Micro Credit

Micro-credit: Its need and the Role of NGOs
Micro-credit:
Its need and
the Role of
NGOs
Submitted by: AANCHAL
KHANNA
Roll No.
B Com (Hons), III year
8/31/2012
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Declaration
This is a project work on the topic
Micro-credit: Its need and the Role of
NGOs being submitted by Aanchal
Khanna, Roll No
, student of B Com
(Hons) III year in Shaheed Bhagat
Singh
College,
New
Delhi
under
University of Delhi in partial fulfillment
of the above program.
I wish to declare that I have referred to
several books, websites extensively on
this topic and the project work is based
on my understanding of the subject. I
have not copied from some published
source or website.
Aanchal Khanna
Roll No
B Com (Hons) III year
Shaheed Bhagat Singh College of Commerce,
New Delhi
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Acknowledgements
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Table of contents
Chapter
No.
Title
Page
1.
Introduction
2.
Background for the Project work
3.
Sources referred
4.
Literature Review
4.1.
Need for Micro credit
4.2.
Models of Micro finance
4.3.
Legal structure and regulation
4.4.
Impact on income & creation of jobs
4.5.
Interest rate practices in Micro credit

schemes
4.6.
Role of NGOs in various models of Micro

Finance in India
4.7.
Current crisis in Micro credit in India
4.8.
Role of NGOs in other countries
4.9.
Latest trends in Micro credit practices

around the world
5.
Problem Statement
6.
Discussion and Analysis of each Problem

statement
7.
Recommendations
8.
Summary
9.
Bibliography
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Chapter 1
Introduction
Microcredit is the extension of very small loans (micro-loans) to impoverished
borrowers who typically have low income, lack steady employment and a
verifiable credit history. The sizes of the loans funded are usually small and repaid
through regular repayment schedules beginning shortly after the loan is agreed.
Microcredit is designed not only to support entrepreneurship and alleviate poverty,
but also in many cases to empower women and uplift entire communities by
extension.
Ideas relating to microcredit can be found at various times in modern
history. Jonathan Swift inspired the Irish Loan Funds of the 18th and 19th
centuries. In the mid-19th century, Individualist anarchist Lysander Spooner wrote
about the benefits of numerous small loans for entrepreneurial activities to the poor
as a way to alleviate poverty. At about the same time, but independently to
Spooner, Friedrich Wilhelm Raiffeisen founded the first cooperative lending banks to
support farmers in rural Germany. In the 1950s, Akhtar Hameed Khan began
distributing group-oriented credit in East Pakistan. Khan used a Model in which credit
is distributed through community-based initiatives.
The origins of microcredit in its current practical incarnation can be linked to several
organizations founded in Bangladesh, especially the Grameen Bank. The Grameen
Bank, which is generally considered the first modern microcredit institution, was
founded in 1976 by Muhammad Yunus. Yunus began the project in a small town
called Jobra, using his own money to deliver small loans at low-interest rates to the
rural poor. Grameen Bank was followed by organizations such as BRAC in 1972
and ASA in 1978. Microcredit reached Latin America with the establishment of
PRODEM in Bolivia in 1986; a bank that later transformed into the for-profit
BancoSol. Microcredit quickly became a popular tool for economic development, with
hundreds of institutions emerging throughout the third world. Though the Grameen
Bank was formed initially as a non-profit organization dependent upon government
subsidies, it later became a corporate entity and was renamed Grameen II in
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2002. Muhammad Yunus was awarded the Nobel Peace Prize in 2006 for his work
providing microcredit services to the poor.
Chapter 2
Background for the project work
It is widely accepted that a lack of access to credit inhibits the ability of those in
developing countries to move out of poverty. This is why poor have been excluded
from the formal banking that causes a need for microcredit and the unique solutions
required to combat them.
Currently, credit markets in developing countries are formed of two parts; formal and
informal markets. The formal credit market excludes poor borrowers but lends to rich
borrowers. The informal loans are funded by moneylenders as well as micro finance
organisations.
However money lenders exploit the vulnerability and desperation of the poor by
charging very high interest rates. High interest rates also remove the incentive for
longer term projects, as the return is unlikely to cover the interest on the loan.
Therefore, intervention of formal credit can help in removing the perceived
exploitation in the informal market. However formal credit agencies do not provide
loans to poor because of
Asymmetric information about the type of project of the borrower, ROI and
capability of the borrower in managing the project.
Limited liability guarantee given by the borrower
Hazard of the antecedents of the borrower enabling him/her running away with
the loan
Hence, the formal credit market only lends to rich borrowers who offer acceptable
collateral to guarantee their loans. The informal credit market, therefore, has to rely
on other methods to mitigate the risks.
Thus there are both formal and informal credit markets, there are still those that are
unable to gain access to loans. Namely those safe borrowers excluded from the
formal credit market and unwilling to pay the high interest rates set by local
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moneylenders. It is these borrowers that microcredit aims to service by changing the
structure of the rural credit market.
Here comes the role of Micro finance Institutions and other institutions like NGOs,
Government promoted lending banks/ agencies in catering to the needs of the
excluded portion of poor. A viable alternative is engaging NGOs, Self Help
groups(SHG), micro Finance Institutions etc to reach these poor people. Banks can
provide funds to these institutions, who will in turn lend to the needy.
The objective of this project work is to study the system of Micro-credit in India and
other countries. The study would also attempt to establish why micro-credit is
needed, role of NGOs as facilitator of the process.
The study would further make an attempt to analyse the various roles NGOs play in
the process of extending micro credit to the needy. NGOs were initially drafted into
the process of micro credit because lending institutions like banks, Government
agencies found it difficult to play the role of lender as well as facilitators for poor
borrowers. This is because the seekers of micro credit i.e. poor people do not have
enough knowledge on how to manage their finances, need training for enhancing
their skills in undertaking a self driven enterprise etc. Thus the services of NGOs
were required as facilitators in this process. However many NGOs have found it
attractive to transform themselves into NGO cum Micro Finance Institutions (MFI) or
even setting up an independent banking institution to disburse loans directly. There
have been some success stories as well as pitfalls of this transformation. The study
would also analyse whether it is beneficial for the Micro credit sector at large if
NGOs divert from their traditional role of social service to become financial/ profit
making institutions. The study would also make a comparison between the financial
performance
of
Indian
microfinance
institutions
(specially
NGOs)
vis--vis
commercial banks in India, analyse the financial structure of MFIs in India and to
analyse Profitability and Efficiency of MFIs in India.
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Chapter 3
Sources referred
The main source of studies for this project work were various studies on mico-credit
published on websites.
The literature available on Micro-credit through various books was studied. Web
sites of important stake holders in micro credit like NABARD, various NGOs,
Microfinance companies were researched for collecting the study material.
Some important case studies were also available on the web sites of universities/
educational institutes. These case studies were also referred in making this project
work.
Due to paucity of time, it was not possible for me to design and administer
questionnaire on respondents. Hence instead of collecting primary data and
analysing the same, I have utilised the secondary data to anlyse and conclude on
the problem statements made in this project work. This secondary data was taken
from the web sites of different organisations as well as from the case studies referred
above.
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Chapter 4
4. Literature review
4.1
Need for Micro-credit
Microfinance has been an important tool in poverty alleviation, empowerment of

women and in bringing about financial inclusion. India has the highest number of
households, about 145 million, which are excluded from the banking system. Also,
out of the 6 lakh villages in India, only approximately 50000 have access to finance.
(as on January 2011). Globally there are about 2.5 billion people which constitute
nearly half of the services (data as on January 2011). Out of these 2.5 billion, nearly
2.2 billion of the unbanked population lives in Africa, Asia, Latin America and the
Middle East. Hence there exists a great opportunity for the microfinance sector to
provide credit to the low income population thereby reducing poverty and thus in the
development of the country as a whole.
According to the latest research done by the World Bank, India is home to almost
one third of the worlds poor (surviving on an equivalent of one dollar a day). Though
many central government and state government poverty alleviation programs are
currently active in India, microfinance plays a major contributor to financial inclusion.
About half of the Indian population still doesnt have a savings bank account and
they are deprived of all banking services. Poor also need financial services to fulfill
their needs like consumption, building of assets and protection against risk.
Microfinance institutions serve as a supplement to banks and in some sense a better
one too. These institutions not only offer micro credit but they also provide other
financial services like savings, insurance, remittance and non-financial services like
individual counselling, training and support to start own business and the most
importantly in a convenient way. The borrower receives all these services at her/his
door step and in most cases with a repayment schedule of borrowers convenience.
But all this comes at a cost and the interest rates charged by these institutions are
higher than commercial banks and vary widely from 10 to 30 percent.
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4.2 Models of microfinance

In India there are three major models of delivery of microfinance. However each
model has its own merits and seems to work under differing conditions. These are as
follows:
Grameen model involving formation of group of five people and the bank lending
to each one of them through consensus without any collateral and guarantee of
saving by group member. This model has served poorest of poor well in
Bangladesh.
SHG bank linkage model works on formation of group of 15-20 members,

decision on lending to a member is taken by the group and savings by each
member is inherent in this model. The SHG is financed by directly by the banks
viz., CBs (Public Sector and Private Sector), RRBs and Cooperative Banks.
MFI - Bank Linkage Model : This model covers financing of Micro Finance
Institutions (MFIs) by banking agencies for on-lending to SHGs and other small
borrowers.Under this model there are two sub models:
o one where joint liability groups are formed thereby providing social
collateral to the lending institution
o the other being direct lending to individual clients.
The following diagram captures the appropriateness of each of the models described
above
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The outreach of SHG- Bank linkage model is limited to only limited parts of the
country because lending institutions like banks are not having infrastructure like
manpower to regularly interact with SHG. Moreover there are also issues like helping
poor to form a SHG, training them in acquiring skills, educating them on managing
their finances etc where role of NGOs is important. NGOs also arrange the loans
through banks/ MFIs cro finance Institutions in addition to providing training/
educations services. A number of organizations with varied size and legal forms offer
microfinance service. The MFIs provide micro loans to the needy in collaboration
with NGOs. Although the capital for extending these loans is arranged by the MFIs
themselves but they do get funding support from Government institutions like
NABARD, SIDBI, RMK, DRDA etc.
These institutions lend either to individuals or through the concept of Joint Liability
Group (JLG). A JLG is an informal group comprising of 5 to 10 individual members
who come together for the purpose of availing bank loans either individually or
through the group mechanism against a mutual guarantee. The reason for existence
of separate institutions i.e. MFIs for offering microfinance apart from banks offering
the loans are as follows:
High transaction cost generally micro credits fall below the break-even point of
providing loans by banks
Absence of collaterals the poor usually are not in a state to offer collaterals to
secure the credit
Loans are generally taken for very short duration periods

