1

AL-AMEEN INSTITUTE OF MANAGEMENT STUDIES,

HOSUR ROAD, BANGALORE – 560 027

CERTIFICATE FROM THE GUIDE

This is to certify that the project report entitled “A STUDY ON MICRO

FINANCE” is a bonafide work carried out by ISMAIL ZABIULLA in the
partial fulfilment of requirement for the award of Bachelor’s Degree in Business
Administration of Bangalore University, during the year 2016- 2017 under the
supervision and guidance of Mr. MOHAMMED WAJID ,lecturer of Al
Ameencollege and no part of this report has been submitted for the award of any
other degree/diploma/fellowship or similar title and prizes and that the work has
not been published in any scientific or other magazines.

Date: 03/09/2016
Place:BANGALORE

STUDENT GUIDE
ISMAIL ZABIULLA MOHAMMED WAJID

AL AMEEN INSTITUTE OF MANAGEMENT STUDIES

 2

DECLARATION

I, do hereby declare that all the information provided in this project report titled
“A STUDY ON MICRO FINANCE” has been submitted by me during the year
2016 under the guidance and supervision of Mr MOHAMMED WAJID (project
guide) in partial fulfilment of the project work for Bachelor of Business
Management degree examination of Bangalore University.

This Project is a genuine work and has been written and submitted by me. The
matter embodied in the project work has not been submitted for the award of
any other degree, diploma or any other similar title to the best of my knowledge
and belief.

Date: 03/09/2016.
Place: Bangalore.

ISMAIL ZABIULLA
14ACC26025

AL AMEEN INSTITUTE OF MANAGEMENT STUDIES

 3

AL AMEEN INSTITUTE OF MANAGEMENT STUDIES

 4

PART 1
 INTRODUCTION TO FINANCE:

Finance is the field that deals with the study of investments. It includes the dynamics of
assets and liabilities over time under conditions of different degrees of uncertainty and risk.
Finance can also be defined as the science of money management. It aims to price assets
based on their risk level and their expected rate of return. It can also be broken into 3 sub
categories Public Finance, Corporate Finance and Private Finance. More than half of the
personal savings are invested in physical assets like land, houses, cattle and gold. Prime
Minister Indira Gandhi nationalised 14 banks in 1969, followed by six others in 1980, and
made it mandatory to provide 40% of net credit only to agriculture, small scale units, retail
trade, small businesses, etc. Mr. R.K. ShanmukhamChetty was the first finance minister of
independent India.

DEFINITION OF FINANCE:
Finance is the management of large amounts of money
especially by governments and large companies or provide funding for a
person or enterprise.
Finance is the science that describes the management,
creation and study of money, banking, credit, investments, assets and
liabilities.

 TYPES OF FINANCE (CHART REPRESENTATION):

CORPORATE
FINANCE

FINANCE

PUBLIC PRIVATE
FINANCE FINANCE

1. CORPORATE FINANCE:
AL AMEEN INSTITUTE OF MANAGEMENT STUDIES
 5

It deals with the sources of funding and capital structure

of corporations and the actions taken by the managers to increase the value
of the firm for the shareholders, as well as the tools and analysis used to
allocate financial resources.
2. PUBLIC FINANCE:
It describes finance as related to sovereign states and sub
national entities and related public entities or agencies takes funds from
the public in order to complete an entitled project for a fixed income
attached having assuring less amount of risk as it is a govt inclined issue.
3. PRIVATE/PUBLIC FINANCE:
Private finance is a method of providing funds for
major capital investments where private firms contracted to complete and
manage public projects (Funding Public Infrastructure projects with
private capital, developed firstly by Australia and UK governments and
extensively used in Spain. It was formerly used as an off balance sheet
item and now according to National Audit Office felt in 2003 it made good
money value and hence Treasury Select Committee found it should be
added as an item of balance sheet.

 BUSINESS FINANCE:
Business finance is a term that encompasses a wide range of
activities and disciplines revolving around the management of money and
other valuable assets.
I.e: Accounting Methodologies, Investing Strategies and effective debt
management.

 TYPES OF BUSINESS FINANCE:

1. Term Loans
2. Short Term Loans
3. Equipment Financing
4. Factoring
5. Capital from angel investors and credit card loans.
1. Termed loans consists of long and medium termed loans which are huge in
amount taken for expansion, acquisition or if the company is unto some
losses, an agreement is signed between the borrowing company and the
funding authority to repay the borrowed money mostly within 5 to 10 years at
a prescribed rate of interest levied on the total debt given to the borrowing
company.
2. Short Term Loans are the secured debts offered to the company in need for
short duration could be for the working capital requirement and has a less
interest and the repayment of debt on the bond and could be easily applied
and processed.
3. Equipment Financing is usually done by the some institutes who directly
deliver the machinery or equipment on an hire purchase system to a company
with some interest attached to its repayment through funds on split basis any
duration set by the borrowing company the interest increases with more
partition of installments.

AL AMEEN INSTITUTE OF MANAGEMENT STUDIES

 6

4. Factoring is a process where the borrowing company gives its accounts

receivable or invoice the payments owed to the co. by outsiders to
discounting companies and those instantly gives 80% to the needful
company and rest when the bills are cleared dues of the actual amount are
deducted and given back on a 3-5% commission charged on the total bill
amount.
5. Capital from venture/angel investors is acquiring of capital to startup on a
new or existing ideas from a private player or agency promising to update
him on the business project and ensuring a great return on his money that is
invested wholly to start up the business enterprise without much difficulty,
Credit cards are issued to control inflationary situations and provide liquidity
to individuals having worth to spend and make effective usage by increasing
its purchase power in return expected interest is charged on the holder for the
type of credit card he happens to hold.

