Assessment of Micro finance by public sector banks In Pune region (2003-2008)

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The number of people living on less than $1 per day in India is significantly greater than the entire population of the United States. From a social perspective, this is a humanitarian pandemic. From an economic perspective, these people represent the bottom of the pyramid (BOP). From a commercial perspective, these individuals are not considered a viable market given their miniscule purchasing power. Do the poor people of India represent an opportunity for a large, organized financial services company?

Introduction

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Microfinance refers to the provision of financial services to low-income clients, including consumers and the self-employed. More broadly, it refers to a movement that envisions a world in which as many poor and near-poor households as possible have permanent access to an appropriate range of high quality financial services, including not just credit but also savings, insurance, and fund transfers. Those who promote microfinance generally believe that such access will help poor people out of poverty.

 History of Microfinance,

 Microfinance has proven to be a very effective development tool because it provides empowerment instead of charity. Typically, microfinance clients are self-employed

household entrepreneurs who lack the resources to invest in their business and their future and thus cannot escape the grips of extreme poverty.   The word of microfinance diverse they exist in various legal forms, including nongovernmental organization (NGOs), credit unions, nonbank financial intermediaries and commercial banks.  Early efforts to provide financial services to the poor tied those services to specific economic activities that were perceived as more financially sound. For example, between the 1950s and 1970s governments and donors focused on providing subsidized agriculture credit to small and marginal farmers in hopes of raising productivity and incomes. During the 1980s micro-enterprise credit expanded by providing loans to poor women to invest in tiny businesses, enabling them to generate and accumulate assets and raise household income and welfare.

 The proof that women are more parterres for MFIs is well documented and rests on a few simple principals. Because women are in charge of the household, the benefits of the money lent are more likely to filter into the family. Therefore, by lending to one women the bank is helping the lives of at least four or five people. Also, women are more likely to respond to the pressure of the social collateral, which many of the MFIs depend on for repayment.

 In 1997 , the micro-credit summit was formed to exchange ideas and starts a global campaign dedicated to reaching 100 million of the worlds poorest families by 2005. Worldwide there are 7,000 MFIs. Of these, fewer than 100 claim financial selfsufficiency. Each type of MFIs faces unique constraints that prohibit its financial sustainability.

 Micro credit in India, 

 Mondal of Bengal, Rangappa of Karnataka, Ilamkar of Maharashtra, or Cherian of Keralanone are lucky enough to have a secure job. Each is destined for selfemployment. They are scattered over different locations in India. Their trades are varied too. But they are tied by a common needthe need for credit, or rather micro credit, as it is popularly called today. If only I had some more capital is a common refrain that echoes through the small ventures of India. 

 Micro credit means loans to artisans, tiny and small industries, grocers, vegetable vendors, rickshaw pullers, roadside retailers and the like. Other activities include farming, poultry, cattle rearing, piggery, fishery etc. Micro credit has its origins in the early eras of civilization. It was out of necessity that man became aware of the benefits of lending and borrowing. Much before the advent of money and banking, the practice of lending was prevalent in kind. For example, a farmer gave some seeds to another on the condition that the recipient would return the seeds with some extra quantity. This little extratoday known as interestwas the cost of micro borrowing. The world witnessed the first organized system of lending with the establishment of the Bank of Venice in Italy, way back in 1157. Born in 1694, the Bank of England brought about an improvement. Much later, India joined the league in 1786 when the General Bank of India came into existence.   Before this, the indigenous bankers better known as private moneylenders controlled the entire unorganized banking sector. Obviously, the borrowers were always exploited. Exorbitant rates of interest and unscrupulous practices often drove borrowers to the point of destitution. Particularly, the takers of micro credit the poor farmers and small traders were the worst sufferers.   In India, the gap between the haves and the have-nots is always alarmingly high. Vices like superstition, illiteracy, caste system and the greed of the rich and powerful do not allow the principle of equality to set in. Consequently, India is unable to get rid of poverty and unemployment.   It was with the objective of alleviating poverty and generating employment that the role of small finance came into the limelight. Even the great visionary like poet Rabindranath Tagore utilized his Nobel Prize money to start a rural bank to extend financial assistance to small farmers and traders. Unfortunately, the bank did not last long.