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Higher frequency of repayment of installments and higher rate of Default
Microfinance sector has grown rapidly over the past few decades. Today it has
evolved into a vibrant industry exhibiting a variety of business models. Microfinance
Institutions (MFIs) in India exist as NGOs (registered as societies or trusts), Section
25 companies and Non-Banking Financial Companies (NBFCs). Commercial Banks,
Regional Rural Banks (RRBs), cooperative societies and other large lenders have
played an important role in providing refinance facility to MFIs. Banks have also
leveraged the Self-Help Group (SHGs) channel to provide direct credit to group
borrowers.
Various models of providing finance through NGOs MFI are operating in states of
India. In most of these models, the NGO facilitates finance to SHG through bank
rather than lending themselves. These models are discussed in later section.
An analysis of the institutions operating in MFI category in India is tabulated as under
S No. Type of MFI
Number Legal Registration
Not-for Profit MFIs

1
NGOs
400-500
Society Registration Act, 1860

Indian Trust Act, 1882
2 Non-Profit Companies 20
Section-25 of Indian Companies Act, 1956
Mutual Benefit MFIs

3 Mutual benefit MFIs 200-250
Mutually
Aided
Mutually Aided Co-operative societies, Act

enacted by State Governments
Cooperative Societies
(MACS)
For Profit MFIs
4 Non-Banking
45
Financial Companies
Indian companies Act, 1956

Reserve Bank of India Act, 1934
(NBFCs)
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Source: NABARD ISSUES RELATED TO MICROFINANCE , 2011

NGOs, Non-Banking Financial Companies (NBFCs), Co-operative societies,
Section-25 companies, Societies and Trusts, all such institutions operating in
microfinance sector constitute MFIs and together they account for about 42 percent
of the microfinance sector in terms of loan portfolio.
However the MFI channel is dominated by NBFCs which cover more than 80 percent
of the total loan portfolio through the MFI channel.
NGO-MFIs:There are a large number of NGOs that have undertaken the task of
financial intermediation. Majority of these NGOs are registered as Trust or Society.
Many NGOs have also helped SHGs to organise themselves into federations and
these federations are registered as Trusts or Societies. Many of these federations
are performing non-financial and financial functions like social and capacity building
activities, facilitate training of SHGs, undertake internal audit, promote new groups,
and some of these federations are engaged in financial intermediation. The NGO
mFIs vary significantly in their size, philosophy and approach. Therefore these NGOs
are structurally not the right type of institutions for undertaking financial
intermediation activities, as the byelaws of these institutions are generally restrictive
in allowing any commercial operations. These organisations by their charter are nonprofit organisations and as a result face several problems in borrowing funds from
higher financial institutions. The NGO MFIs, which are large in number, are still
outside the purview of any financial regulation. These are the institutions for which
policy and regulatory framework would need to be established.
Non-Profit Companies as MFIs: Many NGOs felt that combining financial
intermediation with their core competency activity of social intermediation is not the
right path. It was felt that a financial institution including a company set up for this
purpose better does banking function. Further, if mFIs are to demonstrate that
banking with the poor is indeed profitable and sustainable, it has to function as a
distinct institution so that cross subsidisation can be avoided. On account of these
factors, some NGO MFIs have set up a separate Non-Profit Companies for their
microfinance operations.
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Mutual Benefit MFIs: The State Cooperative Acts did not provide for an enabling
framework for emergence of business enterprises owned, managed and controlled
by the members for their own development. Several State Governments therefore
enacted the Mutually Aided Co-operative Societies (MACS) Act for enabling
promotion of self-reliant and vibrant co-operative Societies based on thrift and selfhelp. MACS enjoy the advantages of operational freedom and virtually no
interference from government because of the provision in the Act that societies under
the Act cannot accept share capital or loan from the State Government. Many of the
SHG federations, promoted by NGOs and development agencies of the State
Government, have been registered as MACS. Reserve Bank of India, even though
they may be providing financial service to its members, does not regulate MACS.
For Profit mFIs: Non Banking Financial Companies (NBFC) are companies
registered under Companies Act, 1956 and regulated by Reserve Bank of India.
Earlier, NBFCs were not regulated by RBI, but in 1997 it was made obligatory for
NBFCs to apply to RBI for a certificate of registration and for registration with RBI,
NBFCs were to have minimum Net Owned funds of Rs 2.5 million and this amount
has been gradually increased to Rs 20.0 million w.e.f April 21, 1999.
4.3
Legal structure and regulation
With financial inclusion emerging as a major policy objective in the country,

Microfinance has occupied centre stage as a promising conduit for extending
financial services to unbanked sections of population. At the same time, practices
followed by certain lenders have subjected the sector to greater scrutiny and need
for stricter regulation. NBFCs, which cover the major part of the outstanding loan
portfolio by the microfinance channel, are regulated by Reserve Bank of India, other
MFIs like societies, trusts, Section-25 companies and cooperative societies fall
outside the purview of RBIs regulation.
The microfinance sector in India has gone through turbulent times in the past couple
of years. The southern state of Andhra Pradesh, the biggest market for the countrys
microfinance institutions, was at the center of the storm, and populist moves by
politicians led to mass default of loans. The southern state began its crackdown with
an ordinance in 2010 which prohibited microfinance firms from operating in the state
if they did not register with it and obtain approvals before lending.
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It followed it up with the Andhra Pradesh Micro Finance Institutions (Regulation of
Money Lending) Act 2011, bringing fresh lending to a virtual halt and triggering a
wave of defaults totaling more than 6,500 crore. Many small microfinance entities
closed shop and the larger ones had to write-off several hundred crores worth of
loans.
The central government has now stepped in. The Microfinance Institutions
(Development and Regulation) Bill, 2012 puts the Reserve Bank of India firmly in
control of the sector.
Microfinance Institutions (Development and Regulation) Bill, 2012, will take MFIs
outside the purview of state-level legislation, including the controversial Andhra
Pradesh law that saw the asset base of the microfinance industry shrinking and led
to a drastic increase in bad debts due to restrictions on collection practices.
All MFIs will have to register themselves with the Reserve Bank of India (RBI). The
central bank can specify lending rates and margins that can be charged by an MFI,
the recovery methods to be followed, the processing fees, the tenure and ceiling of
the loan. Those MFIs registered with the apex bank wont be treated as
moneylenders, thereby keeping them out of the purview of the Andhra Pradesh Micro
Finance Institutions (Regulation of Money Lending) Act, 2010.RBI will also specify a
threshold on the assets deployed for classifying any institution as an MFI.
4.4
Impact on income and creation of jobs
Microcredit is being justified by its positive impact on poverty reduction, income,

consumption, the creation of businesses, education and health, the empowerment of
women and the empowerment of the poor in general.
Critics argue that microcredit has driven poor households into a debt trap, that the
money from loans is used for consumption, that men actually use the money for
which their female relatives get into debt and that microcredit does not alleviate
poverty or improve health and education.
Micro lending aims at increasing income through productive activities such as goat
herding, as shown here in Rwanda on a cooperative funded through micro lending.
Tazul Islam suggests that microcredit has a positive impact on enterprise and
household income and asset accumulation, household consumption. However, the
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positive economic impacts associated with microcredit are not as extensive as once
thought. A study by Dean Karlan of Yale University in the Philippines compared two
groups in Manila: a treatment group, financed through microcredit, and a control
group that did not receive microcredit. The study showed that in this case many
microcredits were loaned to people with existing business, and not to those seeking
to establish new businesses. The businesses became more profitable and laid off
unproductive employees including friends and relatives that they previously had felt
obliged to employ.
The first randomized evaluation of the impact of introducing microcredit in a new
market has been undertaken in slums in Hyderabad, India, in 2008. Half the slums
were randomly selected for opening branches of banks that provided microcredits
while the remainder were not. The study showed that fifteen to 18 months after
lending began, there was no effect on average monthly expenditure per capita, but
expenditure on durable goods increased and the number of new businesses
increased by one third.
Milford Bateman, the author of Why Doesn't Microfinance Work?, argues that
microcredit offers only an "illusion of poverty reduction". A few in poverty do manage
to establish microenterprises that produce a decent living," he argues, but "these
isolated and often temporary positives are swamped by the largely overlooked
negatives."
Sociologist Jonathan H. Westover, Ph.D. found that much of the evidence on the
effectiveness of microfinance for alleviating poverty is based in anecdotal reports or
case studies.
According to one more study by an Islamic foundation, the Grameen Bank does not
reach the poorest, since the clients of the bank tend to be clustered around the
poverty line of predominantly moderately poor or vulnerable non-poor. Of the poor
who join Grameen banks microcredit program, a high percentage often drop out
after only a few loan cycles, while many others eventually drop out in later loan
cycles as loan amounts begin to exceed their repayment capacity.
Risks like sickness and natural disasters are a critical dimension of poverty and poor
people rely heavily on informal savings to manage these risks. Microfinance
institutions could provide savings services to this population to reduce these risks,
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but not all of them have been successful at doing so. For example, a study of
microcredit institutions in Bolivia in 2003, for example, found that they were very slow
to deliver quality microsavings services because of easy access to cheaper forms of
external capital.
Microcredit has been blamed for many suicides in India: aggressive lending by
microcredit companies in Andhra Pradesh is said to have resulted in over 80 deaths
in 2010.
4.5 Interest rate practices in Micro credit schemes