 AIMS/OBJECTIVES OF BUSINESS FINANCE:

1. Revenue growth is the most basic and fundamental financial objective of
any business having emphasis on sales and marketing activities.
2. Profit Margins are a bit more sophisticated than revenue growth goals, any
money left after sales revenue after all expenses been paid is considered
profit.
3. Economic Sustainability by keeping the brand alive and keep revenue and
profit levels from falling.
4. Return on Investment is a financial ratio applied to capital expenditures.
ROI is concerned with returns generated by investments in real property
and productive equipment.

 OBJECTIVES OF FINANCE

The financial management is generally concerned with procurement, allocation and control of
financial resources of a concern. The objectives can be-

1. To ensure regular and adequate supply of funds to the concern.

2. To ensure adequate returns to the shareholders which will depend upon the earning
capacity, market price of the share, expectations of the shareholders.
3. To ensure optimum funds utilization. Once the funds are procured, they should be
utilized in maximum possible way at least cost.
4. To ensure safety on investment, i.e, funds should be invested in safe ventures so that
adequate rate of return can be achieved.
5. To plan a sound capital structure-There should be sound and fair composition of
capital so that a balance is maintained between debt and equity capital.

AL AMEEN INSTITUTE OF MANAGEMENT STUDIES

 7

 Functions of Financial Management

1. Estimation of capital requirements: A finance manager has to make estimation with

regards to capital requirements of the company. This will depend upon expected costs
and profits and future programmes and policies of a concern. Estimations have to be
made in an adequate manner which increases earning capacity of enterprise.
2. Determination of capital composition: Once the estimation have been made, the
capital structure have to be decided. This involves short- term and long- term debt
equity analysis. This will depend upon the proportion of equity capital a company is
possessing and additional funds which have to be raised from outside parties.
3. Choice of sources of funds: For additional funds to be procured, a company has many
choices like-
a. Issue of shares and debentures
b. Loans to be taken from banks and financial institutions
c. Public deposits to be drawn like in form of bonds.

Choice of factor will depend on relative merits and demerits of each source and period
of financing.

4. Investment of funds: The finance manager has to decide to allocate funds into
profitable ventures so that there is safety on investment and regular returns is possible.
5. Disposal of surplus: The net profits decision have to be made by the finance manager.
This can be done in two ways:
a. Dividend declaration - It includes identifying the rate of dividends and other
benefits like bonus.
b. Retained profits - The volume has to be decided which will depend upon
expansional, innovational, diversification plans of the company.
6. Management of cash: Finance manager has to make decisions with regards to cash
management. Cash is required for many purposes like payment of wages and salaries,
payment of electricity and water bills, payment to creditors, meeting current
liabilities, maintainance of enough stock, purchase of raw materials, etc.
7. Financial controls: The finance manager has not only to plan, procure and utilize the
funds but he also has to exercise control over finances. This can be done through
many techniques like ratio analysis, financial forecasting, cost and profit control, etc.

AL AMEEN INSTITUTE OF MANAGEMENT STUDIES

 8

 INTRODUCTION TO FINANCIAL MANAGEMENT

Financial management refers to the efficient and effective management of money (funds) in
such a manner as to accomplish the objectives of the organization. It is the specialized
function directly associated with the top management. The significance of this function is not
seen in the 'Line' but also in the capacity of 'Staff' in overall of a company. It has been
defined differently by different experts in the field.

The term typically applies to an organization or company's financial strategy, while personal
finance or financial life management refers to an individual's management strategy. It
includes how to raise the capital and how to allocate capital, i.e. capital budgeting. Not only
for long term budgeting, but also how to allocate the short term resources like current
liabilities. It also deals with the dividend policies of the share holders.

 DEFINITIONS OF FINANCIAL MANAGEMENT

"Financial management is that activity of management which is concerned with the

planning, procuring and controlling of the firm's financial resources. " By Deepika&Maya
Rani
“Financial Management is the Operational Activity of a business that is responsible for
obtaining and effectively utilizing the funds necessary for efficient operation.” By Joseph
Massie
“Business finance deals primarily with rising administering and disbursing funds by
privately owned business units operating in non-financial fields of industry.”– By Kuldeep
Roy
“Financial Management is an area of financial decision making, harmonizing individual
motives and enterprise goals." -By Weston and Brigham
“Financial management is the area of business management devoted to a judicious use of
capital and a careful selection of sources of capital in order to enable a business firm to move
in the direction of reaching its goals.” – byJ.F.Bradlery

APPROACHES TO FINANCIAL MANAGEMENT

TRADITIONAL APPROACH
This approach refers to its subject matter in the academic literature in the initial
stages of its evolution as a separate branch of study. The scope of financial management is
confined to the raising of funds. Hence the scope of finance was treated by the traditional
approach in the narrow sense of procurement of funds by corporate enterprise to meet their
financial needs. Since the main emphasis of financial function at that period was on the
procurement of funds, the subject was called corporation finance till the mid 1950’s and
covered discussion on the financial instruments, institutions and practices through which
funds were obtained. Further as a problem of raising funds is more intensively felt at certain
episodic events such as merger, liquidation, consolidation, reorganisation and so on. These
are the broad features of the subject matter of corporation finance which has no concern with
the decisions of allocating firms funds.

AL AMEEN INSTITUTE OF MANAGEMENT STUDIES

 9

MODERN APPROACH
After the 1950’s a number of economic and environmental factors, such as the
technological innovations, industrialisation, intense competition, interference of government,
growth of population, necessitated efficient and effective utilisation of financial resources. In
this context optimum allocation of the firms resources is the order of the day to the
management. Then the emphasis shifted from episodic financing to the managerial financial
problems, from raising of funds to efficient and effective use of it. Since the financial
decisions has a great impact on all other business activities, the financial manager should be
concerned about determining the size and nature of the technology, setting the direction and
growth of the business, shaping the profitability, amount of risk taking , selecting the asset
mix, determination of optimum capital structure, etc. The new approach is thus an analytical
way of viewing the financial problems of a firm. According to the new approach the financial
management is concerned with the solution of the major areas relating to the financial
operations of the firm.

