondary sources: Secondary data that was utilized in the project was the data provided by the Internet, Magazines etc.

3. Data analysis and Interpretation: This includes the overall analysis of the data collected and interpretation of the facts witnessed in the research.

2.4 Implication of this Study The report helps to identify the measures to improve the micro finance servicesand to develop as business model to provide the various services of micro finance, exposure growth in the coming years, with the purpose of improving its performance by strengthening the way to provide the services. 2.5 Limitation of the Study: As some of information is not revealed, whatever suggestions generated by us is based on certain assumptions. Due to time constraints we analyzed only the sample of 500 people, so sample error is possible.

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3. HISTORY OF MICRO FINANCE

The history of micro financing can be traced back as long to the middle of the 1800s when the theorist Lysander Spooner was writing over the benefits from small credits to entrepreneurs and farmers as a way getting the people out of poverty. But it was at the end of World War II with the Marshall plan the concept had a big impact. Micro finance institutions (MFIs) have expanded rapidly in recent years: According to the Microcredit Summit Campaign, micro finance institutions had 154,825,825 clients, more than 100 million of them women, as of December 2007. In 2006, Mohammad Yunus and the Grameen Bank were awarded the Nobel Prize for Peace, for their contribution to the reduction in World Poverty.
[[[[

Today, the term which we use as MF has its root in 1970. At that time a small institution named as Grameen Bank of Bangladesh came up with concept of MF and the person who has developed the MF was Mohammad Yunus. He has started and shaped the emerging concept of micro financing. Another pioneer in this sector is Akhtar Hameed Khan. At that time a new wave of micro finance initiatives introduced, many new innovations into the sector. Many pioneering enterprises began experimenting with loaning to the underserved people. The main reason why micro finance is dated to the 1970s is that the programs could show that people can be relied on to repay their loans. It is possible to provide financial services to poor people through market based enterprises without subsidy. Shore bank was the first micro finance and community development bank founded 1974 in Chicago .

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Another organization, the caisse populaire movement grounded by Alphone and Dorimene Desjardins in Quebec, was also concerned about the poverty. Between 1900 to 1906 when they founded the first caisse, they passed a law governing them in the Quebec assembly; they risked their private assets and must have been very sure about the idea about microcredit.

Today the World Bank estimates that more than 16 million people are served by some 7000 micro finance institutions all over the world. CGAP (CATFISH GRANT ASSISTANCE PROGRAM) experts say that about 500 million families benefits from these small loans making new business possible. In a gathering at a Microcredit Summit in Washington DC the goal was reaching 100 million of the worlds poorest people by credits from the world leaders and major financial institutions.

The year 2005 was proclaimed as the International year of Microcredit by The Economic and Social Council of the United Nations in a call for the financial and building sector to fuel the strong entrepreneurial spirit of the poor people around the world.

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4. WHAT IS MICRO FINANCE?

Micro finance is the provision of a broad range of financial services such as deposits, loans, payment services, money transfers, and insurance to poor and lowincome households and, their microenterprises. Micro finance services are provided by three types of sources: Formal institutions, such as rural banks and cooperatives; Semiformal institutions, such as nongovernment organizations; and Informal sources such as money lenders and shopkeepers.

Institutional micro finance is defined to include micro finance services provided by both formal and semiformal institutions. Micro finance institutions are defined as institutions whose major business is the provision of micro finance services.

4.1 Utilizationof Micro Finance Credit

There are basically two ways for utilization of micro finance credit they are as follows: 1. Productive utilization: Productive utilization means use of micro finance credit for the purpose of purchasing profit generating asset (i.e. loan for purchasing of a sewing machine).

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2. Non-productive utilization: Non-productive utilization means use of micro finance credit for satisfying a personal financial requirement of a lower income section of a society (i.e. loan to be given for the education for children).

As MFIs we are required to encourage our borrower to use a credit for productive purpose rather than non-productive purpose because it can help to generate employment and provide opportunity to them to take independent decision as they are owner of their business.

4.2 Approaches to MFIs

In general there are two approaches which are followed by MFIs 1. Minimalist: It is also known as credit only approach where only credit is provided with the assumption that a poor people will use it for economic activity. 2. Maximalist: It is also known as credit plus approach where MFIs helps in capacity building through a various programs such as business related training, access to a market along with a provision of credit.

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So from the above two approaches of MFIs we can say that minimalist approach focus only on providing credit rather than how to utilize the money or invest money or give them financial guidelines where they need to invest so they get the maximum return out of it here, the minimalist approach failed and the maximalist approach came up with the overcome of where minimalist approach was failing. So we can say that maximalist approach is more beneficial than minimalist approach.