There has been much criticism of the high interest rates charged to borrowers. For
example, Bangladesh's former Finance and Planning Minister M. Saifur Rahman
charged in 2005 that some microfinance institutions use excessive interest
rates. Sharma has criticized microfinance institutions for creating small-debt traps for
the poor in Andhra Pradesh in India with high interest rates and coercive methods of
recovery. A 2008 study in Bangladesh showed that some loan recipients sink into a
cycle of debt, using a microcredit loan from one organization to meet interest
obligations from another. Field officers who are in a position of power locally and are
remunerated based on repayment rates sometimes use coercive and even violent
tactics to collect installments on the microcredit loans. Muhammad Yunus has
recently made much of this point, and in his latest book argues that microfinance
institutions that charge more than 15% above their long-term operating costs should
face penalties.
A related issue is interest rate disclosure: Many suppliers of microcredit quote their
rates to clients using the flat calculation method, which significantly understates the
true annual percentage rate. In Andhra Pradesh, the villagers who take out the loan
often did not know the interest that they were being charged and were not aware of
the consequences of taking multiple loans as they take the second loan to clear the
first loan.
Tucker argued in 1995 that the 98% repayment rate of Grameens loans only refer to
first-time loans, that they are often repaid by new loans and that the practice of
lending only to groups of women puts lenders under pressure because each member
can only obtain a new loan if each member has repaid the previous loan.
4.6
Role of NGOs in various models of Micro finance in India

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NGOs are voluntary social work organization who renders help to government and
society for improvement of quality of life people, help in the formation of SHGs. In
order to reduce the smaller transaction NGOs help banks. Over the last quarter
century, a few organizations, outside the purview of the public sector, have
succeeded in effective poverty alleviation through micro-credit. Their main objective
is to draw attention about microfinance by conduction meetings in rural areas
NGOs provide the minimum knowledge related to the finance, help people to
improve their skills in education, making contact between the SHGs and banks. The
Advantage with NGOs as facilitator is that there is no collateral needed in
microfinance loans. Unlike in a commercial loan where there is collateral. More often
than not, clients of microloans have no credit history. And they have low educational
attainment. Some are illiterate, too. Since the clients of microloans often live in
remote areas, there is cost involved in reaching their doorsteps and regularly
monitoring repayments.
Also, NGOs normally conduct value formation seminars and entrepreneurial skills
training for members who are prospective borrowers of funds. Commercial banks do
not offer this service to poor borrowers. Microcredit loans are approved fast. These
small loans do not usually meet the commercial banks requirements on borrowers
cash flows.
Poor borrowers prefer to go to NGOs because of many reasons. The poor borrowers
do not want to go to commercial banks, wait for long periods and mingle with betterdressed clients of the banks. These are psychological costs that the poor borrower
does not incur if he borrows from an NGO in the countryside. The NGO credit
service is more personalized, with more intensive supervision and monitoring of the
utilization of funds.
We would now look at various models under which NGOs have been operating in
the microfinance activities in our country. In India microfinance operates through
following channels:
SHG Bank Linkage Programme (SBLP)
Micro Finance Institutions (MFIs)
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However NGOs play a crucial role of intermediary, facilitator or linkage between the
SHG and lender in most these models.
SHG Bank Linkage Programme
This is the bank-led microfinance channel which was initiated by NABARD in 1992.
Under the SHG model the members, usually women in villages are encouraged to
form groups of around 10-15. The members contribute their savings in the group
periodically and from these savings small loans are provided to the members. In the
later period these SHGs are provided with bank loans generally for income
generation purpose. The groups members meet periodically when the new savings
come in, recovery of past loans are made from the members and also new loans are
disbursed. This model has been very much successful in the past and with time it is
becoming more popular. The SHGs are self-sustaining and once the group becomes
stable it starts working on its own with some support from NGOs and institutions like
NABARD and SIDBI.
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The SHG model starts off with savings as a base. Mainstream banking has
accepted this model for a nationwide bank linkage programme and it is quite
popular with bankers who see potential in microfinance. Most of the groups in
India have been promoted by NGOs. The essential design elements of the SHG
model are as follows:
Homogenous affinity group of 15-20 members
Regular meetings
Regular savings
Lending decisions are of the group
Group selects their leaders
Group accesses external funds
Groups federate at Cluster/Block level.
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This model was adopted in the project known as Micro Credit Action Research
(MCAR) project, a study of various dimensions of SHG Bank Linkage in two districts
of Uttar Pradesh namely Hathras and Raebareli in collaboration with Uttar Pradesh
Land Development Corporation (UPLDC). The project is an ongoing exercise looking
at formation, nurturing and sustainability of SHG Bank Linkage activities involving
Rural Reconstruction Banks (RRBs) and NGOs in the two districts. Funded by the
World Bank, this pilot project was implemented in sodic and non sodic areas to test
the viability and sustainability of SHGs. In all 945 groups were formed (475 Women
SHG, 467 Men SHG) and linked with banks through cash credit limits. Key
considerations for an NGO playing role of a facilitator are:
Ability to fulfill capacity building financial management, book keeping and audit
which ensure ownership, self-reliance of a co-operative
Establishing forward linkages state government etc.,
Need to build strategies for empowerment and generating mutual trust and
respect amongst group
Comply with stringent legal and regulatory requirements
Withstanding long and expensive transition process
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Balancing between their social mission of outreach to the poor and the need to
achieve financial sustainability
Acquiring necessary skills and arranging financial/technical capacity building
Creating appropriate support and monitoring system
NGO as MFI s promoting SHG s

Different ways of helping SHG s by NGOs -MFI s
a. NGO (Myrada) set up an MFI (Sanghamitra) as a separate entity to lend to
people
b. PRADAN established as an NGO MFI by large number of SHG
c. NGO directly lending to the poor borrowers
d. NGO Borrowing funds from SIDBI,RMK (Rashtriya Mahila Kosh), FWWB
(Friends Women World Banking)
e. MFIs organize as NBFC (Non Banking Financial Companies) Eg.,BASIX,
CFTS Mirzapur, SHARE Microfinance Limited etc.
Page 21 of 62
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Self-Employed
Womens
Association
(SEWA-Lucknow)
is
an
autonomous
organisation of Chikan artisans. Impetus for setting up SEWA-Lucknow came from a

UNICEF sponsored study conducted in 1979 on the condition of Chikan artisans.
The study established that over 40,000 Chikan artisans working in and around
Lucknow were highly exploited in the industry even as middlemen made hay. As a
result, Chikan artisans lived in shanty localities and suffered from poverty; they and
their offspring were illiterate; and their families had poor health.
In 1984, Thirty-One women came together to register an organization of women
artisans under the 1860 Societys Registration Act for CHIKAN KARI. Self
Employed Womens Association (SEWA Lucknow) was thus formed with a major
agenda of doing away with the middleman and the organization to act as a platform
from where the artisans would address the market directly.
SEWA organisation has tie ups with many NGOs who in-turn have tie ups with Bank
of Baroda and other financial institutions. The NGOs have linkage with different SHG
under SEWA. The banks lend money to NGOs who in turn lend raw material and job
work to SHGs. The savings of SHG under SEWA are put in banks as collateral.
Page 23 of 62
International Fund for agricultural Development (IFAD) is executing this model with
the help of NGOs in TN for the Development of Women. Some NGOs were
contracted for focusing exclusively on the needs of poor women, while others had
not given priority to poverty targeting. NGOs played the central role in
implementation of the project in:
identifying women beneficiaries;
forming and supervising women's self-help groups (SHGs);
establishing credit linkages for women group members; and
training animators to work to with the women's groups.
The evaluation of the project stressed some lessons learned in working with NGOs.
The catalytic or support role of the NGO has to be clearly defined and
understood. The study found that over half the NGOs were making the decisions
for the group, instead of holding back and letting the women in the group make
their own decisions. This is sometimes hard for enthusiastic NGO field workers to
do, but is important from the point of view of women's empowerment.
The remuneration basis of NGOs is very important. Originally, the

remuneration of the NGOs was based on the number of women applying for
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bank loans in the groups the NGOs had helped set up. But, as the evaluation
noted, where NGOs were underfunded themselves, and NGO staff therefore
heavily reliant for their salaries on income from the project, this had adverse
effects. Such NGOs became too anxious to set up new groups and
encouraged women to apply for credit before group cohesion had been fully
established. In recognition of this problem, the basis of the NGO remuneration
was changed so that it included group formation and sensitization and helping
groups become sustainable. This allowed a more balanced type of support.
NGO support is most important at the early stages of group formation, and
should gradually be phased out.
The Ministry of Rural Development, Government of India has launched a new

programme known as "Swarnjayanti Gram Swarozgar Yojana" (SGSY) by
restructuring the existing schemes namely :
Integrated Rural Development Programme (IRDP)
Training of Rural Youth for Self Employment (TRYSEM)
Development of Women & Children in Rural Areas (DWCRA)

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Supply of Improved Toolkits to Rural Artisans (SITRA)
Ganga Kalyan Yojana (GKY)
Million Wells Scheme (MWS)
The SGSY Scheme is operative from 1st April 1999 in rural areas of the country.
SGSY is holistic Scheme covering all aspects of self-employment such as
organization of the poor into Self Help Groups, training, credit, technology,
infrastructure and marketing. The scheme is funded by the financial institutions,
Panchayat Raj Institutions, District Rural Development Agencies (DRDAs), Non
Government Organisation (NGOs), Technical institutions in the district; are involved
in the process of planning, implementation and monitoring of the scheme. NGOs
help is sought in the formation and nurturing of the Self Help Groups (SHGs) as well
as in the monitoring of the progress of the Swarozgaris. Wherever feasible the
services of NGOs is utilized in the provision of technology support, quality control of
the products and as recovery monitors cum facilitators. The scheme aims at
establishing a large number of micro enterprises in the rural areas. The objective of
SGSY is to bring assisted family above the poverty line within three years by
providing them income generating assets through a mix of bank credit and
Government subsidy. The rural poor such as those with land, landless labour,
educated unemployed, rural artisans and disable are covered under the scheme.
The assisted families known as Swarozgaris can be either individuals or groups and
are selected from BPL families by a three member team consisting of Block
Development Officer Banker and Sarpanch.
4.7
Current crisis in micro credit in India
The Indian microfinance sector has been in a crisis since late 2010, when Andhra
Pradesh, the hub for microfinance in India, imposed tight regulations on microfinance
firms citing usurious interest rates and the use of coercion to recover loans. After
reports of borrowers committing suicide in the state, the Andra Pradesh government
had come out with the AP Microfinance Ordinance in October 2010, which was
subsequently legislated into an Act, which crippled micro-finance institutions (MFIs)
including leading player SKS.
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SKS Microfinance, one the countrys largest, and the only listed microfinance
company, bore the brunt of the fallout. The microfinance company has been forced to
write off nearly Rs 1,500 crore in loans
According to the Microfinance Institutions Network (MFIN), the sector saw a 38%
decline in gross loan disbursements to R20,000 crore in 201112, while the total
number of loan accounts fell by 22% to 26 million.
In the wake of the new regulations, repayment of MFI loans in Andhra plummeted to
zero, while in other states it is still 99%. Andhra Pradesh still has a dominant place in
Indian microfinance sector, as around 15 million loan accounts of the total 26 million
loan accounts in India are in the state. The state has 5,150 MFI branches, which is
around 52% of the total 9,843 branches in the country.
Outside Andhra, though, the growth story looks intact. Gross disbursement by micro
lenders outside the state grew by 5% to R13,700 crore in 201112 from R13,000
crore.
In order to tide over this crisis, The Micro Finance Institutions (Development and
Regulation) Bill, 2012 was introduced in the Lok Sabha on May 22, 2012. The Bill
aims to provide for the development and regulation of micro finance institutions.
This bill will have overriding powers over any bill passed by any state government.
According to this bill, RBI has been given full authority to exercise control over MFIs
in the country.
The RBI has also been given the authority to set the maximum annual percentage
rate charged by MFIs and set a maximum limit on the margin MFIs can make.
Margin is defined as the difference between the lending rate and the cost of funds (in
percentage per annum). Accordingly on 04.08.2012, the Reserve Bank of India (RBI)
modified norms for microfinance companies including removing the interest rate cap
of 26% on loans given by microfinance institutions (MFIs). After reports of MFIs
overcharging small borrower, the central bank had fixed a cap of 26% on loans given
by micro lenders to the small borrowers.
These steps are expected to bring stability in the micro finance market and would
allow MFIs to recover from the shocks.
4.8
Role of NGOs in other countries