SCOPE OF FINANCIAL MANAGEMENT

1. Liquidity
a) Forecasting of cash flow
b) Rising of Funds
c) Managing the flow of internal funds
2. Profitability
a) Cost of control
b) Pricing
c) Forecasting of future profits
d) Measuring the cost of capital
3. Management
a) Long run management
b) Responsibilities of Financial manger to maintain assets.

AL AMEEN INSTITUTE OF MANAGEMENT STUDIES

 10

A STUDY ON MICRO FINANCE WITH SPECIAL REFERENCE TO INDIAN

ECONOMY

INTRODUCTION:
Micro finance is a source of financial service for entrepreneurs and small
businesses lacking access to banking and related services. The two main mechanisms for the
delivery of financial services to such clients are 1) Relationship based banking for individual
entrepreneurs and small businesses 2) Group based models, where several entrepreneurs
come together to apply for loans and other services as a group. For some microfinance is a
moment whose objective is “a world in which as many as poor and near poor households has
possible permanent access to an appropriate range of high quality financial services including
not just credit but also savings, insurance and fund transfers. Having an objective of getting
the poor people out of the poverty alleviation stream. It can also be regarded as a way to
promote economic development, employment and growth through the support of micro
entrepreneurs and small businesses.
Microfinance is a broad category of services, which includes Microcredit.
Microcredit is a provision of credit services to the poor clients. It is one of the aspects of the
microfinance but two are often confused. Mohammed Yunus and Al Whittker founders of
the microcredit moment in 1970’s have tested practices and built institutions designed to
bring the kinds of opportunities and risk management tools that the financial services can be
provided to the doorsteps of poor people. While the success of the GRAMEEN BANK
(which now serves over 7 million poor Bangladeshi women), has inspired the world.
The problem of poverty can be seen substantially in many developed economies such as in
Europe and America but this problem is severe in third world nations especially in Asia and
Africa. However, most of the countries in the world are making an improvement in prosperity
in varying degrees but still poverty exists. It is estimated that 2.5 billion people around the
world live in poverty, struggling to survive on less than 2 US dollar a day. There are more
than 400 million people in India who are seeking an opportunity to reduce their
vulnerabilities, create assets and ensure income security. However, the percentage of
population living below poverty line has declined but the number of people living below
poverty line in urban areas has increased in recent years.
The maximum proportion of poverty in urban areas is transmitted from rural areas in India.
Poor Families struggle to afford even their most basic needs. They are unable to afford
adequate meals, clean drinking water, education, proper shelter and even medicine when they
are sick. Most of the economies have not got much expansion mainly due to poor
accessibility to the credit market. For smooth and overall development of Indian economy, it
is necessary to stimulate the banking system at micro level so that banking services can be
insured easily accessible to the vast sections of disadvantaged and low income groups at
affordable cost in a fair and transparent manner.
It will also help to protect the poor households and small businessman from harsh
moneylenders who charges unexpectedly high rate of interest and exploit them. In other
words, it is possible only through durable microfinance system with well-equipped resources
which can help to stimulate the economic growth from very basic level.

Commercialization alongside triple bottom line

These trends indicate increasing commercialization. So what about mission drift, the possible

AL AMEEN INSTITUTE OF MANAGEMENT STUDIES

 11

distortion of microfinance’s historical mission of social improvement?

So far there is little evidence that the social-oriented values of microfinance are being lost or
that commercialization goes against access for the poor. The best defence against mission
drift might come from within the institutions. We foresee a continued trend towards financial
services being offered by institutions who work along the triple bottom line. Partly because
even purely commercial ventures are focusing more and more beyond the uni-dimensional
objective of profit.

This as a result of a worldwide trend that people and planet are important, that these
dimensions should be a normal part of a company’s bottom line. Staying with the poor will
also be strengthened by the view that at the bottom of the pyramid there simply is a huge
market.

Still further market development at the bottom of that pyramid will continue to require
support by non commercial initiatives and development institutions, to bring new clients on
the radar screen of commercial provider and screen them, to pilot new processes and
products. Opening up of new markets will remain an activity that requires investment and
vision.
Development oriented institutions will no longer focus on developing supply capacity and
will try to strengthen the demand side. Financial education and consumer protection will
flourish and governments will oblige financial institutions to put “smoking is dangerous” type
of stickers on financial products.
3.2 What will happen at the meso level?
It is generally recognized that the development of structures at meso level (credit bureaus,
training centres and consultancy services, micro finance associations, local wholesalers) has
contributed a lot to a sound development of the MF industry. They provide services that make
it easier for MFIs to manage their risks and that allow to concentrate on their core business.

Trends
• Microfinance Associations will face the challenge of remaining relevant and useful by
increasingly powerful providers.
• Credit bureaus so far have focussed on the interests of the providers. The information
accumulated there will increasingly be used for consumer protection.
• Increased need for consultancy in the organizational and governance challenges facing
mature
companies.
• Global initiatives to spread tools and technology.
• Increased competition in the rating market with social rating becomes a standard tool.

MF Associations have increasingly powerful members

In a lot of countries the creation of MF associations has shown its positive effects, for
example in achieving adequate legislation or in obtaining government support when faced
with problems like no payment movements. In an increasingly competitive market, joining
forces will become even more important for “stand alone” MFIs. They can get better deals
from technology providers or take joint initiatives to integrate into the international payments
network or to obtain specialized training. Regional networks can achieve even more, in
particular when they bring together smaller countries. At the same time MF associations
might loose negotiating power, partly because
regulated MFIs and banks might not remain as members. And partly because they will not
offer the high quality services needed by the more specialized and modern providers.

AL AMEEN INSTITUTE OF MANAGEMENT STUDIES

 12

Credit bureaus will continue to be important mechanisms for adequate lending and for
support to an institutions risk management. The wealth of information they contain about
financial service users will also be put to a wider use. In particular the bureaus can play a role
in consumer protection. “ Red lights” will appear when an individual or a company is
acquiring debt beyond capacity.