4.3 Demands for MicroFinance Services

The poor and low-income households and their microenterprises inthe Region are a diverse group. Their demand for micro finance servicesalso reflects this diversity. The collective demand of thesegroups for financial services is large and the types of services theydemand vary across households and microenterprises and over time.This large demand and the heterogeneity of services needed acrosshouseholds and microenterprises and over time have created scope for commercial financial intermediation. Poor and low-income households and their microenterprises inthe Region have a large demand for safe and convenient depositservices. This demand reflects the importance of savings for thesehouseholds and microenterprises for a variety of reasons. The poorneed to save for emergencies, investment, consumption, socialobligations, education of their children and many other purposes. Theyhave the capacity and willingness to save. Savings are important formicroenterprises and provide them with a major source of investmentfunds. The large demand for deposit services among the poor isconfirmed by empirical evidence. For example, the number of savings accounts in unit desas of BRI (Bank Rakyat Indonesia) increased, from 5.0 million in 1988 to16.1 million in 1996. Most of these accounts belong to poor households.
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The cooperative rural banks in Sri Lanka had 4.7 million depositaccounts at the end of 1998; while the Association for SocialAdvancement, micro finance NGO in Bangladesh, had over 1.4 millionactive savings accounts of poor households at the end of 1999.Extensive use of informal savings arrangements by poor householdsis another indicator of their demand for savings facilities. In somecountries, the poor pay high prices to those providing deposit services.The demand for deposit services is particularly strong among poorwomen in the Region. The demand for microcredit that originates both from householdsand microenterprises is also large. Poor households in the Regionrequire microcredit to finance livelihood activities, for consumptionsmoothening, and to finance some lumpy nonfood expenses forpurposes such as education (e.g., school fees and books), housingimprovements, and migration. Many Asian countries have numeroussmall farms and their operators also require micro finance services. Theother source of demand is nonfarm microenterprises, which cover awide array of activities such as food preparation and processing,weaving, pottery, mat and basket making, furniture making, and pettytrading.

The demand for other financial services among poor and lowincomehouseholds and their microenterprises could also be significant.A good share of rural households borrow, many more save, but allseek to insure against the vagaries of life and therefore the demand forinsurance services among the poor is vast.

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A private insurancecompany in Bangladesh that started to provide micro-insurance servicesto low-income households on a commercial basis, for example, foundthat its client base was expanding rapidly. At the end of 1999, thiscompany had over 800,000 clients, about 50,000 of which areconsidered poor. This experience shows that the supply of such servicescreates its own demand because the real demand for such servicesremains hidden when suitable products are not available in the market.

4.4 Supply of MicroFinance Services

The market structure in microfinance varies significantly acrosscountries in the Region depending on their stage of financial development, level of economic development, policy environment, and other factors. However, aspects of the supply, particularly about different types of suppliers, may be usefully discussed. The micro finance services are supplied mainly by informal sources. Their collective outreach, both breadth and depth, is vast in most countries. They supply mainly short-term credit and charge higher interest rates than semiformal and formal sources. Because of the relatively greater bargaining power enjoyed by the informal suppliers in general, the terms and conditions under which services are provided do not enable the clients to fully harness economic opportunities. The informal sources operate in highly localized areas. Therefore, their contribution to financial intermediation and improvement of resource allocation is also limited. For example, informal sources do not allow savings to be collected from more than a small group of individualswell known to one another, and they do not move funds over largedistances. Most informal insurance mechanisms are typically weak,particularly against repeated shocks, and often provide only

inadequateprotection to poor households.

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The involvement of formal sources in micro finance has increasedduring the last two decades. This greater involvement has stemmedfrom (i) the expansion of the scope of formal institutions intomicro finance through downscaling and establishment of linkageprograms with semiformal sources of different types; (ii) the emergenceof new formal institutions focused on micro finance, such as theGrameen Bank of Bangladesh; (iii) reforms of state-owned financialinstitutions such as unit desas of BRI; and (iv) the introduction of newmicro finance programs by the governments through nonfinancialinstitutions. However, the formal operations concentrate mostly onproviding credit facilities, and savings mobilization has yet to receiveadequate attention, with few exceptions.

Formal micro finance has changed to some extent with increasinginvolvement of private sector institutions. The Bank Dagang Bali inIndonesia has expanded its micro finance operations and increased itsclients. Badan kredit-desas, owned by Indonesian villagers, nowreach 1.7 million clients, and the Grameen Bank in Bangladesh, ownedlargely by its borrower members, operates in over 38,000 villages with1,140 branches and reaches about 2.4 million clients.