 With more than 220 million starving people, India must continue to exploit the great potential of micro credit. The posh shopping malls, the multiplexes and the capitalintensive big industries can provide livelihood only to a few educated urbanites. The rest have to live on small ventures and agriculture. These segments can never survive without small loans.

 Micro credit creates a huge purchasing power. This, in turn, gives impetus to industrial growth and finally leads to a higher GDP. The contribution of micro credit towards social reforms cannot be overlooked either. Antisocial persons, ex-

prisoners or even prostitutes may find an easy route of rehabilitation with a small credit.

 Before the nationalization of banks in India in 1969, co-operative banks were the main dispensers of small loans in the organized sector. Commercial banks were not easily accessible to small borrowers. Those were the days of security-oriented approach.

  None could think of a loan, big or small, without a guarantor or mortgage of immovable property. Nationalization changed the picture radically. Purpose became the basis for finance. Profit not being the only motive, the nationalized banks opened branches in the remotest corners of the country. They were to implement various government schemes like the Twenty Point Program, Antodaya Program, subsidized Differentiated Rate of Interest (at 4%) loan and the like, which aimed at uplifting the poorest of the poor with the help of micro credit. Added to this, India saw the establishment of Region  al Rural Banks (RRBs), Deposit Insurance and Credit Guarantee Corporation (DICGC), National Bank for Rural and Agricultural Development (NABARD), Small Industrial Development Bank of India (SIDBI), Export Credit Guarantee Corporation (ECGC) and the latest Credit Guarantee Fund Trust for Micro & Small Enterprises (CGTMSE). The CGTMSE covers collateral-free credit up to Rs. 50 lakhs. These institutions play supportive roles to ensure uninterrupted flow of credit to small time borrowers. 

Micro Credit Lending,

As recently as 1990 donors and micro enterprise development program specialists voiced doubts about extending financial services to people in the marginal economies of developing countries. Few people believed that low-income people, virtually without jobs or income, and hampered by gender, class and social barriers could develop successful enterprises, pay back loans, and generate enough loan volume to be able to service institutions. Five years later poverty lending, a savings and loan method for the poor, has

enabled these people to expand and diversify their enterprises and increase their income enough to repay loans at market rates and make savings deposits. Poverty lending's success has led to an increase of organizations which are using various methodologies to reach very poor people in many developing countries. The nongovernmental organizations are starting to integrate themselves into national financial systems as profit enterprises since profitability is crucial to long-term sustainability. As they begin to achieve self sufficiency, micro enterprise programs are increasingly providing credit to the poor. Mainstream financial institutions usually cannot provide the special services needed by very small enterprises since their capitalization is small and their planning cycles short. Because micro enterprises usually keep no formal records and have neither credit ratings nor collateral, the costs associated with lending to them are high. In the last 15 years several institutions like the Grameen Bank, ACCION, and the World Council of Credit Unions have revolutionized micro enterprise finance through the following techniques: Repayment incentive structures: Peer group lending, wherein a group of borrowers guarantee each others' loans and there is the promise of continuing, increasing credit for borrowers paying on time. Streamlined administration: Simplified and decentralized loan applications, approval and collection processes which assign much of the approval process to borrowers. Market-based pricing: Though micro enterprise loans must pay higher than market rates to cover costs and prevent fund depletion, they are willing to do this to secure credit which would cost even more through informal lenders. Yet micro lending cannot he sustained only by grants from donor agencies. Micro enterprise finance systems need to support themselves, as well, with locally generated funds. Moreover, low-income borrowers tend to save better when provided with appropriate savings mechanisms. Private voluntary organizations which are involved in micro enterprise lending must shift their attitudes from alleviating social problems to providing market-based financial services, As these organizations improve their institutional performance and thus become increasingly self-sufficient, they are less dependent on charitable donations. Once a group accumulates some savings it then , must operate according to its national financial regulations. Some successful micro enterprises illustrate the ways in which they are effecting this transition.