Microfinance sector has grown rapidly over the past few decades. The financial sector
reforms in India with financial inclusion emerging as a major objective for the policy
planners to search for products and strategies for delivering financial services to the poor
households and small entrepreneurs in a sustainable manner. As a result, microfinance has
occupied centre stage within a fast growing Indian economy as a hopeful medium for
extending financial services to the rural population who generally lack direct access to the
banking services. Nobel Laureate Muhammad Yunus is credited with laying the foundation
of modern Microfinance Institutions (MFIs) with establishment of Gramin Bank, Bangladesh
in 1976. National Bank for Agriculture and Rural development (NABARD) was established
in 1982 which had taken this idea and became first organization to introduce the concept of
microfinance to enhance the agriculture and rural development activities in India. After that
the spread of microfinance is steadily growing through the Self-Help Groups (SHGs).

The SHG-Bank Linkage Programme, a bank-led microfinance intermediary was initiated by

NABARD in 1992 to make the traditional and formal banks to extend financial services to
deprived sections through informal SHGs. It has been recognized as a decentralised, cost
effective and fastest growing microfinance initiative in the world, enabling over 103 million
marginalized asset-less and resource deficient poor families access to a variety of sustainable
financial services from the banking system by becoming members of nearly 8 million SHGs
till March 2012. Similarly, Govt. of India has set up a Rural Infrastructure development Fund
in NABARD in 1995-96 with an allocation of Rs. 2000 crore to facilitate the completion of
on-going project of rural infrastructure. A Kisan Credit Card (KCC) scheme was introduced
by NABARD in 1998 to provide credit for production requirements of farmers like purchase
of seeds and inputs for agriculture through cash credit limit. KCC holders were also provided
an accidental insurance against death or permanent disability. General Credit Card (GCC)
scheme was also introduced for non agricultural client of banks in rural and semi-urban areas
to provide credit up to Rs. 25000 as indirect finance to agriculture preferably to women
clients. All such schemes have provided easy credit to the bank customers without insisting
on security and indirectly helped in linking more population with banks.
The direct approach of financial inclusion was started in Nov.

In 2005 when RBI had directed the banks to open “No-Frills Account” with zero or minimal
balances. The basic objective of this approach was to allow the unbanked households to
maintain an account with minimal balances and permit limited number of transactions per
month. Such accounts were used overtime by the government to make welfare payments like
pensions, cash subsidy, social security benefits and wage payments under MGNREGA. The
“No-Frills Account” increased from about 5 lakhs to over 5 crores presently. However, Skoch
development foundation in its study stated that out of total “No-Frills Account” opened
between April 2007 and March 2009, only 11 % were operational which an issue of concern
was. Further, on the recommendations of Financial Inclusion Committee headed by
Dr.Rangarajan in 2006, two funds i.e. Financial Inclusion Fund was established to meet the
cost of development and promotion of financial inclusion and Financial Inclusion
Technology Fund was established to support the technology efforts in the process of financial
inclusion. These funds with a corpus Rs. 500 crore each were operated by NABARD. The

AL AMEEN INSTITUTE OF MANAGEMENT STUDIES

 13

other institutions which provide microfinance in India are Small Industries Development
Bank of India (SIDBI), RashtriyaMahilaKosh, Commercial Banks, Regional Rural Banks,
Cooperative Banks and Non Banking Financial Companies (NBFCs). These institutions
provide finance through the concept of Joint Liability Group (JLP). A JLP is an informal
group comprising of 10 to 15 individual members who come together for the purpose of
availing bank loans either individually or through the group mechanism against a mutual
guarantee. Presently, these institutions constitute the 42% of the microfinance sector in terms
of loan portfolio and dominated by NBFCs which cover more than 80% of the total loan
portfolio through MFI channel. RBI in January 2006 introduced Business
Correspondents/Business Facilitators (BC/BF) models for providing financial and banking
services. The activities performed by BCs include disbursal of small value credit, recovery of
principal/collection of interest, collection of small value deposits, sale of micro
insurance/mutual fund/pension products/other third party product, receipt and delivery of
small value remittances/other payment instruments. Similarly, BFs perform the activities like
identification of borrowers, collection and preliminary processing of loan applications,
creation of awareness about savings and advise on managing money, Debt counseling,
processing and submission of loan applications to banks, post sanction monitoring,
promotion, nurturing, monitoring and handling of SHGs, and follow up for recovery.

Initially, only insurance agents could act as BFs but with time retirees such postmasters,
teachers, bankers etc. could also act as BFs. In July 2009, Government of India identified 91
unbanked blocks of North-East states and 38 unbanked blocks of other states to provide
banking facilities to them and making them financially inclusive. With continuous efforts
these unbanked blocks were reduced to 71 as on March 31, 2011. In December 2009, RBI
permitted the commercial banks that after analyzing the position of financial exclusion in the
North- East states; they can open their branches in rural, semi-rural and urban areas without
taking the permission of RBI. RBI also advised the banks to come up with a road map to
provide banking facilities to the unbanked villages having a population of over 2000 by
March 2012. As a result, State-Level Bankers’ committee identified 700 unbanked villages
and allotted to them various banks. Recently Government of India introduced a scheme to
directly transfer the government subsidies and social security benefits to the accounts of the
beneficiaries; who in turn could draw the money from BCs in their village itself. For the
effective implementation of scheme, banks are asked to provide banking facilities to areas
with population of 1000-2000 in North-Eastern states and hilly states; and with population of
1600-2000 in all states/UTs by March 2013. Microfinance industry is considered as a tool of
financial inclusion as well as poverty reduction for the marginalized and disadvantaged
people of rural areas. Thus, it has considered as a significant and emerging issue in
developing countries and generated a great deal of interest among academicians, researchers,
policymakers and economists. The main objective of this paper is to study the role of
microfinance in economic development and the challenges of this sector in India.