Cooperatives are also playing a significant role as financial intermediaries in the Region, particularly in India, Sri Lanka, Thailand, and Viet Nam. The thrift and credit cooperative societies in Sri Lankareach about 800,000 households while primary agricultural cooperativesocieties in India have about 89 million members. These cooperatives,among other things, provide micro finance services. In many countries,the cooperatives have begun to explore possibilities for deeperpenetration into the micro finance market and show a greater concernabout their financial viability than they did in the 1980s.

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A major feature of semiformal micro finance sources in the Regionis the extensive involvement of NGOs. NGOs have become important providers of micro

financeservices. Their involvement is important because their clientsin general are poorer than those reached by many formal institutions,their services are targeted in most countries to serve poor women, andtheir credit services are provided largely on the basis of social collateral.The small average loan sizes of NGOs, which usually range from about$30 to $150 per active loan account, suggest that their clients includethe poorest. NGOs in some countries are trying to organize themselvesinto national coalitions to improve the industry standards and selfregulation.A few NGOs in the Region have plans to transformthemselves into formal financial institutions.

4.5 Majorachievements inMicro Finance

The MFIs and other financial institutions (OFIs) providing micro financeservices have expanded their outreach from a few thousand clients inthe 1970s to over 10 million in the late 1990s. The developments inmicro finance in the Region have set in motion a process of changefrom an activity that was entirely subsidy dependent to one that canbe a viable business. (i) MFIs and OFIs mobilizing voluntary savings have shattered themyth that poor households cannot and do not save, and provedthat savings can be successfully mobilized from poor households.This is perhaps a more important achievement of micro finance inthe Region than the expanded outreach in access to credit.

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(ii) MFIs, OFIs, and their clients have shown that the poor arecreditworthy (poor women, in particular) and financial servicescan be provided to and accessed by the poor on a profitable basisat low transaction costs without relying on physical collateral, if itis done with appropriate financial technology and a commitment To achieve efficiency. (iii) Micro finance services have triggered a process toward broadeningand deepening of rural financial markets. (iv)Micro finance services have strengthened the social and humancapital of the poor, particularly women, at the household,enterprise, and community level. (v) Sustainable delivery of micro finance services on a large scale insome countries has generated positive developments inmicro finance policies and practices among all stakeholders:governments, central banks, micro finance service providers, and external funding agencies.

4.6 Challenges
The achievement in micro finance in the Region has been impressiverelative to the status in the 1970s. However, a number of major problemsremain.

1. Policy environment

Despite general improvement in the policy environment for financialsector programs, the policy environment for micro finance in manycountries including India remains unfavorable for sustainable growth in micro financeoperations.

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In India process of registration is very burocratic and takes so much time. Moreover there is no stable policy environment for micro finance institutions it is always depend on ruling party (i.e. B.J.P, congress). The policy will also change if there is change in ruling party.

2. Limited retail level institutional capacity As new and emerging MFIs following are the problems to be faced by us as far as retail level capacity is concern (i) Lack capacity to leveragefunds, including public deposits, in commercial markets; (ii) Are unableto provide a range of products and services compatible with thepotential clients characteristics; (iii) Do not have an adequate networkand delivery mechanisms to cost-effectively reach the poorest of thepoor, particularly those concentrated in resource-poor areas and areaswith low population densities (iv) Do not show a vision and acommitment to ensure their financial soundness and sustainabilitywithin a reasonable period, and become subsidy independent (v) Do not have the capacity to manage growth prudently.

Most of the state-sector institutions or programs that providemicro finance services have been created within and nurtured by adistorted policy environment. They do not have a business culture.
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3. Inadequate investments in agriculture and rural development Agricultural growth, which requires for the growth in the ruralnonfarm subsector, significantly influences rural financial marketdevelopment. India is not making adequateinvestments for agricultural growth and rural development. This is amajor constraint on the development of sustainable micro financeservices. The insufficient investments in physical infrastructure(especially irrigation; roads; electricity; and support services formarketing, business development, and extension) continue to increasethe risk and cost of micro finance and particularly discourage privateinvestments in the provision of micro finance services on a significantscale. Also, in the absence of economic opportunities created bygrowthinducing processes, micro finance cannot be expected to playa significant role in poverty reduction.

4. Sustainability The main challenge for MFIs is the problem of its sustainability which indicates lapse in their financial procedure, organizational design and governance. Here we can say that most of the MFIs in INDIA depending on donation or subsidies it are like getting success through other. If they stop helping them, then they will fail

5. Loan without security

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MFIs target the group of lower income people and providing loan to them. Such people are not able to give the security for loan. That will lead to bad debt for MFIs in case of failure of repayment of loan.