Micro-Credit Financing:
Traditional banking sector cannot reach millions of poor for whom small loans could make huge differences. There are several reasons for this. Most of the poor are rural, and they are very dispersed. They have low education levels, if at all. As a result, administrative cost of supplying loans to the poor population is extremely high. Another issue that makes it difficult to serve these customers through traditional banking is that the poor does not have any assets to use as collateral. As a result, the poor had access to loans only through local moneylenders at exorbitantly high interest rates.

Micro-credit financing starts with the assumption that the poor is willing to pay high interest rates to have access to finance. In general, the system uses the social trust as the collateral. Although there are different micro-credit financing models, the borrowers in the pioneering models are usually members of small groups. Loans are given to individuals, but an entire group is responsible for the repayment. Hence, the borrower who does not fulfil his commitment to repay back will lose his/her social capital. Micro-credit institutions report that their repayment rates are above the commercial repayment rates, sometimes as high as 97%. Today, there are millions of poor people around the world who turn to be entrepreneurs through the micro-credit sector. The UN Millennium Project identifies micro-credit as one of the development strategies that should be implemented and supported to attain the bold ambition of reducing world poverty by half. A powerful endorsement of the importance of the micro-finance has come from the United Nations with the designation of 2005 as the International Year of Microcredit. One of the most prestigious awards in the world, Nobel Peace Prize was given to Muhammad Yunus for his pioneering role in the development of the micro-credit sector. Although micro-credit financing is considered as one of the most powerful tools for combating poverty, the sector still faces several serious problems. Despite high repayment rates, the cost of operating micro-credit financial institutions is much higher than their traditional commercial counterparts. These institutions are usually charge excessively high interest rates to cover the high administrative costs of the micro-loans they offer to the poor people. This reality creates a tension between sustainability of the micro-credit sector and the outreach. It also makes it a challenge to regulate micro-finance institutions.

Research problems:-

Microfinance has significant potential to create jobs and reduce poverty, yet it is not fulfilling that potential. Today the microfinance industry faces the twin challenges of growth and sustainability, and needs to respond to the following questions:

How can microfinance institutions (MFIs) provide better services to more lowincome people? How can MFIs reduce costs for clients while meeting their institutional needs? How can MFIs survive in increasingly competitive environments? Can lending to the very poor be financially viable for banks? Is microfinance an effective or efficient way to lift large no. of people out of poverty? How microcredit can be used to improve the rate illiteracy in the rural India?

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Objectives of the research:-

1. Understanding the concept and working of Microfinance. 2. To understand the needs and demand of the low income people. 3. To know the objectives of MFIs. 4. To know the contribution of microfinance in reduction of poverty. 5. To know the risk and reward associated with microfinance. 6. To know the percentage growth in microfinance lending per year.

Scope of the study:-

Microfinance is already a flourishing business working mostly through self-help groups (SHGs) These supported by banks, notably by the government s national bank for agriculture and rural development (NABARD), typically brought together about 15 women, who pooled their savings for a few months, allocated them to members who needed small amounts temperorially, And were than also eligible for a bank loan. Poverty in India is still rampant despite an impressive economic growth. An estimated 250 million people are below the poverty line and approximately 75 % of them are in the rural areas. In general, poverty can be defined as a situation when people are unable to satisfy the basic needs of life. According to the definition by planning commission of India, poverty line is drawn with 1,800 calories. If a person is not able to get that much minimum level of calories, than he/she is considered as being the below poverty line. Considering the above mentioned fact we can understand that still there is a hues scope for the microfinance in India. And it goes without saying that Microfinance can play a vital role to uplift the BPL families and proof India as a developed nation.