 CURRENT FINANCIAL NEEDS OF THE POOR

SECTIONS/BUSINESSES FOR DEVELOPMENT AND GRWOTH:

AL AMEEN INSTITUTE OF MANAGEMENT STUDIES

 14

 Lifecycle Needs such as Weddings, Funerals, Childbirth, Education, Home

Building, Widowhood and Oldage.
 Personal Emergencies like Sickness, Injury, Unemployment, Theft,
Harassment or Death.
 Disasters as Fires, Floods, Cyclones and man made events like wars or
bulldozing of dwellings.
 Investment opportunities like Expanding business,

 CHALLENGES FACED BY MFI’S TO REACH OUT NEEDY:

 Inappropriate donor subsidies.
 Poor Regulation and supervision of deposit taking micro finance institutions
(MFI’S)
 Few MFI’S that meet the needs for savings, remittances or insurance.
 Limited management capacity in MFI’S.
 Institutional Inefficiencies.
 Need for more dissemination and adoption of rural, agricultural micro finance
methodologies.

 RECENT TRENDS IN MIFS

Microfinance is the practice of providing small scale financial services to the world's
poor, mainly loans and savings and increasingly other products like insurance and
money transfer. Worldwide there are an estimated 10,000 Micro Finance Institutions,
with charters ranging from non profit NGOs to Credit Unions and Commercial Banks.
The 1,300 MFIs who at the end of 2008 were reporting to the Microfinance
Information exchange (MIX) have 70 million borrowers and a similar number of
savers. Total loan portfolio stands at US$ 40bn. In the past years key volume
indicators have been growing by 20-30% per year, more in some countries. The stock
of foreign capital invested in the sector, which more than tripled to US$4bn between
2004 and 2006, keeps on growing and now stands at over US$ 10bn. Much of it is
held by specialised microfinance investment vehicles, with an increasing proportion
coming from the private sector that sees investment in microfinance as an attractive
asset.

The industry has definitely entered into a stage of commercialisation although at the
same time there is increasing interest in running operations respecting the triple
bottom line. How will this paragraph look like by 2015? It very probably will contain
a version of the following:
The ambitious goal set forward in the 1997 Microcredit Summit has been achieved
and the vision of inclusive microfinance, extending financial services to the majority
of the low income population, has been substantially accomplished. Microfinance is
an established part of the financial system in most countries and is increasingly
integrated into the financial system to an extent that it is difficult to identify a distinct
microfinance sector. The old and simply recognizable relation between a poor client
and a socially aware MFI has been substituted by all kinds of forms of client provider

AL AMEEN INSTITUTE OF MANAGEMENT STUDIES

 15

relations. These different client provider relations of the future can be visualised as
follows:
 PROVIDERS PRODUCTS CLIENTS
 Banks
 Finance Companies
 NGOs
 Savings & Credit coops
 Big box consumer retailers
 Insurance companies
 Property developers
 Money transfer agencies
 Mobile phone companies
 And other new providers
 Micro loan
 Small loan
 Educational loan
 Credit card
 Mortgage
 Consumer loan
 Checking account’
 Savings account
 Foreign currency account
 Remittances
 Supplier credit
 Leasing
 And other new products
 (Poor) families
 Micro entrepreneurs
 Small farmers
 Families in their different roles:
 as consumers, house builders,
 parents, savers, insurance takers,
 part of money flow networks
 But how will we get there and what are the trends leading to this scenario?
 In this paper we present trends that will contribute to or even be decisive for the
changes and
 further growth of the microfinance industry.

Development of microfinance industry and markets

What are the trends and forces that are shaping the future of the microfinance industry? And
what will this do to the poverty focus?
Trends
• Key words here are growth, scaling up, increased use of technology, integration in
mainstream finance and de-segmentation. These trends have started in the past years and are
likely to continue.

• Another trend is further commercialization, although this does not exclude the trend of

AL AMEEN INSTITUTE OF MANAGEMENT STUDIES

 16

increased attention for social and environmental performance. Big providers might even take
the lead in making the focus on the triple bottom line a standard feature of the industry.
Mission drift (away from the poor) and increased interest in sustainability will co-exist.

• Industry development, once “development led” (from the North) will be taken over by
commercial initiatives, increasingly coming from inside the developing world.
The analysis of a sample of 487 MF providers (reporting to the MIX2) over just a three year
periodclearly shows the scaling up of operations and as result the growing importance of
largeinstitutions. In 2005 almost 50% of these MFIs had less than 10,000 clients. Within two
years thatchanged dramatically (see table). Completely in line with this, the table shows that
the averagenumber of clients per institution is growing rapidly.
By 2015 small MFIs will still be there but their relative weight in the market will be minimal.
Atleast from a quantitative point of view. Small MFIs might continue to play an important
role asinnovators or providers of services to special groups, but their scale will definitely put
them in aweak position when it comes to investment capacity, access to technology and
retaining of humanresources.

New type of owners and promoters

We do expect a continued change in ownership patterns. Ten years ago ownership of
microfinance institutions was of the NGO type. Nowadays there is a mixture of NGOs, social
investors, commercial capital (local and international). The portion owned by commercial
capital will continue to increase. But as commercial capital will from within pay more
attention to the triple bottom line, the commercial ownership will have its social lining. We
foresee harder times for independent MFIs who do not belong to a network, who have only
themselves (personnel, board) to count on. And who in the end depend on a couple of foreign
investors. As banks and NBFIs become more important, microfinance will become
increasingly integrated in the mainstream financial markets. Microfinance as a separate term,
from the time of clear market segmentation, will disappear. Even “pro poor finance” might
become as strange a term as “pro rich finance”.Although both of course exist.