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In Philippines, the NGO microcredit practitioners charge interest that range from 24%
to 30% annually computed monthly usually 2% to 3% percent every month which
may seem to on a higher side. But the wonder of it all is that the repayment/recovery
rate of NGO credit is very much higher than the repayment rate of commercial loans.
Incidentally, the interest rates charged by NGOs is still lower than the interest rates
charged by the moneylenders of the 5/6 loan.
Grammen bank, promoted by Mohd Yunus in Bangladesh is a success story.
Grameen brought credit to the poor, women, the illiterate, the people who pleaded
that they did not know how to invest money and earn an income. Grameen created a
methodology and an institution around the financial needs of the poor and enabled
the poor to build on their existing skill to earn a better income in each cycle of loans.
The Grameen Model is perhaps the most well known, admired and practised model
in the world. The model involves the following elements.
Homogeneous affinity group of five
Eight groups form a Centre
Centre meets every week
Regular savings by all members
Loan proposals approved at Centre meeting
Loan disbursed directly to individuals
All loans repaid in 50 instalments
However the Grameen model follows a fairly regimented routine. It is very cost
intensive as it involves building capacity of the groups and the customers passing a
test before the lending could start.
Kenya has prioritized the regulation and supervision of the microfinance industry as
a key policy objective and reform agenda for enhancing financial inclusion and
economic development. It is in this spirit that they have operationalised Microfinance
Act and attendant Regulations in 2008. The Act covers deposit-taking MFIs, nondeposit taking MFIs and provides for banks to establish fully owned subsidiaries to
undertake deposit taking microfinance business. The implementation of the Act and
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the Regulations is aimed at promoting the orderly growth and development of a
sound and stable microfinance industry. In addition, it provides a platform for the
broadening and deepening of access to financial services throughout Kenya,
especially to the low income populace and small and medium enterprises (SMEs) in
both urban and rural areas. Towards the development of the microfinance sector, the
Central Bank, in partnership with the microfinance industry, has facilitated a number
of policy initiatives aimed at increasing outreach, depth and cost-effective delivery of
products and services.
For example, MFIs in Sub-Saharan Africa had 6.5 million borrowers and 16.5 million
depositors by the end of 2008. Microfinance has played, and continues to play, a
critical role in enhancing financial inclusion and promoting economic development in
Kenya.
However, in Latin America, there has been a shift in loaning trend during the past
decade from group lending to individual lending. In 1990, Banco de Desarrollo in
Chile had a portfolio that was evenly split between group and individual loans, and
NGOs had 80% of their portfolios in group loans. By the end of 1999, Banco de
Desarrollo had gotten out of group lending all together, the NGOs had reduced their
portfolios in absolute terms and new bank entrants all used individual lending
techniques. Individual lending now accounts for more than 90% of the market. And
there goes the poor who can only do this through groups.
In Paraguay, in 1990 Fundacion Paraguaya operated a group program. By 1999, all
lendings through both the finance companies and Fundacion Paraguaya were
individual. As in other countries, this shift is mostly seen in the fact that all later
entrants offered only individual loans. This shift implies that group activities and
dynamics will be reduced or totally removed, which will have implications for the socalled social mission of the NGOs transforming into a MFI. This shift is also reducing
poverty outreach of NGOs, their basic mission.
Christen, based on his analysis of microfinance transformation in Latin America,
reported that regulated microfinance institutions in Latin America provide larger loans
to their clients than do unregulated NGOs. The average for unregulated NGOs
($322) is roughly a third that for regulated MFI ($803). Such an increasing average
loan size may have implications for the social mission. For example, in the case of KPage 29 of 62

Rep Bank, its default rates were higher for the larger loans. As a lesson, K-Rep, an
NGO turned MFI, returned back to basics policy of focusing attention on smaller
loans to lower-income borrowers, both to better achieve K-Reps mission and to
improve credit risk management.
However the experience of developed countries has been different than the
developing countries. Grameen Bank launched their US operations in New York in
April 2008. Bank of America has announced plans to award more than $3.7 million in
grants to nonprofits to use in backing microloan programs. ACCION USA, the US
subsidiary of the better-known ACCION International, has provided US$117 million in
microloans since 1991, with an over 90% repayment rate.
Even so, efforts to replicate Grameen-style solidarity lending in developed countries
have generally not succeeded. For example, the Calmeadow Foundation tested an
analogous peer-lending model in three locations in Canada, rural Nova Scotia and
urban Toronto and Vancouver, during the 1990s. It concluded that a variety of factors
including difficulties in reaching the target market, the high risk profile of clients,
their general distaste for the joint liability requirement, and high overhead costs
made solidarity lending unviable without subsidies.
Microcredits have also been introduced in Israel, Russia, Ukraine and other nations
where micro-loans help small business entrepreneurs overcome cultural barriers in
the mainstream business society. The Israel Free Loan Association (IFLA) has lent
more than $100 million in the past two decades to Israeli citizens of all backgrounds.
4.9
Latest trends in Micro credit practices around the world
Microfinance institutions are using various Credit Lending Models throughout the
world. Some of the models are listed below.
Peer-to-peer lending over the Web
The principles of microcredit have also been applied in attempting to address several
non-poverty-related issues. Among these, multiple Internet-based organizations have
developed platforms that facilitate a modified form of peer-to-peer lending where a
loan is not made in the form of a single, direct loan, but as the aggregation of a
number of smaller loansoften at a negligible interest rate. There are several ways
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by which the general public can participate in alleviating poverty using Web
platforms.
New platforms that connect lenders to micro-entrepreneurs are emerging on the
Web, for example Kiva, Zidisha, Lend for Peace, and the Microloan Foundation.
Another WWW-based microlender United Prosperity uses a variation on the usual
microlending model; with United Prosperity the micro-lender provides a guarantee to
a local bank which then lends back double that amount to the micro-entrpreneur.
United Prosperity claims this provides both greater leverage and allows the microentrepreneur to develop a credit history with their local bank for future loans. In 2009,
the US-based nonprofit Zidisha became the first peer-to-peer microlending platform
to link lenders and borrowers directly across international borders without local
intermediaries. Vittana allows peer-to-peer lending for student loans in developing
countries.
Credit to Associations
This is where the target community forms an 'association' through which various
microfinance (and other) activities are initiated. Such activities may include savings.
Associations or groups can be composed of youth, or women; they can form around
political/religious/cultural issues; can create support structures for microenterprises
and other work-based issues. In some countries, an 'association' can be a legal body
that has certain advantages such as collection of fees, insurance, tax breaks and
other protective measures. Distinction is made between associations, community
groups, peoples organizations, etc. on one hand (which are mass, community
based) and NGOs, etc. which are essentially external organizations.
Community Banking
The Community Banking model essentially treats the whole community as one unit,
and establishes semi-formal or formal institutions through which microfinance is
dispensed. Such institutions are usually formed by extensive help from NGOs and
other organizations, who also train the community members in various financial
activities of the community bank. These institutions may have savings components
and other income-generating projects included in their structure. In many cases,
community banks are also part of larger community development programmes which
use finance as an inducement for action.
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Lending to women
Lending to women has become an important principle in microcredit, with banks
and NGOs such as BancoSol, WWB, and ProMujer catering to women exclusively.
Women continue to make up seventy-five percent of all microcredit recipients
worldwide. Exclusive lending to women began in the 1980s when Grameen Bank
found that women have higher repayment rates, and tend to accept smaller loans
than men. Subsequently, many microcredit institutions have used the goal of
empowering women to justify their disproportionate loans to women.
A 1996 study in Bangladesh acknowledges the "success" of reaching women with
microcredit as "highly impressive", but also notes that loans are often given over to
male relatives or husbands. In a minority of cases there was even an increase
in domestic violence for women who did not get the loan or had to wait a long time to
get the loan. The study also showed that women are more likely to retain control
over their loans in traditional womens work like livestock rearing that are considered
womens work.
The bigger the size of the loan, women lose their control more. For example, a study
in Bangladesh showed that women have 100% control over loans that are smaller
than 1000 Taka but only 46% of control if the loan is bigger than 4,000 Taka. A study
in India showed that women may be put under pressure by their male relatives to join
a credit group and indebt themselves. A study in Bangladesh showed that
microcredit increases dowries, with women forced at times to take microcredit loans
as the only means to pay these increased dowries for their daughters.
Chapter 5
Problem Statement
The problem statement can be formulated for this project as follows:
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a) Are the micro credit approaches adopted in India adequate to address the
requirements of the needy?
b) Are NGO meeting the objective for which they have been roped in by the
Government?
c) Should NGOs transform into MFI in order to provide a single window solution to
the poor people?
In the subsequent section, i would attempt to analyse each problem statement with
the help of secondary data available to arrive at concluding statement.
Based on my analysis of the above problems, recommendations would also be made
in the next chapter.
Chapter 6
Discussion and Analysis of each Problem statement
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a) Are the micro credit approaches adopted in India adequate to address the
requirements of the needy?
Microfinance is one of the great success stories in the developing world in the last 30
years and is widely recognized as a just and sustainable solution in alleviating global
poverty. In India also it has been viewed as a development tool which would alleviate
poverty and enhance growth of the country through financial inclusion.
India is a country which has the highest number of households which are excluded
from banking. Microfinance has served to provide financial services and credit to the
unprivileged and unbanked sector in India thereby bringing about financial inclusion.
India is the second most populous country in the world, whose rapidly developing
economy is widening the gap between rich and poor. India has the highest number of
households, about 145 million, which are excluded from the banking system. Also,
out of the 6 lakh villages in India, only approximately 50000 have access to finance.
(as on January 2011). Out of a population of 1.2 billion, approximately 25% of the
populatiion lives below poverty line in our country.
Microfinance in India can trace its origins back to the early 1970s when the Self
Employed Womens Association (SEWA) of the state of Gujarat formed an urban
cooperative bank, called the Shri Mahila SEWA Sahakari Bank, with the objective of
providing banking services to poor women employed in the unorganised sector in
Ahmadabad City, Gujarat. The microfinance sector went on to evolve in the 1980s
around the concept of SHGs, informal bodies that would provide their clients with
much-needed savings and credit services. From humble beginnings, the sector has
grown significantly over the years to become a multi-billion dollar industry, with
bodies such as the Small Industries Development Bank of India and the National
Bank for Agriculture and Rural Development devoting significant financial resources
to microfinance.
The Indian state put stress on providing financial services to the poor and
underprivileged since independence. The commercial banks were nationalized in
1969 and were directed to lend 40% of their loan able funds, at a concessional rate,
to the priority sector. The priority sector included agriculture and other rural activities
and the weaker strata of society in general. The aim was to provide resources to
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help the poor to attain self sufficiency. They had neither resources nor employment
opportunities to be financially independent, let alone meet the minimal consumption
needs. To supplement these efforts, the credit scheme Integrated Rural Development
Programme (IRDP) was launched in 1980. But these supply side programs (ignoring
the demand side of the economy) aided by corruption and leakages, achieved little.
Further, The share of the formal financial sector in total rural credit was 56.6%,
compared to informal finance at 39.6% and unspecified sources at 3.8%. [RBI 1992].
Not only had formal credit flow been less but also uneven. The collateral and
paperwork based system shied away from the poor. The vacuum continued to be
filled by the village moneylender who charged interest rates of 2 to 30% per month
(Rural Credit and Self Help Groups- Microfinance needs and Concepts in IndiaK.G.Karmakar 1999). 70% of landless/marginal farmers did not have a bank account
and 87% had no access to credit from a formal source.( World Bank NCAER, Rural
Financial Access Survey 2003).
This supply led approach in rural finance caused various qualitative issues such as
concerns about financial viability of institutions on account of high rate of loan
delinquency, cornering of subsidy by well off people in what has been described as
rent seeking behaviour, continued presence of moneylenders, inability to reach the
core poor and led to a reorientation in thinking around 1980s and a resultant
worldwide shift in rural finance discourse and operational paradigm is shown in the
table:
Thus a change in approach in providing microfinance occurred worldwide as well as