Some fact s regarding the Microfinance in India.(literature

Review)
Several banks across the country, are participating in the SHG-bank linkage programme. SHGs covered by this study were financed primarily by commercial banks (58%) and by regional rural banks (38%). A small percentage (4%) was financed by primary agricultural cooperative societies, which in turn were perhaps financed by district cooperative central banks.
Fig-1: Types of Banks

38% 4%

58%

CBs

RRBs

PACS

All the bank branches have their service area fixed for operational jurisdiction. The groups located within the service area of a respective branch of a bank are eligible to open savings accounts only in that branch of the bank. Even though there are other banks located nearer, the groups are not allowed to utilize the services of other banks because of service area approach. This was felt to be a problem by many of the groups.

Participating Banks
The 400 SHGs covered by this study were financed by 20 banks. State Bank of India financed nearly a fifth of the SHGs. Other key financiers of the sample of SHGs studied were Andhra Bank, and the regional rural banks at Vizianagaram and Kurnool. Unless SHG financing is significant business for a bank, it may not invest adequately in the development of this business. Banks such as Canara Bank and State Bank of Mysore have considerable experience of financing SHGs in neighbouring states, even though in the sample studied, they were not significant players.

: Name of financing bank S. No. 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 20 Name of the Bank State Bank of India Andhra Bank Vishakha Grameen Bank Rayalaseema Grameen Bank State Bank of Hyderabad Syndicate Bank Sri Venkateswara Grameen Bank PACS Union Bank of India Sanghameshwara Grameen Bank Kakatiya Grameen Bank Vysya Bank Manjeera Grameen Bank Indian Overseas Bank Pinakini Grameen Bank Indian Bank Punjab National Bank Canara Bank State Bank of Mysore Total No. of SHGs financed 77 48 39 38 24 23 19 17 17 17 16 13 12 11 9 8 7 4 1 400 Percentage

19.3 12.0 9.8 9.5 6.0 5.8 4.8 4.3 4.3 4.3 4.0 3.3 3.0 2.8 2.3 2.0 1.8 1.0 0.3 100.0

Distance from Bank

The distance between an SHG and its bank could have an influence on the regularity of savings and loan remittances, on operational costs, on bank-SHG relations, and on repeat finance. Simultaneously, where SHGs are at a distance from their bank, it is an indication of banks not limiting their assistance to easily accessible SHGs. Data shows that nearly 47% of the bank branches are located at Mandal headquarters followed by bank locations elsewhere (32%). In the case of 19% of the SHGs, their financing bank was located within their habitation.

Location of bank
S. No. 1 2 3 4 Location In the habitation itself Panchayat headquarters Mandal headquarters Others* Total * including neighboring Panchayat, etc Frequency 76 10 186 128 400 Percentage 19.0 2.5 46.5 32.0 100.0

Showing 20 MFIs reporting data for 2008.

Name ABCRDM Adhikar AML Diamonds Gross loan portfolio Number of active borrowers 3 3 3 2,513,302 5,668,705 104,332,997 21,420,185 8,239,335 920,723 5,096,937 103,827,768 73,600,059 20,051,509 37,471,172 226,360 21,501,710 316,662 22,509,417 4,493,997 43,401,148 9,101,901 35,647,924 4,128,377 314,154 35,274 339,158 145,701 211,562 46,846 As per 117,018 54,249 890,832 153,742 86,237 10,125 31,108 1,454,834 498,681 263,968 352,352 2,806 168,475

AMMACTS 3 Arohan Asomi AWS Bandhan BASIX BFL BISWA BJS BSS BWDC 5 3 5 5 5 3 5 4 5 3