A clear trend is the shift in the origin of initiatives for promoting, setting up and supporting
microfinance. Traditionally coming from the development scene in the North, the focus is
changing. Specialized ventures promoting and setting up greenfield microfinance banks will
increasingly become important. 8 The people behind this are a mix of visionary
entrepreneurs, social investors and specialized MFIs wanting to do more than just bring in
more new clients in their institution and capitalizing on their experience.

We also see a trend whereby the North, the developed world and its institutions oriented at
poverty reduction, will become less important as promoters of microfinance. India’s and
Brazil’s strategies for poor people’s financial access are homegrown, not derived from
developed country counsel. Players in such countries, which include also China and Russia
and may be some “regional powers” like South Africa will venture outside their own borders
and set up microfinance operations in interesting countries. Regional microfinance funds will
become active and try to conquer markets by offering equity and liabilities with a
geographical touch.

For a development institution based in the North, teaming up with such players can be very
interesting and offer important complementarities.

Trends

AL AMEEN INSTITUTE OF MANAGEMENT STUDIES

 17

• Further blending of different types of providers.

• Decrease in market segmentation.
• The coverage in big market like Mexico, Brazil and China will increase and they are being
discovered by big providers.
• In mature markets, market development led by innovative providers who close the quality
gap.
• Sustained growth of product offer, with increasing technology contents in the products.
• Increasing competition brings price and other advantages to the client but also threat of
“overlending”.
• MFIs facing the organizational and governance challenges of a growing industry.
• Cross border financial services on the increase.
• More and more specialized and niche products.

In the past twenty years the focus of MFIs, microfinance networks, funders, development
projects and donors has been on developing the supply capacity. Good practices were about
improving the efficiency of the business, about how to charge cost covering interest rates,
about risk management and developing new products. Parallel to that the donors drew up
guidelines about what to do, where to help, what to demand from the MFIs (see the pink
book). Providers have thrived and this has led to impressive progress in closing the
“quantitative gap”, the gap between those demanding financial services and those having
access to them. In countries like Bangladesh and Nicaragua, more than 40% of families have
access to micro lending. In other countries outreach is still very low. The very disparate
coverage between early (like Bolivia and Bangladesh) and late starters (like Brazil, Nigeria,
China) will be reduced as these often big markets are being further discovered by big
providers.

Clients will determine the supply

A major and newer challenge is closing the quality gap: the difference between the services
offered and the services best suited to the clients’ needs. In the years to come, there will be a
continued effort to also cover that gap. Getting a US$ 100 dollar loan as part of a group with
a fixed term and a pre-defined pattern of growth of the amount is not what you call a client
tailored loan. So although a poor woman might be a credit client in the statistics, the service
not necessarily covers her needs. The trend is that clients learn about their needs and
gradually are able to express them better. As a matter of fact in the access to a MFI the clients
tends to “discover” her real need, and can express it directly to the loan officer or indirectly
by walking away, driving up drop-out rates. For both providers and clients there is a
continued learning process and in their interaction the basis is laid for product diversification.

Microfinance Banana Skins 2008reveals strong doubts among microfinance

practitioners, investors and observers about the ability of many MFIs to adapt to new
demands while still retaining their social objectives. Current levels of management
experience and financial skills are seen as a challenge for the industry. The fastest rising risk
is identified as the growth of competition, driven by the appeal of microfinance to outside
investors and commercial banks.

Competitive pressures are seen to be undermining standards, cutting into profitability and

AL AMEEN INSTITUTE OF MANAGEMENT STUDIES

 18

aggravating staffing problems, though they are also spurring innovation and forcing down
prices. Unless MFIs can manage these pressures, some could fail and damage the reputation
of microfinance more widely.

 PRINCIPLES OF EFFECTIVE MFI’S:

 Poor people need not just loans but also savings, insurance and money
transfers.
 Microfinance must be useful to poor households, helping them raise income,
build up assets and cushion themselves from external shocks.
 Microfinance can pay for itself, subsidies from donar and government are
scarce and uncertain and so, to reach large numbers of poor people,
microfinance must pay for itself.
 It means building permanent local institutions.
 It also means integrating the financial needs of poor people into a country’s
main stream financial system.
 The job of government is to enable the financial services, not to provide them.
 Donors fund should complement private capital, not compete with it.
 The key bottleneck is the shortage of strong institutions and managers, Donors
should focus on building capacities.
 Interest rate ceilings hurt poor people by preventing microfinance institutions
from covering their costs which chokes of the supply of credit.
 MFI’S should measure and disclose their performance both financially and
socially.

MFI’S ROLE IN INDIAN ECONOMY:

Most of the countries in the world are making an improvement in prosperity in varying
degrees but still the problem of poverty is severe in third world nations especially in Asia and
Africa. It is estimated that 2.5 billion people around the world live in poverty, struggling to
survive on less than 2 US dollar a day. There are more than 400 million people in India who
are struggling to ensure income security. However, there is some improvement in prosperity
in India but the people living below poverty line in urban areas has increased in recent years
as more proportion of poverty in urban areas is transmitted from rural areas. Poor Families
are unable to afford adequate meals, clean drinking water, education, proper shelter and even
medicine when they are sick. Most of the economies have not got much expansion mainly
due to poor accessibility to the credit market. For smooth and overall development of Indian
economy, it is necessary to stimulate the banking system at micro level so that banking
services can be insured easily accessible to the vast sections of disadvantaged and low
income groups at affordable cost in a fair and transparent manner. It will also help to protect
the poorer from harsh moneylenders who charges unexpectedly high rate of interest and
exploit them. In other words, it is possible only through durable microfinance system with
well-equipped resources which can help to stimulate the economic growth from very basic
level.
The financial sector reforms in India with financial inclusion emerging as a
major objective for the policy planners to search for products and strategies for

AL AMEEN INSTITUTE OF MANAGEMENT STUDIES

 19

delivering financial services to the poorer and small entrepreneurs mainly of

rural area in a sustainable manner who generally lack direct access to the
banking services. NABARD was the first organization to introduce the
concept of microfinance to enhance the agriculture and rural development
activities in India. After that the spread of microfinance is steadily growing
through SHGs. Government of India and RBI has also done a lot for easy
accessibility of financial services to poorer and small businesses. Microfinance
sector has made substantial progress over the past few decades and brought
number of people above poverty line in India.

