A PROJECT ON

ENVIRONMENTAL FACTORS AFFECTING MICROFINANCE IN INDIA

(w.r.t. BANK OF BARODA)
Submitted in partial fulfillment of the Requirements of the degree of., (Hons.) For the course

MARKETING MANAGEMENT

Submitted by:

Submitted to:

B.B.A., LL.B. (Hons.) Semester V Roll No.

Faculty In-charge

FACULTY OF MANAGEMENT NATIONAL LAW UNIVERSITY, JODHPUR

TABLE OF CONTENTS
                     

S. No.
1. 2. 3. 4. 5.

Content
Acknowledgements Executive Summary Research Objectives Research Methodology Environmental Factors: Concept

Page No.
iii. iv. v. vi. 1.

6. 7. 8. 9. 10. 11. 12. 13. 14.

Microfinance Industry In India: An Overview Bank of Baroda: In the field of Microfinance Field Study-Questionnaire Field Study: Analysis Conclusion Recommendations Annexure Limitations Bibliography

12. 24. 27. 31. 42. 43. 45. 46. 47.

ACKNOWLEDGEMENT

I am highly thankful to the faculty of Strategic Management , who not only guided me throughout this project, but also gave her valuable time to me in patiently solving all my queries with respect to the microfinance industry and various environmental factors affecting the industry, due to which I was able to complete this project. I owe sincere gratitude for her untiring and instant academic, intellectual support and guidance. I shall always be thankful to her for her assistance, guidance, and time. I am also thankful to , Assistant Manager, Bank of Baroda, Masuda (Beawar) who provided me the relevant information without whose help and cooperation the would be incomplete. Last but not the least it would be mean on my part if I do not mention my colleagues who helped me out in the completion of this project and also the members of Library committee of my University who provided me with the books and other related material which helped me and also guide me a lot to build my project.

EXECUTIVE SUMMARY
3

The project aims at analysing the various environmental factors which affects the functioning of microfinance industry in India. For this purpose firstly I have discussed various environmental factors present in the surrounding of the business organisations and the interaction between the two. Then I have tried to explain the concept of microfinance in India, varoius models of microfinance followed here and the current trends and challenges faced by the industry as a whole.

For the better understanding of the impact of the environmental factors on the performance of microfinance industry the field study was conducted with respect to Bank of Baroda. The study aims at analysing the major environmnetal factors which have an impact on its planning and strategy formulation. Then, to understand how the Bank deal with these issues and the strategies adopted by the bank to function affectively in this field.

RESEARCH OBJECTIVES
4

 To identify various environmental factors affecting microfinance  To analyse the impact of the above environmental factors on Regional Rural Banks  To identify the strategies adopted by the banks in maximizing the opportunities and minimizing the threats

RESEARCH METHODOLGY
5

 TOPIC: A Study of Environmental Factors Affecting Microfinance In India (w.r.t. Bank of Baroda) 

RESEARCH METHODOLOGY
The methodology that is adopted in this subject is deductive in nature.

RESEARCH TOOLS: The research tools used in the project are both primary and secondary. Primary data are collected from the field study conducted for this project where an interview method was used by presenting a questionnaire to the Assistant Manager of Bank of Baroda, Masuda (Beawar) while the secondary data was collected from Internet, magazines, articles, books and newspapers.

FOOTNOTING
NLU footnoting style has been used through out the project.

Chapter 1

Environmental Factors:Concept
6

An organization, being a sub system of the broader societal system, has to work within the framework provided by the society and its various constituents. In this working the organization interacts with the force lying outside it, commonly known as external environment or only as environment.1 When they interact with each other both of them lay down an impact on other as it is a two-way process but the impact of the organization on its environment is not as significant as that of the environment on the functioning of the organization. Thus defining Environment, The environment includes all the conditions, circumstances and influences surrounding and affecting the total organization or any of its subsystems. External environment can be further classified into two parts-Macro-environment and micro environment. The following figure explains the same-