iIn India in the 1980s with the formation of pockets of informal Self Help Groups
(SHG) engaging in micro activities financed by Microfinance. The first official effort
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materialized under the direction of NABARD.(National Bank For Agriculture And
Rural Development).The Mysore Resettlement and Development Agency (MYRADA)
sponsored project on Savings and Credit Management of SHGs was partially
financed by NABARD during 1986-87.[Mainstreaming of Indian MicrofinanceP.Satish, 2005].
Successful microfinance interventions in parts of India by NGOs provided further
impetus. In this backdrop, NABARDs search for alternative models of reaching the
rural poor brought the existence of informal groups of poor to the fore. The concept
of Self-help was discovered by social-development NGOs in 1980s. Realising that
the only constraining factor in unleashing the potential of these groups was
meagreness of their financial resources, NABARD designed the concept of linking
these groups with banks to overcome the financial constraint. The programme has
come a long way since 1992 passing through stages of pilot (1992-1995)
mainstreaming (1995-1998) and expansion phase (1998 onwards) and emerged as
the worlds biggest microfinance programme in terms of outreach, covering 1.6
million groups as on March, 2005.23 It occupies a pre-eminent position in the sector
accounting for nearly 80% market share in India.
Records show a recovery rate as high as 95% for loans extended by banks to SHGs
and a study sponsored by FDC, Australia, it was observed that the reduction in costs
for the bankers is around 40 % as compared to earlier loans under Integrated Rural
Development Programme (IRDP). The programme has received strong public policy
support from both Government of India and Reserve Bank of India.
With the small beginning as Pilot Program launched by NABARD by linking 255
SHGs with banks in 1992, the programme has reached to linking of 69.5 lakh savinglinked SHGs and 48.5 lakh credit-linked SHGs and thus about 9.7 crore households
are covered under the program.
The other model adopted was MFI - Bank Linkage Model. This model covers
financing of Micro Finance Institutions (MFIs) by banking agencies for on-lending to
SHGs and other small borrowers.
Following the RBI guidelines issued vide its circular dated 18 February 2000, to all
scheduled commercial banks including RRBs, MFIs have been availing bulk loans
from banks for on-lending to groups and other small borrowers. On the basis of
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returns received from banks for the year 2009-10, SIDBI, 21 Public Sector
Commercial Banks, 14 private sector Commercial Banks, 04 foreign Commercial
Banks, 7 RRBs and one Co-operative Bank had reportedly financed MFIs for onlending to groups and other small borrowers to promote microfinance activities.
As per NABARD MIS, banks have financed to 691 MFIs with bank loans of Rs
8062.74 crore in 2009-10 as against 581 MFIs with bank loans of Rs 3,732.33 crore
during 2008-09, representing growth rate of 116.5 per cent in bank loans disbursed.
As on 31 March 2010, the outstanding bank loans to 1513 MFIs was Rs 10147.54
crore as against Rs 5009.09 crore to 1915 MFIs as on 31 March 2009, showing
doubling of bank loan over the previous year.
Further, during the year 2009-10, SIDBI had financed to 88 MFIs with financial
assistance of Rs 2665.75 crore and the loan outstanding against 146 MFIs as on 31
March 2010 was Rs 3808.20 crore.
As such the total exposure of banks and financial institutions to MFIs as on 31 March
2010 was to the tune of Rs 13955.74 crore.
The following statistics give details of loans given to needy thru different models of
micro financing in India.
a. During 2009-10, banks have financed 15.87 lakh SHGs, including repeat loan to
the existing SHGs, with bank loans of Rs 14,453.30 crore as against 16.10
SHGs with bank loans of Rs 12,253.51 crore during 2008-09, registering a
decline of 1.4 per cent of SHGs but a growth of 17.9 per cent in bank loans
disbursed.
b. The agency-wise details of loans disbursed by banks to SHGs during the years
2008-09 and 2009-10 are as under:
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c. Loans given by NABARD under SHG- bank klinkage model
d. Loans given by NABARD to MFIs for onward lending to SHGs
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e. Loans given by SIDBI to MFIs for onward lending to SHGs
f. Number of SHGs having loan outstanding in 2009 and 2010
g. Amount of loan outstanding with SHGs in 2009 and 2010

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In order to assess the social and economic impact of the microfinance initiatives,
NABARD had commissioned Puhazhendhi & Satyasai in the year 2000. Their study
covered 223 SHGs spread over 11 states across India. The study found that 58.6%
of sample households registered an increase in assets from pre to post SHG
situation, an additional 200 economic activities taken up by sample households and
decrease in the percentage of sample households with annual income levels of
Rs.22500 from 73.9% to 57%. Another study commissioned by NABARD in 2002
covered 60 SHGs in Eastern India. The findings of this study also corroborate the
findings of earlier evaluation with 23% rise in annual income and 30% increase in
asset ownership among 52% of sample households. World Bank policy research
paper (ibid) 2005 details the findings of Rural Finance Access Survey (RFAS) done
by World Bank in association with NCAER. The RFAS covered 736 SHGs in the
states of Andhra Pradesh and Uttar Pradesh and also points to positive economic
impact. The findings indicate 72% average increase in real terms in household
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assets, shift in borrowing pattern from consumption loans to productive activities and
33% increase in income levels.
With an average repayment rates upto 98% reported all across the country, we can
conclude that why micro-finance has succeeded is because of the small credit
disbursed to a huge customer pool. The mere volume of transactions is the winner in
this game.
Microfinance in India is currently being provided by three sectors: the government,
the private sector and charities. However these three sectors, as large as they are,
have only a small fraction of the capital and geographic scale required to meet the
overwhelming need for finance amongst Indias rural poor. The top 10 private sector
microfinance providers in India together serve less than 5% of the unbanked
population of India approximately 20 million clients.
Therefore we can conclude that microfinance activities in India have been aimed at
inclusion of the section of the society which needs it most. However the outreach
needs to be increased substantially so that most of the needy sections in rural as
well as urban areas can have access to it. This is also important because India has
become an important hub for service sector industry in addition to the already strong
manufacturing industry. Different types of services/ manufacturing small or big are
needed to support these industries which gives an opportunity to all sections of
society to start their enterprise.
For example the present outreach of (SHG Linkage to Banks), is not nation-wide. It
is concentrated mainly in the southern states which are relatively less poor, both in
percentage and in absolute numbers of households below the poverty-line. SHGs
have not caught on in the north and east, particularly in the BIMARU states (Bihar,
Madhya Pradesh, Rajasthan, Uttar Pradesh), Orissa and West Bengal, in which
much more than half of the countrys BPL households live. So definitely other
approaches, both alternative and mainstream, are needed to grow the outreach of
microfinance services to a significant proportion of the poor, all over the country.
An important step in increasing the outreach of microfinance sector would be to
diversify the sources of funding available for the microfinance institutions in order to
attract foreign investments for well-established microfinance institutions in order to
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serve the rural low income population. The Govt of India needs to modify the
investment policies for this sector.
Private sector MFIs have an essential role to play if the goal of financial inclusion is
to be realized, as neither the government nor charities have the capital nor business
model required to meet the insatiable demand for finance in rural India. Private
sector institutions should make an attempt, as done by few MFIs, to attract
increasingly large amounts of private capital, in order to accelerate the growth of the
industry, which is essential to expanding financial inclusion as far and as fast as
practicable.
b) Are NGO meeting the objective for which they have been roped in by the
Government?
Microfinance sector has traversed a long journey from micro savings to micro credit
and then to micro enterprises and now entered the field of micro insurance, micro
remittance and micro pension. This gradual and evolutionary growth process has
given a great opportunity to the rural poor in India to attain reasonable economic,
social and cultural empowerment, leading to better living standard and quality of life
for participating households.
The Government of India had, in 1985, realized its failure in properly implementing
development projects and decided to involve NGOs during the Seventh Five-Year
Plan, in executing development projects which was based on the observations of
Shah that there was failure of development policy and administration, with a weak
role played by the State in supporting the institutions of development and
emphasized the importance of developing NGOs as change agents.
The majority of institutional microfinance providers in India are semi-formal
organizations broadly referred to as MFIs. Registered under a variety of legal acts,
these organizations greatly differ in philosophy, size, and capacity. The least
regulated institutions include over 600 non-government organizations (NGOs)
registered as societies, public trusts, or non-profit companies. While NGOs play a
crucial role in the formation and bank linkage of SHGs, microfinance is often but a
subset of their activities. Nonetheless, many NGOs have emerged as successful
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financial intermediaries between banks and apex institutions on the one hand, and
individuals, SHGs, and other groups of borrowers on the other.
In India, microfinance is done by NGOs having diverse orientations, as shown in
Figure below.
NGOs in India perform a range of developmental activities, microfinance usually is a