4.7 Lessons learned

(i) Adoption of the financial system development approach is the keyto achieving sustainable results and to maximizing developmentimpact. This approach emphasizes an enabling policy environment,financial infrastructure, and the development of financialintermediaries that are committed to achieving financial viability andsustainability within a reasonable period and that can provide avariety of financial services, not just credit, to the poor. (ii) Micro finance clients are more concerned about access to servicesthat are compatible with their requirements than about the cost ofthe services. (iii) Given the diversity of demand for financial services, a broad rangeof institutional types is required to expand the outreach. (iv) Strong retail institutions committed to outreach and sustainabilityare essential for extending the permanent reach of financialservices and to have a significant impact on poverty reduction.Thus, building the capacity of institutions with a commitment toreach the poor is vital.

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(v)

Financial institutions committed to provide micro finance services inmost developing countries require considerable technical assistance for capacitybuilding. This is particularly true for institutions that target potentialclients in resource-poor areas and the poorest of the poor.

(vi)

The demand for savings services by poor households andmicroenterprises is as strong as or stronger than the demand forcredit. Expansion of the outreach of savings services can have apotentially significant impact on both institutional sustainability andpoverty reduction.

(vii) Because micro finance is primarily targeted to the poor who aredisadvantaged, social mobilization is necessary to introduce themto a formal or semiformal, market-oriented institutional environment.This is particularly true for poor women and the poorest of the poor. It isimportant, however, to distinguish between financial intermediation andsocial intermediation in designing support programs.

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DATA ANALYSIS AND INTERPRETATION

5. DATA ANALYSIS AND INTERPRETATION

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1. Your Age?

AGE GROUP

120 100 NO. OF RESPONDENTS 80 60 44 40 20 0 31 20 10 8 13 3 99

70

73 64 65 No. of Respondent Percentage

AGE

INTERPRETATION From the above graph we can clearly see that more than 90% of the population is between the ages of 16-50 years. It means they are considering as a productive work force. We can give loan to them for starting their own business which improves their living slandered.As they are physically efficient to do work.

2. Education Qualification
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180 160 140 NO. OF RESPONDENTS 120 100 80 60 40 20 0

165

167

75 58 33 33.4 15 35 7 H.S.C 11.6

No. of Respondents Percentage

Illiterate

Primary

S.S.C QUALIFICATION

Graduate

INTERPRETATION Here we can see that nearly 33% of the population is illiterate and 34% of the population had gone through primary education only. These illiterate people also include child labor which is 25% of total illiterate people. Money is major constrain for the parents of child laborwhich is again a scope for us where we can develop as a MFI. Here we can observe from above chart that 33.6% people get education either at S.S.C level or more.

3. Marital Status
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450 400 350 NO. OF RESPONDENTS 300 250 200 150 100 50 0 Married MARITAL STATUS Unmarried 79.6 102 No. of Respondents Percentage 398

20.4

INTERPRETATION As the most of the people in the village are uneducated and thus this create a huge gap of understanding and thus at the very young age they get married. So here it talks about the mentality of the people that how the illiteracy effect even the living standards of the people also. After get married most of women remain unemployed and sitting at their home idle. So it clearly indicates the potentiality for development MFI by framing SHGs of women.

4. Number of years you are in this village?

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STAYING IN THE SAME VILLAGE

600 500 NO. OF RESPONDENTS 400 300 200 100 0 More than 3 years NO OF YEARS Less than 3 years 99.2 4 0.8 496

No.of Respondents Percentage

INTERPRETATION Basically we found out that almost 99% of the populations of the villages were residing in the village since more than 3 years and major of them owed their own houses only. So it was one of the plus points because we can at least trust them that they are being part of the village since long period. When we are going to give them loan it require for us to verify that particular person has living in the same village since last 3 year. As it is one of the criteria for giving them loan.

5. Occupation
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250 205 200 NO. OF RESPONDENTS

150 115 100 100 80 41 23 0 Agriculture Labour Other Unemployed OCCUPATION 16 20 No. of Respondents Percentage

50

INTERPRETATION Here almost 41% of the people are doing labor work because of they are not having enough money power so that they can do their own business, so though if they possess any specific skills they have to hide that skill because of insufficiency of money. Hence they go for the labor work and one more thing that nearly 20% of population is unemployed, so one of the major concern where we can define our scope to develop MFI.

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6. Income per day

160 140 NO. OF RESPONDENT 120 100 80 60 40 20 0 Rs.0 Less than Rs.50 23 22.2 115 111

149

101

No.of Respondent Percentage 29.8 20.2 24 4.8 Rs.50 to Rs.100 INCOME (in Rs.) Rs.100 to Rs.150 More than Rs.150

INTERPRETATION From the observation we can see that 75% of the total population earns less than Rs. 100 per day. It means they have potentiality to repayment of loan. Most of them are engaged in either in labor work or agriculture. It is again scope for us to provide them financial services at micro level.