This sector play an important role in beginning and expanding the small
business by offering small loans to lower income groups which generate
income and employment to local communities. Thus no doubt, microfinance
has been treated as an important tool for economic development. However,
there are huge masses of people especially in rural areas who are still
remaining out of the ambit of the outreach programmes. Further, with
phenomenal growth in microfinance, there are some glaring challenges also
reality of this sector. Thus, the main objective of this paper is to study the role
of microfinance in economic development and the challenges of this sector in
India.

ROLE OF MICROFINANCE IN ECONOMIC DEVELOPMENT

In the world where almost half population lives in poverty, microfinance play an important
role in beginning and expanding the small business by offering small loans to lower income
groups which generate income and employment to local communities. Thus, microfinance
has been treated as an important tool for Economic Development. Poorer people have to wait
much longer to get the benefits of the economic growth as they are separated by distance
from the urban areas where economic activity is concentrated. It is essential to engage this
section of society in the economic mainstream to achieve balanced growth which is critical
for the long term sustainability of social development and economic prosperity. For the social
economic empowerment, financial services should be delivered to people living in rural areas
and lower income strata. Only then full potential of the country’s physical and human
resources can be realized. Microfinance plays vital role in economic development through
following ways:

Poverty Alleviation: According to World Bank report 1.4 billion population in developing
countries is living on less than 1.25 US dollar a day. That’s why to alleviate poverty by the
year 2015 is one of the major millennium development goal announced by UNO in 2008. To
eradicate poverty most of the nations have been pursuing various policies and programmes.
Among these most effective policy adopted by the low income countries in the world is
microfinance because it has been found an effective tool for lifting the poor by providing
them financial services to start or expand a small business that enables them to break out of
poverty. In other words, it enables them to earn an income so they no longer have to struggle
to afford food, clean water, healthcare and education for their children. These small
businesses also create employment opportunities for such local communities where jobs are
rare. It helps them to earn extra income.

Women Empowerment: Microfinance is an important tool not only reducing poverty but also
empowering women as normally more than 50% SHGs are formed by women. SHGs has

AL AMEEN INSTITUTE OF MANAGEMENT STUDIES

 20

proved to be strategic tool for organizing women in groups and promoting their saving habits
to gain greater access to financial and economical resources. Poor women use small loans to
start a long chain of economic activity and raise their socio-economic status in the society.

Financial Inclusion: Microfinance has been recognized as an important tool in connectivity

the unbanked population to mainstream institutional banking services. It has contributed to
reduce their dependency on informal money lenders and non-institutional sources.

Mobilization of Savings: Microfinance develops the saving habits among the people. Now
poor people with meager income also save money and are bankable. The financial resources
generated through saving of group members and micro credit obtained from banks are
utilized to provide loans to its members.

Financial Stability: Microfinance has also played a greatest in providing financial stability to
people which contributed to local economies in substantial extent. Small loans have offered
opportunities to earn extra income, so that people can pay for their extreme necessities.

Global Poverty: Financial stability to poor and low income families through small loans may
break the poverty cycle for future generation. As many of these communities started growing,
the local economies are started flourishing. The gross domestic product of the country started
increasing and gap between the poorer and wealthiest people has also decreased.

Development of Skills: Microfinance has helped in identifying the potential rural

entrepreneurs. SHGs encourage its members to set up their businesses jointly or individually.
They receive training from their supporting institutions and learn leadership qualities. Thus,
microfinance helps indirectly in the Development of Skills.

CHALLENGES AND SUGGESTIONS

Microfinance in India has made substantial progress and has brought number of people above
poverty line. However, there are huge masses of people especially in rural areas who are still
remaining out of the ambit of the outreach programmes. Thus, with phenomenal growth in
microfinance, there are some glaring challenges also reality of this sector and some of them
are:

Low Coverage and Regional Disparity: Microfinance has become a major instrument for
financial inclusion providing access to credit to the poorer which helps in their poverty
reduction. But the coverage of MFIs is just 8% which is very low. The main focus of these
institutions is to provide credit to the rural poor and less attention to urban poor. However,
now-a-days urban poverty is very serious issue with increasing population and migration.
Further, growth of MFIs is unequal among various regions as well as limited growth in
poorer states of India. Almost 54.8 outreach of microfinance is distributed in southern region
while west, north and northern east account for 6.75%, 4.27%, and 1.75% respectively. There
is a need to take more efforts to utilize the potential of microfinance in poorest states like
Bihar, Uttar Pradesh, Assam, Jharkhand etc. The main reason for success of microfinance in
southern is that NGOs and MFIs are more active in this region than the northern areas
especially. The major issues for the growth of microfinance are high literacy, supportive
culture, financial infrastructure and existence of NGOs etc. Government should also take
more steps for creating effective banking structure in backward region. The poor section

AL AMEEN INSTITUTE OF MANAGEMENT STUDIES

 21

should be the main target without any difference in to utilize the potential of microfinance
rural or urban poor.

Inability of MFIs to Generate Sufficient Funds: Inability of MFIs to raise sufficient funds
remains one of the important concerns in Microfinance sector. However, NBFCs are able to
raise funds through private equity investments which are for profit motive. These MFIs are
restricted from taking public deposits. Not for profit companies which constitute a major
chunk of the microfinance sector have to primarily rely on donation and grants from
government, NABARD and SIDBI. Apart from this, generally the major sources of funds for
MFIs are bank loans. To increase their borrowings further, MFIs need to raise their equity
through outside investors.