sub-component. Some of these NGOs organize groups and link them to an existing
provider of financial services. In some cases NGOs have a revolving fund that is
used for lending. But in either of these cases, microfinance is not a core activity for
these NGOs. An example is the Aga Khan Rural Support Programme India (AKRSPI). For AKRSP-I, the microfinance component is incidental to its work in natural
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resource management. Examples like MYRADA and the Self-Employed Womens
Association (SEWA) fall in the same category.
However, as their microfinance portfolios grew, both organizations decided to form
separate entities for microfinance. MYRADA set up an MFO called Sanghamitra
Rural Financial Services (SRFS), while SEWA set up the SEWA Cooperative Bank.
At the next level, we find NGOs helping the poor in economic activities. Their
purpose is developmental. They see microfinance as an activity that feeds into
economic activities. For instance, the South Indian Federation of Fishermens
Societies (SIFFS) started as a support organization for fishermen, providing
technical and marketing support. It then arranged for loans to its members through
banks. When the arrangement was not effective, it started providing loans itself.
At the third level, we have organizations with microfinance at the core. They have
developmental roots, but are diverse in their operational details, orientation, and form
of incorporation. There are cases where NGOs which have created new MFIs to deal
with the specialized function of microfinance like BASIX, SHARE etc. This
phenomena is known as transformation of NGO into MFIs, moving from a
developmental root to a commercial sprout.
The NGOs strength lies in target group approach, flexibility, experimentation,
innovation, grassroots presence and motivation. By learning from the example of
Grameen Bank, Bangladesh, many NGOs in India, have come forward to provide
financial services to the rural poor and RNFS enterprises. For NGOs, it is also a shift
in approach from development to empowerment wherein they can plan their
withdrawal strategy from service delivery projects and think of their own sustainability
by providing financial services. The 600+ NGOs involved in micro-finance delivery
systems in India have adopted different strategies of promoting peoples livelihood
through micro-finance. These strategies are based on their clientele, approach, focus
area, interest rate, savings linkages, collateral, coverage and organisational/ legal
structure. These strategies can be classified into four broad categories, namely, SHG
promotion, MFI, micro-enterprise development and social development.
Page 44 of 62

SHG Promotion Strategy
The SHG promotion approach is based on the premise that the NGO promotes
SHGs and provides them services as financial advisor. This ultimately leads to build
the capacity of SHGs in terms of savings mobilisation, linking them with banks and
providing technical support in starting viable micro enterprises by the members of
SHGs members. In this approach NGO basically is a mediating contact between
SHGs and banks. NGO also examines creditworthiness of the SHGs so that bank
can lend money to the SHGs. In all this NGO gets some financial support in terms of
grant from Apex Financial Institutions (AFIs) like NABARD, SIDBI and RMK
(Rashtriya Mahila Kosh). The examples of such NGOs who are following SHG
promotion approach are: MYRADA in Karnataka, SHARE in Andhra Pradesh, RDO
(Rural Development Organisation) in Manipur, PREM (Peoples Right and
Environment Movement) in Orissa & Andhra Pradesh, YCO (Youth Charitable
Organisation) in Andhra Pradesh, Anarde (Acil Navsarjan Rural Development
Foundation) in Gujarat, PRADAN (Professional Assistance for Development Action)
& RUDSOVAT (Rural Development Society for Vocational Training) in Rajasthan and
ADITHI in Bihar.
Although the growth of SHGs in India has been phenomenal there are some
significant problems faced by them which might hamper their growth in the coming
years. For instance politicizing of subsidy allotment among SHGs has become a big
problem. Qualification for government subsidy is easily influenced by Panchayat
members. Thus, Panchayats are now competing with NGOs and rural banks in
forming SHGs. While the Panchayat-formed SHGs have the lure of government
grants they are often open to political pressure and misuse of funds by the
recommending Panchayats and/or political parties. The NGO-formed SHGs have the
benefit of honest and expert counseling from the nursing NGOs. Thus the qualities of
NGO-formed groups are usually superior to those formed by the local government
(Panchayats) and villagers are often keen to join the former. These age-old problems
of government initiatives in poverty reduction, unless stemmed quickly, can actually
harm the movement by eroding the fundamental precepts of self-help and
empowerment of the poor. (The Indian Microfinance Experience -Accomplishments
and Challenges Rajesh Chakrabarti, 2005).
Page 45 of 62

Promoting a Micro-Finance Institution Strategy
The approach of promoting MFIs is based on the premise that AFIs like SIDBI (Small
Industries Development Bank of India), RMK and other donor agencies provide bulk
lending, soft loan and some grant to such NGOs which can act as MFIs by onlending the money to the poor people/ SHGs/ Federations/ smaller NGOs. These
MFIs stimulate the credit demand of the poor people. They also provide technical
support for the beneficiaries to ensure proper utilisation of loans and repayment. At
the same time they meet their cost of funds, cost of credit management and cost of
default through the spread of interest and generate surplus for the viable operation of
micro-finance. The examples of such MFIs are Sewa Bank & FWWB in Gujarat,
BASIX in Andhra Pradesh and RGVN (Rashtriya Grameen Vikas Nidhi) in northeastern states, Orissa and Bihar.
Micro-Enterprise Development Strategy
Entrepreneurship is one of the most important inputs in the economic development
of a country and of the regions within the country. Economic growth and
industrialisation are the by-products of entrepreneurship. It is a breeding ground for
the development of small-scale enterprises. The term EDP (Entrepreneurship
Development Programme) means a programme of entrepreneurship development
designed to help a person in strengthening his/ her entrepreneurial motive and in
acquiring skills and capabilities necessary for playing his/ her entrepreneurial role
effectively. It inculcates entrepreneurial traits into a person and develops his/her
personnel, financial, technical, managerial and marketing skills. There are number of
programmes which are aimed at providing informational or managerial inputs
required by a new entrepreneur.
To make EDP successful and effective, the role of the NGOs has significant
importance in terms of identification of place or location, pre-promotional activities,
selection of potential entrepreneurs, entrepreneurial training, monitoring and followup mechanism. NGOs are playing important role as catalyst in helping the rural
unemployed persons to acquire training through MEDPs (Micro-Enterprise
Development Programmes) so that they can become self-employed by starting their
enterprises. Thus institutionalisation of MEDPs through NGOs was found to be an
alternative approach of rural development in India.
Page 46 of 62

Micro-finance for micro-enterprise development is also an appropriate approach for
India. Some of the NGOs in India have adopted the approach of micro-enterprise
development through micro-finance. The examples are CDF (Co-operative
Development Foundation) in Andhra Pradesh, LHWRF (Lupin Human Welfare
Research Foundation) in Rajasthan, UPLDC (Uttar Pradesh Land Development
Corporation) in Uttar Pradesh and Group Enterprise Development Project of EDI
(Entrepreneurship Development Institute of India) in Nagaland.
It was found that a number of the older SHGs having availed loans several times
from a bank can attain a position to graduate into micro enterprises by taking to
income generating activities.
Social Development Strategy
The social development approach of micro-finance is based on the premise that
people should earn money by investing in viable micro-enterprises. They should earn
profit from their enterprises. Major share of the profit should be reinvested in
enterprises for their growth. The other share of the profit should be spent on social
development that is, health, education, housing, sanitation etc. By earning profit from
the viable micro-enterprises, people will increase their paying ability for services
delivered to them under different social development projects run by NGO and
States/ Central Government. For the NGOs and Government it can be a process of
gradual withdrawal and for people, decrease dependency on the NGOs and
Government. Such projects have micro-finance as a major component coupled with
social service delivery. These projects have demonstrably positive effects. The
examples of such projects are Indo- Canada Agriculture Extension Project in Uttar
Pradesh, IFFDC (Indian Farm & Forestry Development Corporation) project of farm
and forestry development in Uttar Pradesh and Rajasthan, ICDS (Integrated Child
Development Services) project of RASS (Rayalseema Sewa Samiti) in Andhra
Pradesh and Conversion of ICDS project into Indira Mahila Yojana.
We can therefore conclude about the role played by NGOs in micro finance in India
over the last fes decades that NGOs were drafted in the microfinance on the
assumption that once the NGOs play the social intermediary role and build
SHG/SAGs the poor will have access to affordable credit facilities.
Page 47 of 62