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7. Are you having a bank account?

350 300 NO. OF RESPONDENT 250 203 200 150 100 59.6 50 0 Yes HAVING BANK A/C. No 40.6 No. of Respondents Percentage 297

INTERPRETATION One of the major things is that 60% of the people were not even having a bank account also. So if they want to deposit any amount they were not able to do it. And one of the major reason as being illiterate if they go to bank then there will be no one to guide them how to proceed for opening a bank account and if they open a bank account then they would be not be able to keep the minimum required balance in the account. So these are some of the major reasons that why the villagers were not having a bank account. This is an opportunity for us to develop our MFI. As it indicates that they cannot access financial services provided by commercial bank.

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8. Is there any financial institution providing loan to you at cheaper rate?

600 500 500 NO. OF RESPONDENTS 400 300 200 100 100 0 0 Yes No FI'S PROVIDING LOAN AT CHEAPER RATE 0

No. of Respondents Percentage

INTERPRETAION It was really interesting there are no financial institutions which provide the loan at cheaper rate. The people are in need of loan in order to meet their livelihood so even they pay high rate of interest also and they are in need of any such institution which provides loan to them at the cheaper rate.

9. Is there any SHG working in your village?

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600 500 500 NO. OF RESPONDENT 400 300 200 100 100 0 0 Yes ANY SHG's WORKING No 0

No. of Respondents Percentage

INTERPRETATION Even there are no SHGs also working in these villages, so there is a huge scope for the SHGs to come up in these villages and start their business. As it is new emerging concept of linkage between SHG and bank to provide empowerment to the downtrodden people of rural area. So as MFI we can become pioneer in providing financial services by linking SHGs with our micro finance enterprise.

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10.Do you have any Photo Identity Proof?

600 500 NO. OF RESPONDENTS 400 300 200 100 0 Yes No ANY PHOTO IDENTITY PROOF 97.4 13 2.6 487

No. of Respondents Percentage

INTERPRETATION One good thing which was seemed out in these villages was that at least they were having photo identity proof almost 97% of the people were having it. So at least they were being recognized to be the Indian civilization.it means most of them are fulfilling one of the criteria for giving them loan facility.

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11.How many earning members are there in your family?

250 197

200 NO. OF RESPONDENTS 151 150

100 100 49 20 9.8 More than 3

No. of Respondents Percentage

50 3 0.6 0 0

30.2

39.4

NO. OF EARNING MEMBERS IN FAMILY

INTERPRETATION Nearly 70% of population was like that were only one or two members were the earning members in the family and the rest other were dependent on them and this lead to a huge pressure on the member who is earning and provide livelihood for the rest of the members of the family. So family in which there are more than three earning members can start their own business if provide them loan facility and Families which have less than one earning member can get employment in the same business. By this way we can provide them empowerment.

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12. Do you think that is there any requirement of MFIs for providing you loan?

600 500 500 NO. OF RESPONDENTS 400 300 200 100 100 0 0 Yes REQUIREMENT OF MFI's No 0

No. of Respondents Percentage

INTERPRETATION There was not a single individual who refused to us that they are not in requirement of MFIs. Basically these villages need such types of institutes who help them and provide loan to them at cheaper rates. Also provide them other financial facility (i.e. micro insurance, acceptance of micro deposits etc.) which they require most.

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13. Do you possess any inherent skill in you?

500 450 400 NO. OF RESPONDENTS 350 300 250 200 150 100 50 0 Yes INHERENT SKILL No 63 12.6 87.4 No. of Respondents Percentage 437

INTERPRETATION There are nearly 13% of the population who possess specific skills like tailoring, handicraft, etc. which can be effectively utilized and by this way they can groom up and come up with new ideas and new concepts. We can also develop some new skills by providing them training and utilize the same skill for getting business.

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6. BUSINESS MODEL FORKALPTARUMICRO FINANCE INSTITUTION

MFIs satisfy the financial requirement of poor section of the society. We will plan to give a loan (maximum up to Rs.5,000) to lower income group who are not focused by commercial banks. For the purpose of getting success at MFIs at initial stage we are required to give loan for productive asset only (i.e. loan for purchasing equipment for handicraft item). If we give loan for a productive use only then they will generate profit out of it. Now problem of reimbursement of loan may take place. This problem can be solving if we grant loan for productive use not for non-productive use. Now we are required to collect this loan in an installment of small amount. Before they start to earn profit from this productive asset we are required to collect principle amount only. Once they are starting to earn profit we can get some of the portion of their profit which is consider as interest income for us.