Staff Training: The quality of microfinance services depends on the capability of human
resources involved as service providers. Incompetent staff and undiversified credit leads to
the poor performance over the period. Poorly trained or untrained human resources affect the
functioning of MFIs. However, NABARD is promoting technical assistance for the staff of
banks, NGOs and SHGs. To increase the efficiency of MFIs, an effective sub-sector
information system should be developed and consultancy services should be viable for the
staff.

Need of Proper Checking: MFIs provide credit to small businesses, dairy/poultry farming,
farmers, education loan, housing loan etc. There is need of proper check for what the credit
approved and really used with timely performance report. The outcome in terms of
production and income is the major challenge for the sustainability of MFIs. Uneducated and
untrained groups are the customers of these institutions. Thus, they impose a risk of
inefficient management and improper planning. The training programme will boost the
confidence of beneficiaries in their business and helps to enhance the income generation
capacity. It will enable them to repay the loan and to extent their business.

Dropouts and Migration of group members: Generally, microfinance is provided on group

lending concept. The two major problems with group concept are Dropouts and Migration of
group members. Most MFIs lend on the basis of the past record of a group
(SHG/JLG)/individual repayment performance. In absence of a decent past record, members
are deprived of getting big loans and additional services.

Regulation: The regulatory framework is necessary to utilize the potential of MFIs for
upliftment of poor. The regulation of MFIs is of major concern to protect the interest of
stakeholders/depositors, setting prudent ial norms, standards and promoting systematic
stability to build public confidence in MFIs/banks.

Quality of SHGs: The success of microfinance movement depends on the quality and
performance of SHGs in highly competitive environment. There is a rapid growth in the
number of SHGs in the last decades. At present there are about 8million SHGs functioning in
the country. Unfortunately, there quantity has grown very fast but there quality suffered the
most. The major factors responsible for their poor quality are inadequate resources for
training and capacity building, shortage of staff in bank branches, improper utilization of
funds, poor quality of products and lack of knowledge about productive investment.
Therefore, now we have to focus on the quality of SHGs as their long term viability depend

AL AMEEN INSTITUTE OF MANAGEMENT STUDIES

 22

on quality. For improvement of their quality, there should be proper use of information
technology for better monitoring and service delivery on cost effective basis and research
centres should also be established to encourage focused research and training in
microfinance.
Transparency of Interest Rates: Generally, it has been observed that MFIs are followed of
different pattern of charging interest rates and few one are also taking free deposits and
additional charges. All this make the pricing very confusing and hence most of the borrowers
feel incompetent in terms of bargaining power. Thus, a common practice for charging interest
should be followed by all MFIs so that it makes the sector more competitive and the
beneficiaries can easily make effective comparison of different financial products before
buying.
Political Interference: No doubt government is playing an important role in building legal and
regulatory environment for MFIs. However, restrictive regulation and too much political
interference in the working of MFIs may harm their sustainable growth. In 2010, Andhra
Pradesh Government has passed an Act, which includes a number of measures that greatly
restricts MFIs workings. Before this, Andhra Pradesh has been the forefront of microfinance
in India but This Act of Andhra Pradesh Government has put a destructive impact on
microfinance sector. Recent example of this can be taken from Andhra Pradesh crisis2010.
The act was passed on the basis of media and Government speculation that MFIs are earning
huge profits by charging extraordinary high rate of interest. The media also highlighted
extreme example of suicides linked to repayment stress. As a result of this Act loan
repayment dropped dramatically and Andhra Pradesh which was the forefront of
microfinance now became the home of one of the largest group of blacklisted creditors in the
world. Thus, government should make a regulatory frame work to strengthen the
microfinance movement rather than block innovation with rigid rules.

CONCLUSION
The main objective of microfinance is to provide an umbrella of services to poor so that they
can enrich their lives. Microfinance in India has helped a lot to bring a number of people
above poverty line but coverage is uneven with large number of people in rural area still
remaining outreach programme. Microfinance refers to small savings, credit and insurance
services extended to socially and economically disadvantaged segments of society. It is
emerging as a powerful tool for poverty alleviation in India. This working paper tries to
outline the prevailing condition of the Microfinance in India in the light of
its emergence till now. The prospect of Micro-Finance is dominated by SHGs (Self Help
Groups) - Banks linkage Program. Its main aim is to provide a cost effective mechanism for
providing financial services to the poor. Recently Union Rural Development Minister Jairam
Ramesh wanted the help of SHGs for the establishment of DRDO designed bio-toilets in rural
areas. This paper discovers the prevailing gap in functioning of MFIs such as practices in
credit delivery, lack of product diversification, customer overlapping and duplications,
consumption and individual loan demand with lack of mitigation measures, less thrust on
enterprise loans, collection of savings/loans and highest interest rate existing in micro finance
sector. All these are clear syndromes, which tell us that the situation is moving without any
direction. Finally paper concludes with practicable suggestions to overcome the issues and
challenges associated with microfinance in India. Government can play a vital role to create a

AL AMEEN INSTITUTE OF MANAGEMENT STUDIES

 23

supportive environment in which MFIs can flourish. To boost microfinance sector in India,
there is a coordinated action of various agencies such as government, financials, NGOs etc.
As most of the population are living in rural areas and illiterate and have low awareness about
microfinance services therefore, a special campaign should be started to familiarize the poor
about microfinance services. The contribution of women can also play an active role in the
growth of this sector. Banks should convert and build up professional system into social
banking system for poor. Government should also provide support for capacity building
initiatives, ensure transparency, and enhance creditability through disclosures. Delivering
credit and mix of other services at lowest cost is only possible by increasing competition
among MFIs. In nutshell, microfinance has witnessed a phenomenal growth in the past years.
This sector is playing an active role in helping the poor in many ways. However, the focus of
most of the MFIs has remained on expanding the outreach of microfinance programme with
little attention of depth, quality and viability of financial services.

AL AMEEN INSTITUTE OF MANAGEMENT STUDIES