However many NGOs started borrowing from financial institutions and on-lend to
groups they had promoted owing to following factors:
The linkage between the SHGs and the banks was not as smooth as the NGOs
had expected. There are geographic variations in the bankers response and the
NGOs ability to link the groups.
Not all the NGOs have sufficient grant fund to play the role of social
intermediary. They are able to cross-subsidise the costs of social intermediation
through the income from financial interm intermediation.
Many NGOs were concerned, about the way the SHGs are made the
beneficiaries of all development programmes of the government, leading to
distortions in the original concept of mutual help and affinity. This concern had led
many NGOs, reluctantly, to play the role of financial intermediary.
The few NGOs that were focusing only on financial services created non-banking
finance companies (NBFCs)/ mutually-aided co-operative societies (MACs) etc.
once their member base had increased and they were confident of reaching out
to larger numbers of people.
There is thus nothing wrong if a number of smaller NGOs adopt a programme which
is widely accepted as working and for which funding is available. However in this
process, a large number of NGOs decided to become financial intermediaries,
borrowing from wholesale institutions such as the RMK and SIDBI and lending in
retail to their constituents. Thus what was earlier a facilitator, enabler or welfare/
service provider role, changed to a lender role.
It is important for an NGO to play this role seriously because it needs changes in
their attitudes, competencies and systems. Many NGOs did not bring about these
changes and in the early years at least, suffered delinquency and default. Through
inputs from a number of capacity building agencies and also in response to funder
pressure, NGOs have improved their performance on this front steadily.
From the above we can conclude that the NGOs have played a significant role in
extending the outreach of micro finance to the needy in India. MFIs, Banks and
insurance companies have realised that NGOs offer a gateway to the large market of
the lower-income households and that accounts for why a number of themare
Page 48 of 62

establishing business alliances with NGOs. As long as this enables the spread of
financial services to the underserved at competitive rates, I think it is a good thing
that is happening.
Non-governmental Organisations (NGOs) played a vital role in rural reconstruction,
agricultural development and rural development even during pre independent era in
our country. In the post independent period the NGOs became a supplementary
agency for the developmental activities of the government and in some cases they
become alternative to the government. After the introduction of microfinance through
Self-Help Groups (SHG), they penetrated into each and every corner in India and
actually the NGOs are responsible for converting the pilot project of microfinance into
a major programme and the NGOs are responsible for making the microfinance
through SHG as the largest programme in the world. NGOs are playing vital role in
the formation of SHGs and motivating women to join the groups and linking the
groups with the banks for microfinance.
However the sheer size of the untapped population leaves a room for newer and
newer roles for NGOs in future. Subsequent to the provisions of Micro finance bill
2012 the Government of India might as well allow MFIs to raise equity from the
market or allow FDI in MFIs which would increase the availability of funds to be
disbursed. One such role which comes to my mind is playing a role in marketing the
products of SHGs. NGOs would surely play a crucial part in reaching out to the
needy for disbursing these funds.
c) Should NGOs transform into MFI in order to provide a single window

solution to the poor people?
Self-Help Groups (SHGs) among the poor, have rapidly become a common rural
phenomenon in many Indian states. NGOs provide the leadership and management
necessary in forming and running such groups in most cases. They also act as the
crucial link between these groups and the formal banking system.
However over the last quarter century, a few NGOs have succeeded in effective
poverty alleviation through micro-credit. Self Employed Womens Association
(SEWA) in the Western Indian state of Gujarat and Working Womens Forum in the
Southern state of Tamilnadu were among the pioneers in this effort. Many of the
Page 49 of 62

NGOs which have been previously functioning in different developmental roles
among the poor, and now added microcredit to the list of services they provided. A
few others, impressed by the success of microfinance elsewhere, started off as
MFIs. Presently well over 600 NGO-MFIs are actively engaged in microfinance
intermediation across the country.
There are two kinds of transformation
1. NGO to NGO MFI - A significant proportion of nongovernmental organizations
(NGOs) operate either as microfinance institutions (MFIs) in developing countries
or as projects run by international NGOs.
2. NGO MFI to RFI - Many of these NGO MFIs plan to transform into a for-profit
companyoften, a regulated financial institution. Several NGO MFIs have
transformed into regulated financial institutions in an effort to gain legitimacy in
the eyes of investors, commercial lenders, and other financial institutions and
policy makers. In a few cases, NGO MFIs have transformed specifically to enable
employees or clients to become owners.
NGOs transform into NGO MFI / RFI for various reasons:
To offer financial services beyond lending
To access capital
To comply with new legislation requiring or permitting transformation
To gain legitimacy
To enable employees, clients, and other stakeholders to become owners
Many of the NGOs have also been involved in disbursing micro finance to the poor.
However their sources of funds are limited to donations, income from lending and
subsidized loans. As NGO MFIs, they do not have access to commercial sources of
funds. Therefore many NGOs have realized that the donor grants and soft loans are
limited (both in terms of amount and terms attached) and do not support the portfolio
growth needed to ensure long-term sustainability for the institution.
With this objective, NGO MFIs have attempted transformation into an independent
regulated MFI (RFI) to access other sources of capital more rapidly and to increase
leverage. The transformation of an NGO- MFI into RFI is a model that has been
Page 50 of 62

evolving since the late 1980s. It has become appealing to an increasing number of
MFIs due to its anticipated benefits, such as an ability to mobilize public deposits,
access to private sources of capital with an ultimate goal to reach significant scale
and financial sustainability.
Institutional models in changing from a NGO to MFI/ RFI
NGOs have experimented with three main institutional models in the transformation
from NGO to regulated MFI.
NGO to regulated MFI: In this case, transformation results in a single institution
and the initial NGO ceases to exist.
NGO to regulated MFI and a NGO: This more typical, where the original NGO
retains its legal status and spins off a regulated financial institution. In this case, the
two resulting institutions have specific roles and responsibilities to complement each
other. In some cases the NGO remains as a laboratory experimenting with new
products, exploring new frontiers and/or providing consulting services. In some, the
MFI takes over the responsibility for the main banking or financial services, such as
credit, savings, insurance and any other financial services they are allowed to offer
under their current legislation. Examples like MYRADA and the Self-Employed
Womens Association (SEWA) fall in the same category. As their microfinance
portfolios grew, both organizations decided to form separate entities for
microfinance. MYRADA set up an MFO called Sanghamitra Rural Financial Services
(SRFS), while SEWA set up the SEWA Cooperative Bank.
NGO to a group of companies: This model results in a group of companies,
including the regulated financial institution and the NGO. It allows the institutions to
provide specialized services, such as insurance, leasing, business development
services and the like, which may not be possible for either the NGO or the MFI
alone. Institutions that choose this model tend to have a long term vision to expand
the market and provide services that are responsive to their clients demand. They
also tend to have more financial, human and physical resources at the time of the
transformation. Examples of this kind of transformation are BASIX and SHARE, in
which NGOs have created new MFIs to deal with the specialized function of
microfinance.
Page 51 of 62

Table below presents a list of institutions that have employed a particular model. The
results of each model are yet to be measured and verified. The decision to take on a
particular institutional model depends on a number of factors, including the
regulatory environment, the long term vision of the institution, the leadership and
human resource capacity, etc.
The first microfinance transformation on record occurred in 1992, when the Bolivian
NGO Promocin y Desarrollo de la Microempresea (PRODEM) created the
commercial bank Banco Solidario, S.A., or BancoSol. PRODEM transferred only its
already profitable branches to BancoSol. The two institutions agreed that, on an
ongoing basis, the NGO would develop new markets and transfer its new branches
and clients to BancoSol once they became profitable. However, the initial
arrangement resulted in a falling out between the two institutions. PRODEM
Page 52 of 62

developed a rural portfolio but transferred it to a finance company (Prodem FFP) that
the NGO established in 1999. Postscript: Today, Prodem FFP is the third largest MFI
in Bolivia, serving more than 250,000 clients through 90 rural and urban branches.
Currently, more than 600 Prodem employees are also shareholders.
In contrast, the Philippine NGO CARD has an ongoing arrangement with CARD
Bank (established in 1997, 11 years after the establishment of the NGO). Since the
transformation, the NGO has continued to open new branches. When a branch is
financially sustainable, it is absorbed (subject to regulatory approval) by CARD Bank.
Indian Experience of transformation of NGOs
The transformation process in India is still at a nascent stage. There are a large
number of small initiatives being carried out at various places. The estimated number
of microfinance institutions that have requested finances from SIDBI; have
contracted rating agencies like M-Cril, Planet Finance, and CRISIL for rating; or are
MACS promoted by the Co-operative Development Foundation (CDF) are indicated
in Table below:
Page 53 of 62

Instances of MFIs that have registered as NBFCs - Here, there are two
approaches: one taken by Share and Cashpor Financial and Technical Services
(CFTS), and the other by BASIX.
Share and CFTS are similar in orientation and focus. Both are inspired by Grameen
and focus on reaching the poorest. Share operated as a public society for a long
time before setting up a NBFC. CFTS started as an NBFC and is still trying to
grapple with the norms applicable to NBFCs. When Share set up an NBFC, it
transferred a portion of grants received from C-Gap to poor customers and
encouraged them to reinvest those grants as equity in the new NBFC. This ensured
adequate capital for Share to start an NBFC. This was similar to the Bolivian
approach. However, an important difference is that it was possible for the Bolivian
NGO to invest in an FFP (a similar arrangement was with K-Rep, Kenya). In the case
of Share, it had to transfer all the clients to a new legal entity, slowly and gradually
winding down the operations in the NGO and transferring the clients to the NBFC
branch by branch.
In the case of CFTS, the incorporation itself was a process of transformation.
Cashpor is an NGO operating in multiple countries. When CFTS set up its operations
in India, it was registered as a company. However, unlike Share it did not have prior
operations in India as an NGO. It was, therefore, difficult to raise the start-up capital.
Local laws make it difficult for small international investments to come in the form of
equity in the financial sector. For a long time, CFTS did not have adequate domestic
capital to be registered as an NBFC. CFTS had to go through the process of raising
capital, by finding donor money that could go to the clients and then be re-invested in
the company to reach a size that gained economies of scale and recognition
The path followed by BASIX was different. BASIX had a design that looked at
mainstreaming microfinance right from inception. The structuring of BASIX was
complicated. BASIX sought a mix of developmental and commercial funding for its
operations and had a separate vehicle through which the operating entity was
adequately capitalized. This involved setting up a holding company that had large
external borrowings from donor organizations. The holding company was heavily
leveraged. As the formality of getting clearances for setting up an NBFC was going
on, BASIX carried on its operations for a year through an existing NGO-Indian
Grameen Services. BASIX represents a mix of developmental capital flowing in on
Page 54 of 62