If we follow this model then we can generate profit from operation of MFIs by doing business through this model for 2 to 3 years. Then we can have accumulated profit that we can plough back and expand our business. Once after generating a profit by this way and creating enough capital for us, now we can also give loan for non-productive use and charge interest on it at nominal rate which will become additional income for MFIs. And we can also increase the limit of loan providing for productive purpose (more than Rs. 5,000). So if lower income people invests more in productive asset and generate more and more profit, then it ultimately a profit for MFIs only as they are sharing their profit for getting interest income.
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6.1 Sources of income for MFIs

One of the major reasons for less development of MFIs is its dependability on external sources for fund (i.e. donation, subsidies, etc.). If we want to get success in MFIs then we have to rely less on external sources for fund. We can also generate the fund for us through following sources: 1. Contribution from promoters If we want to start MFI then it is required to invest some portion of money from our side. If we invest money at initial level then we can start our business and circulate this money by providing money. Once we start to provide a loan then we will get income in form of interest and we can able to expand our business in this case we would like to say that MONEY CAN ATTRACT MORE MONEY. 2. Deposits from Public One of the major sources of income for us after starting operation of our business is to accept a small amount of deposit from lower income section of the society. If a labor work into agriculture wants to invest and/or deposit Rs. 50 then he cannot approach to a bank for such a small amount i.e. is a big opportunity for us to collect fund through deposit to run our business. Here we would like to say that SMALL SMALL DROPS OF WATER FILL THE LAKE

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3. Advertisement A product which are producing with the help of asset purchase through our borrowing we can put the name of any business organization on those product as advertisement for those business organization. For e.g. if our borrower produces sweater from woolen then we can put a sticker of Bank of Baroda in that sweater or we can also give the same product in a polythene printed on the name of Bank of Baroda. In return we can get income from this bank as we are doing their advertisement.

As it is our business policy to motivate our borrower who can generate more profit out of their productive asset so there by arranging a social function and other event where number of people will come and so they can come to know about our business and that is an indirect cost less advertisement for our business. If we put hoarding of any business organization on those functions so we can get revenue from them also. In this way an advertisement becomes a major source of income for us. 4. Insurance Premium As micro insurance is one of the product MFIs. We know that still many insurance companies have not started up with micro insurance, so we can approach to all that insurance companies and can tell them to have a tie up with us or they can sell their micro insurance product to the employees of our organization and hence through this was the insurance companies as well as our business can be benefited from this.

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5. Collection from Business Organization and NGOs

It is also a major source of income for us. Business organization believes in doing CSR (corporate social responsibility) activities, if we convince them to give this money to us. Now we can utilize the same to give micro loan and providing other micro finance facility. Here in this case we will require giving loan on the name of such an organization that provides money to us not on the name of our organization. In this way both provider and users (MFIs) are in benefit. MFIs get income in form of interest, while for provider of loan it is CSR cum PUBLICITY.

6.2 Reward and recognition to borrower

Once we provide a loan for a productive purpose now we are required to create a competitive environment among ours borrower that can motivate them to earn more and more profit. In short, we are required to arrange some programs and giving a reward in form of award or monetary benefit, to a person who generate more profit from asset purchase with the help of our borrowing it gives recognition and self-motivation to them for earning more and more profit.

As it is our business policy to have some portion of profit generated by them if they earn more profit it will increase profitability of our business.

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6.3 Products and services offered by Kaptur Micro Finance Institution

1. Microloans Microloans (also known as microcredit) are loans that have a small value; most loans are less than US$100 in size. These loans are generally issued to small scale entrepreneurs who run micro-enterprises in developing countries. Examples of micro-enterprises include basket-making, sewing, street vending and raising poultry. The average global interest rate charged on micro-loans is about 35%. Although this may sound high, it is much lower than other available alternatives (such as informal local money lenders). Moreover, MFIs must charge interest rates that cover the higher costs associated with processing the labor-intensive microloan transactions.

Kaptur Micro Finance Institution loan model A group is comprised of six to 10 women/men, and 25-45 groups form a center. Women/men are jointly responsible for the loan of their group, and of the center. The first loan is Rs. 5,000. It takes 50 weeks to reimburse principal and interest rate; the interest rate is 12%. They are required to pay interest only after they start to earn profit out of the asset purchased through loan provided by us. If they all reimburse they are eligible for second loans of Rs.5,000-7,000; loans amounts increase up to Rs. 15,000 (if they are regular in paying loan consecutive for 3 years).

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Unlike other micro finance organizations, Kalptaru Micro Finance Institution does not require its clients to borrow to start a business: the organization recognizes that money is fungible, and clients are left entirely free to choose the best use of the money, as long as they repay their loan.