Cashpor MC 4 CReSA Equitas ESAF GK GOF 5 5 5 5 4

The census of 2001 only 27.78% population of the country lives in the urban segment while the rest are still residing in the inherently characteristic Rural India. The things however have changed significantly since independence when around 82% of the population lived in the rural segment. The rural segment is distinct in respect of various features such as purchasing power, development, social system etc. These distinctions relate directly to the kind of distinct demand patterns that the rural sector has in various product segments especially when it comes to financial services. The sector presents a real challenge given its technological backwardness and mass illiteracy as people are still caught in ancient financial systems that were both exploitative and futile. Financial inclusion is the biggest problem in front of the financial system today in rural India and infrastructural bottlenecks are worsening it even further with each passing day. Banking and other financial services were acknowledged as the ultimate growth drivers in rural India at the time of independence. The role of the banking sector in financing rural households was envisioned in the 1950s, in pursuance of the recommendations of the RBI survey, viz. All-India Rural Credit Survey (AIRCS), which observed that Agricultural credit fell short of the requirements, was not of the right type, did not serve the right purpose and often failed to go to the right people . Despite the insignificant role played by cooperatives in financing rural households at that time, a proactive role for cooperatives was suggested stating that Cooperation has failed, but cooperation must succeed . Commercial banks were also inducted in the 1970s into the ambit of financing agriculture and other priority sectors. Thus both commercial and cooperative banks have been financing the rural segment holding a major share in institutional finance. However a lot remains to be achieved so far in the rural domain which as per this paper will be the future key to growth for the banking sector in India. We will thus analyze the role of Micro finance Institutions in providing cheap and prompt access to financial services in the rural terrain so as to explore a massive untapped segment of the financial market in India. Micro financing has emerged as the promising arena to channelize the savings of millions of rural citizens all over the world to create a sustainable model of growth, development and empowerment. The context for this paper derives from the current overriding emphasis on microfinance in rural finance discourse and its celebration as the new magic wand in the fight against poverty. The paper also discusses the factors and theoretical position associated with evolution of microfinance and its global acclaim based on it being a Win-Win proposition for both Micro Finance Institutions (MFIs) and Clients. The paper aims at analyzing the historical and the present state of the rural financial system in India and also seeks to identify the reasons so as to how

the rural sector can be the next big sector. The paper is divided into presents the background of the rural of Financial exclusion, (II) segment the rural financial system, segment and deals with the analysis of the Finance Institutions

developmental platform for the Indian Financial three major segments where Segment (I) financial system and also studies the problem deals with the institutions working for (III) focuses on Micro Finance Institutions overall paradigm as it holds for the Micro in India

The paper is based on references and inferences from works done previously in this particular domain and it takes into account various special studies done by international and domestic agencies such as the World Bank, Asian Development Bank and off course the Reserve Bank of India. The paper poses to be a symposium of diverse facts and conclusions drawn from various research works. The paper seeks to present the rural sector as an opportunity of the future for the commercial banking system as they fight out the challenge of financial inclusion in rural India and thus hit fortune at the bottom of the income pyramid in India. It provides a comprehensive picture of why and how rural sector can emerge as a profitable segment for the banking industry in India and how there is tremendous scope for taking universal banking to the Indian hinterlands with a little bit of creativity and lot of ingenuity. Micro financing in particular has the competence to revolutionalize the financial system of rural India and thus facilitate its alignment with the overall growth story of India and its Economy in this century that is slated to see India claim its historical position of the global leader. Thus this paper is a small attempt to accentuate the importance of Micro financing in the rural Indian economy.

Conclusions: There is ample evidence to support the positive impact of microfinance on poverty alleviation as it relates to fully six out of seven of the Millennium Development Goals. In particular, there is overwhelming evidence substantiating a beneficial effect on income smoothing and increases to income. There is less evidence to support a positive impact on health, nutritional status and increases to primary schooling attendance. Nevertheless, the evidence that does exist is largely positive. Microfinance is an instrument that, under the right conditions, fits the needs of a broad range of the population, including the poorest, those in the 'bottom half' of people living below the poverty line. While there will be people in this group who will not be suited for microfinance because of physical or mental illness, etc, the exclusion of this small percentage of the population will likely not be a limiting operational issue for MFIs.

Empirical indications are that the poorest can benefit from microfinance from both an material and social well-being point-of-view, and that this can be done without jeopardizing the financial sustainability of the MFI. While there are many biases presented in the literature against extending microfinance to the poorest, there is little empirical evidence to support this position. However, if microfinance is to be used, specific targeting of the poorest will be necessary. Without this, MFIs are unlikely to create programs suitable for and focused on that group.