the promise of sustainability and commercial capital flowing in from the
developmental windows of large financial institutions.
Mutually Aided Co-operative Societies (MACS) As debates continue in the
microfinance world on issues of mainstreaming, initial capital norms, and
incorporation, there is silent revolution in parts of Andhra Pradesh, particularly in the
districts of Karimnagar and Warangal. There are nearly 250 small thrift cooperatives,
each with an average membership of around 500, carrying on successfully and
offering all the services offered by MFOs for more than a decade. While there are a
good number of womens cooperatives, there have been an equally large number of
mens cooperatives, all promoted by CDF. The advantage of a cooperative is that it
can access various types of savings from its members besides providing credit like
other MFOs. It can also easily get its stakeholders in the governance structure by the
use of democratic processes.
Setting up a local area bank (LAB). We have only one instance that can be
classified as microfinancethe case of BASIX. The setting up of this bank was not
a transformation but was part of the design of the BASIX group. BASIX started the
Krishna Bhima Samruddhi LAB (KBSLAB) in 2001 and is the only instance of how
microfinance principles can be adopted by the banking sector. The entry norms for
LABs are more stringent than for NBFCs. While NBFCs are expected to bring in a
start-up capital of Rs. 20 million, LABs are expected to start with an initial capital of
Rs. 50 million. There are further restrictions on LABsthey can only operate in a
geographical area limited to three contiguous districts.
Transformation Options and Their Implications
Microfinance could happen not only by the transformation of small NGOs into bigger
institutions, but also by the transformation of larger financial institutions embracing
the microfinance methodology and microfinance clients. The options available for
transformation within India and their implications are detailed in Table below.
Page 55 of 62
In brief, we do not have an optimal route for the transformation of NGOs into
mainstream MFOs. NBFCs that could operate across the country will have to go
through a steep entry hurdle and registration process. LABs have a double
disadvantage of steep entry norms and limited operational area. With the concerns
that most MFIs have for community involvement and with the existing legislation in
India, the obvious choice for microfinance initiatives is a cooperative. This involves
the clients in governance because of its democratic nature. Even though
Page 56 of 62

cooperatives seem to be an obvious alternative, they are not so across the country
because only a few states have passed liberal cooperative legislation. Besides, the
major disadvantage of cooperatives is their geographic limitations.
We can therefore conclude that of the 7,000 NGOs providing microfinance services
to poor entrepreneurs throughout the world, only a minute percentage has initiated
transformation into privately owned, regulated MFIs. However, there is some
evidence that most transformed MFIs have achieved encouraging results. They have
found new shareholders, increased their equity capital and improved governance,
institutional sustainability and outreach to the poor. Transformed institutions have
been able to grow because they have access to commercial and semi-commercial
resources as well as increasing amounts of public deposits. Because they have
access to public deposits they are no longer relaying to the same extent on grants
and subsidies and now contribute to government revenue through tax payments.
The concern that transformed MFIs may lead to mission drift has not become a
reality in most cases. Instead most transformed MFIs have been able to further their
outreach their scale and scope of operations mainly because of greater access
to resources. Most transformed institutions do not have a predominantly private
ownership structure.
It has been acknowledged that not every micro-finance NGO needs to transform.
There are large, efficiently run NGOs, such as ASA and BRAC in Bangladesh, that
do not intend to become RFIs. However, important lessons can be learned from the
experience of transformed institutions, which can assist microfinance NGOs to
assess their situation and make a decision on whether and how they choose to
transform. However, NGOs still need to focus on better governance, more efficient
polices and transparency and need to adopt a more business-like approach. The
experience of earlier NGOs/ MFIs which transformed suggests that institutional
transformation is not an easy task. Only if the internal and external environments are
favorable, will the NGO/ MFI decide to transform. To make transformation
successful, it needs to assess their situation and plan carefully.
Page 57 of 62
Chapter 7
Recommendations
Following recommendations can be presented based on my study on the subject of
Micro credit in India
1. The efforts of NGOs, MFIs and other institutions are surely reaching the poor and
needy people both in urban and rural areas. However as large part of the needy
are yet to be tapped, there is need for taking these benefits to more and more
people.
2. The NGOs should also play a role in arranging exposure visits to other successful
SHGs, tie up for marketing products of SHGs, release of subsidy from DRDA and
arranging exhibitions for the products of SHGs. If proper marketing arrangements
are not provided the members of SHGs may lose their motivation and the
sustainability of the micro enterprises may be affected in the long run.
3. The possibility of FDI in Retail sector is imminent and Government must protect
rights of small producers by making it mandatory for them to source at least a
certain percentage of their input material say 50% from Indian vendors only. This
would ensure that Indian products would find readymade market within the
country as well as the big players in retail would not put excessive pressure on
Indian producers to reduce their rates in the name of competition from foreign
products.
4. The Government both at Central and State level need to stay away from populist
measures like waiver of loans and instead should focus on instituting faster
delivery mechanism to the borrowers, regulation of interest rates for protection of
borrowers from excessive interest rates. The Micro Finance bill 2012 needs to be
put in practice immediately.
5. There is need for infusion of more capital in micro finance sector which can not
be met by the Government alone. Hence Government should formulate investor
friendly policies to attract private capital both from within the country as well as
from foreign investors for which some tax sops can be given to the organisations
investing capital.
Page 58 of 62

6. Co-operative movement, particularly Amul has been an example to the world.
Indian
government
should
encourage
co-operative
development
among
borrowers as an alternative to SHGs so as to formalise and protect both lendr

and borrower.
7.
The role of technology need to be brought in view of the fact that most of the
villagers are able to afford mobile connections and even internet connectivity is
available in villages through e-choupals. NGOs can play a vital role in imparting
education to villagers on use of SMS, Mobile applications, Internet for seeking
services quickly and transparently. On their part, Government and institutions
can initiate these technology based initiatives. Aadhar scheme of Govt of India
would prove beneficial in delivery of benefits to the needy in many such cases.
Chapter 8
Page 59 of 62
Summary
Microcredit is a welcome development but the biggest challenge in development,
however, is the simultaneous development of investment potential and improvement
of skill levels of the borrowers. A glut of low skilled services is an unwelcome
substitute for scarcity of credit. As microcredit alleviates the credit availability
problem, the need for micro-consulting, business planning and services like
marketing, are being felt with greater acuteness. Microcredit cannot be expected to
be a panacea to rural developmental problems. In some sense, its role is similar to
that of credit in the general economy. It is a string that can hold back progress, but it
is almost impossible to push on a string. There is a very real need of investments
that yield higher returns than the sustainable microcredit interest rates for the
microcredit initiative to be truly successful. However, so far the evidence largely
anecdotal points to the several beneficial side-effects of microcredit. In particular,
empowerment of women and the inculcation of financial training and discipline
amongst the poor will undoubtedly have long-term socioeconomic benefits. The
principles of self-help and microcredit thus hold the key to economic and sociocultural freedom for Indias millions of poor, opening the gates of a hitherto untapped
reservoir of human enterprise.
On the other hand technology enabled programs must be initiated for reaching the
needy directly rather than through a NGO partner. This would surely make the
delivery mechanism faster and spread the benefits to the billions of untouched
population. India is a force to reckon with in the field of IT and boasts of leading
Indian IT MNCs. This advantage needs to be leveraged by us in reaching out to
masses.
Chapter 9
Page 60 of 62
Bibliography
1. Articles in the website Wikipedia.org
2. Articles in the newspaper The Times of India, The Hindustan Times, Finacial
Express etc
3. Website humanshelpinghumans.org
4. Articles by Grameen Bank, Bangladesh
5. Article The World in 2050 by Noble laurette Mr. Mohd. Yunus from
Bangladesh
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Micro-credit: Its need and the Role of NGOs

Micro-credit: Its need and the Role of NGOs

Micro-credit: Its need and the Role of NGOs

Micro-credit: Its need and the Role of NGOs

Background for the Project work

Need for Micro credit

Models of Micro finance

Legal structure and regulation

Impact on income & creation of jobs

Interest rate practices in Micro credit

Role of NGOs in various models of Micro

Current crisis in Micro credit in India

Role of NGOs in other countries

Latest trends in Micro credit practices

Discussion and Analysis of each Problem

Micro-credit: Its need and the Role of NGOs

Micro-credit: Its need and the Role of NGOs

Limited liability guarantee given by the borrower

Micro-credit: Its need and the Role of NGOs

Micro-credit: Its need and the Role of NGOs

Micro-credit: Its need and the Role of NGOs

Need for Micro-credit

Microfinance has been an important tool in poverty alleviation, empowerment of

Micro-credit: Its need and the Role of NGOs

4.2 Models of microfinance

SHG bank linkage model works on formation of group of 15-20 members,

Micro-credit: Its need and the Role of NGOs

Loans are generally taken for very short duration periods

Micro-credit: Its need and the Role of NGOs

Higher frequency of repayment of installments and higher rate of Default

Number Legal Registration

Not-for Profit MFIs

Society Registration Act, 1860

Section-25 of Indian Companies Act, 1956

Mutual Benefit MFIs

Mutually Aided Co-operative societies, Act

Indian companies Act, 1956

Micro-credit: Its need and the Role of NGOs

Source: NABARD ISSUES RELATED TO MICROFINANCE , 2011

Micro-credit: Its need and the Role of NGOs

Legal structure and regulation

With financial inclusion emerging as a major policy objective in the country,

Micro-credit: Its need and the Role of NGOs

Impact on income and creation of jobs

Microcredit is being justified by its positive impact on poverty reduction, income,

Micro-credit: Its need and the Role of NGOs

Micro-credit: Its need and the Role of NGOs

4.5 Interest rate practices in Micro credit schemes

Role of NGOs in various models of Micro finance in India

Micro-credit: Its need and the Role of NGOs

SHG Bank Linkage Programme (SBLP)

Micro Finance Institutions (MFIs)

Micro-credit: Its need and the Role of NGOs

Micro-credit: Its need and the Role of NGOs

Homogenous affinity group of 15-20 members

Lending decisions are of the group

Group selects their leaders

Group accesses external funds

Groups federate at Cluster/Block level.

Micro-credit: Its need and the Role of NGOs

Establishing forward linkages state government etc.,

Comply with stringent legal and regulatory requirements

Withstanding long and expensive transition process

Micro-credit: Its need and the Role of NGOs