Eligibility criteria for loan

(a) female/male, (b) aged 18 to 59, (c) residing in the same area for at least one year, (d) has valid identification and residential proof (ration card, voter card, or electricity bill), (e) at least 80% of women/men in a group must own their home. Groups are formed by women themselves, not by Kalptaru Micro Finance Institution. Kalptaru Micro Finance Institution does not determine loan eligibility by the expected productivity of the investment (although selection into groups may screen out women/men who cannot convince fellow group-members that they are likely to repay)

2. Micro savings Micro savings accounts allow individuals to store small amounts of money for future use without minimum balance requirements. Like

traditional savingsaccounts in developed nations, micro-savings accounts are tapped by the saver for life needs such as weddings, funerals and old-age supplementary income. 3. Micro-Insurance Individuals living in developing nations have more risks and uncertainties in their lives. For example, there is more direct exposure to natural disasters, such as mudslides, and more health-related risks, such as communicable diseases.
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Micro-insurance, like its non-micro counterpart, pools risks and helps provide risk management. But unlike its traditional counterpart, micro-insurance allows for insurance policies that have very small premiums and policy amounts. Examples of micro-insurance policies include crop insurance and policies that cover outstanding balances of micro-loans in the event a borrower dies. Due to the high administrative expense ratios, micro-insurance is most efficient for MFIs when premiums are collected together with microloan repayments.

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7. SUGGESTIONS
1. MFIs should closely monitor the utilization of credit by their clients and encourage them to use more for productive purpose. 2. They should take positive action to stimulate entrepreneurial spirit of an economically weaker section of the society. 3. Agency related input for capacity building in terms of various other nonfinancial services such as development of forward linkage (motivating workshops, training activities, assisting in purchase of machinery and tools, locating suppliers, etc.) and backward linkage (such as marketing assistance, identification of dealer or sales person, development of common brand, etc.) are also required for the development of micro finance enterprises. 4. The utilization of loan has a strong bearing on the economy, so MFIs should follow up strongly for utilization and should take periodical feedback. 5. Proportion of economically weaker section of women is significantly less in entrepreneurship category. To motivate women empowerment, they should provide privilege loan to women.

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8. CONCLUSION

Some valuable lessons can be drawn from the following experience of successful micro finance operations. India is going to stand among the countries developed and we must accept fact that poverty alleviation and reduction of income inequalities, has to be the top most priority. In this backdrop impressive gain made by SHG-Bank Linkage Programmed in coverage of rural population with financial services offers a ray of hope. The paper argues for mainstreaming of impact assessment and incorporation of local factors in service delivery to maximize impact of SHG Bank Linkage Programmed on achievement of Millennium Development Goals (MDGs) andnot letting go the opportunities.

The conclusion of this study is that micro finance can contribute to solve the problem of inadequate housing and urban services as an integral part of poverty alleviation programs. The challenges lies in finding the level of flexibility in the credit instrument that could make it match the multiple credit requirements of the low income borrowers without improving unbearably high cost of monitoring to end use lenders. A promoting solution is to provide multipurpose loans or composite credit for income generation, and consumption support.

Micro finance can indeed be sustained in the long run in a profitable manner; going by the increasing number of commercial banks that have evinced interest in this area, the future is seems to be bright. The changing face of micro finance in India, appear to be positive in terms of the ability of micro finance to attract more funds and therefore increase outreach. This will lead in measuring how this positions

micro finance in terms of poverty alleviation and social impact a going forward.
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Micro finance remains a powerful tool for development. It may not be a panacea, but it has brought a sea of change in the lives of many. Only spreading the outreach of micro finance will bring down the cost of capital, the operating cost to strengthen the bonding between micro finance and the formal financial system. However, for sustainable development of the poor.

Rural economy, focus must be on development of rural infrastructure and rural economy, to ensure that there exist activities which require financial assistance.

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9. BIBLIOGRAPHY

Web URL
(1) http://www.investopedia.com/terms/m/micro finance.asp (2) micro finance\Grameen Bank - Wikipedia, the free encyclopedia.htm (3) Opportunity International - Wikipedia, the free encyclopedia.htm (4) Www. Themix.org (5) micro finance\GTZ Financial Sector Development Programme.htm

(6) http://www.cgap.org/p/site/c/template.rc/1.9.34818/ (7) http://www.rmmfi.org/?page_id=27

Magazines Micro Finance in India a State of the Sector Report, 2007 ICFAI Banker Article on micro finance September 2009 Micro Finance as insight into the world of micro finance July-September 2009

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ANNEXURES

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10. ANNEXURES Annexure 1 Questionnaire

Dear Sir/Madam,

We are the students of Parul Institute of Management, Vadodara and presently doing a Grand Project on PROBLMES FACED BY MFIs AND MEASURES TO SOLVE IT, Vadodara. We request you to kindly fill the questionnaire below and we assure you that the data generated shall be kept confidential. Name: .. Address: .. Contact No :( O) (M) City: ...............Pin: .Village: .

1. Your Age: ____________________ 2. Education Qualification. (a) Illiterate (c) S.S.C (e) Graduate 3. Marital Status. (a) Married No. of Children: __________ (b) Single (b) Primary (d) H.S.C

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4. Number of years you are in this Village. (a) Less than three years (b) More than three years

5. Occupation. (a) Worker (c) Other 6. Your income per day. (a) <than Rs.50 (c) Between Rs.100 to Rs. 150 7.Are you having a bank account? (a) Yes (b) No (b) Between Rs.50 to Rs.100 (d) >than Rs. 150 (b) Farmer

8. Is there any financial institution providing loan to you at cheaper rate? (a) Yes (b) No

9. Is there any SHG working in your village? (a) Yes (b) No

10. Do you have any photo identity proof? (a) Yes (b) No

If yes, please specify which_______________________ 11. How many earning members are there in your family? (a) 1 (c) 3 (b) 2 (d) More than 3

12. Do you think that is there any requirement MFIs for providing you loan? (a) Yes (b) No

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13. Do you possess any inherent skill in you? (a) Yes (b) No

If yes then which_______________________

Date:

Signature by
Interviewer Interviewee

_____________

____________

Thank You

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Annexure 2

1. Your Age?

Sr. No.

Category

No. of Respondents

Percentage

1 2 3 4 5 6 7 8 9 10 11 12

16-20 Years 21-25 Years 26-30 Years 31-35 Years 36-40 Years 41-45 Years 46-50 Years 51-55 Years 56-60 Years 61-65 Years 66-70 Years 71-75 Years Total

44 99 70 73 64 65 31 20 10 8 3 13 500

8.8 19.8 14 14.6 12.8 13 6.2 4 2 1.6 0.6 2.6 100

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Annexure 3

2. Education Qualification Sr. No. Category No. of Respondents 1 2 3 4 5 Illiterate Primary S.S.C H.S.C Graduate Total 165 167 75 35 58 500 33 33.4 15 7 11.6 100 Percentage

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Annexure 4
3. Marital Status

Sr. No.

Category

No. of Respondents

Percentage

1 2

Married Unmarried Total

398 102 500

79.6 20.4 100

Annexure 5
4. Number of years you are in this village?

Sr. No.

Category

No. of Respondents

Percentage

More than 3 years

496

99.2

Less than 3 years Total

4 500

0.8 100

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Annexure 6
5. Occupation

Sr. No.

Category

No. of Respondents

Percentage

1 2 3 4

Agriculture Labor Other Unemployed Total

115 205 80 100 500

23 41 16 20 100

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Annexure 7
6. Income per day

Sr. No.

Category

No. of Respondents

Percentage

1 2 3 4 5

Rs.0 Less than Rs.50 Rs.50 to Rs.100 Rs.100 to Rs.150 More than Rs.150 Total

115 111 149 101 24 500

23 22.2 29.8 20.2 4.8 100

Annexure 8
7. Are you having a bank account?

Sr. No.

Category

No. of Respondents

Percentage

1 2

Yes No Total

203 297 500

40.6 59.4 100

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Annexure 9
8. Is there any financial institution providing loan to you at cheaper rate?

Sr. No.

Category

No. of Respondents

Percentage

1 2

Yes No Total

0 500 500

0 100 100

Annexure 10
9. Is there any SHG working in your village?

Sr. No.

Category

No. of Respondents

Percentage

1 2

Yes No Total

0 500 500

0 100 100

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Annexure 11
10.Do you have any Photo Identity Proof?

Sr. No.

Category

No. of Respondents

Percentage

1 2

Yes No Total

487 13 500

97.4 2.6 100

Annexure 12
11.How many earning members are there in your family?

Earnings Members 0 1 2 3 More than 3 Total

No. of Respondents 3 151 197 100 49 500

Percentage 0.6 30.2 39.4 20 9.8 100

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Annexure 13
12.Do you think that is there any requirement MFIs for providing you loan?

Sr. No.

Category

No. of Respondents

Percentage

1 2

Yes No Total

500 0 500

100 0 100

Annexure 14
13. Do you possess any inherent skill in you?

Sr. No.

Category

No. of Respondents

Percentage

1 2

Yes No Total

63 437 500

12.6 87.4 100

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