Figure.12

Micro-environment-The

micro environment consists of those factors

having impact directly on the firm and its activities in relation to a particular market in which it operates. They are those forces which are closer to the operation of the firm and
L.M.Prasad, Business Policy:Strategic Management, (Sultan Chand & Sons, Educational Publishers, New Delhi, 3rd edition, 2001) pg 112 2 http://marketingteacher.com/Lessons/lesson_marketing_environment.htm , visited on August 10, 2007
1

the organization has some degree of control over them. In other words the organization can exercise a degree of influence over these factors. For eg. it includes suppliers that deal directly or indirectly, agents, consumers and customers, distributors, other distributive intermediaries and competing firms. Thus it is a more local relationship and the firm may exercise a degree of control over them or can regulate them.3 Following are the major factors constituting micro- environment: Suppliers environment It includes other business firms or individuals who provide the marketing firm with raw materials, services or other tangible goods to create or enhance a product or service for sale, or in the case of retailing firms, possibly the finished goods themselves. Any firm or organization has to depend on numerous suppliers or creditors for its functioning. Both buyer/supplier tries to form a good mutual and stable relationship but the factors in the supply environment keeps on changing. For example any dispute between them may affect the delivery of the goods to the buying organization or if there is shortage of the raw material then the supplier may not be able to supply in time or the sufficient amount of raw material or if the prices of the raw materials rise then it will definitely have an impact on the prices charged by the supplier. Also if there are only few competitors, each individual purchase represents only a small amount of their companys sales, there are not good substitutes of the product purchased, and the product or service is unique then the supplier will be more powerful. Thus, the any changes or development in the supplier environment will have an impact on the planning of the organization.  Distributive environment This environment includes marketing intermediaries like wholesalers, dealers, physical distributors, agents, marketing service agencies and other financial intermediaries. These factors are required by the organizations where it cannot reach its consumers directly thus to ensure that their products reach the final consumer through these intermediaries. Thus, they constitute an important component of the value delivery network of the company
3

http://www.rocw.raifoundation.org/management/mba/mba_marketing/lecture-notes/Lesson-17.pdf, visited on August 11, 2007

and consist of the sources that are involved in promoting, selling and distributing its goods to the final buyers.4 Normally these intermediaries deal in various brand of the same product, hence it is very important for the company to maintain the good relations with the resellers in order to motivate them to promote their brand. Physical distribution firms are the one who are involved in storing the companies products and moving them to the place of sale. Marketing service agencies consists of marketing research firms, media firms, advertising agencies that promote the companies product to the target market and give information to them. Financial intermediaries constitute, insurance companies, banks, credit companies who insure and take the risk associated with the products / services.5 Changes in the distributive environment occur relatively slowly, and there is therefore a danger of marketing firms failing to appreciate the commercial significance of cumulative change. But for the growth of the business the organizations are required to have a constant look on the intermediaries and maintain good relations with them along with identifying the new and potential intermediaries.  Competitive environment For any organization to achieve success, the key option is to provide better products than its competitors. Apart from meeting the needs and wants of the target markets the organization needs to provide the products which prove better than its opponents. While buying goods or products the consumer always has this thing in mind that how a particular product is different and better than other one. It is how the strategies are used by the organization to help the people choose its products. It is on the company to keep a constant track of competitors strategies and change as and when required. Thus, the organization must be alert to the potential threat of other companies marketing similar and substitute product. Competition is good for the consumers as it gives them a choice but it posses threat to the competing organizations. 6 It is essential that marketing
4 5

http://www.da-group.co.uk/geoff_lancaster/micro_macro_handout.doc, visited on August 14, 2007 Supra note 3 6 http://www.iamot.org/conference/viewpaper.php?id=1300&cf=4, visited on August 13, 2007

management has a full understanding of competitive forces. Thus, they must keep a constant track on the competitors and the benefits they are offering to the market. If the company has all the necessary information as to its competitors and a check on their changing strategies then, the company will have a greater opportunity to compete effectively.

 Customers Customers are an essential part of any business, without the customer there would be no need for the business. The aim of every business organization is understand the behaviour and demand of its customers and provide the products accordingly. A successful business strategy involves designing products and marketing programmes that incorporate attributes which provide value to consumers. To ensure that the product satisfies the customers many organizations go into the consumer research, study the demand and customer-related factors to make plans effectively.

Needs and demands of the customers keeps on changing with new products in the market thus it is advisable to the organizations to have a continuous eye on this aspect and study the behavior of various types of customers. Like there are Consumer markets, Business markets, Reseller market, government markets (buy the goods and services to provide it to the people who need it) etc. Only by keeping a track of what the customers want one can grab the opportunities emerging in the environment.

Macro environment-

Macro environment consists of all those external

factors which can influence and affect a companys planning and performance, but that are out of its control. This environment is concerned with broad trends and patterns in the society as a whole, which affects the markets at large. Changes in the wider macroenvironment may not be as close to the marketing firms day-to-day operations, but they are just as important.

10

Eg. Political factors, socio-cultural factors, economic factors and technological factors. The factors are continuously changing, and the company needs to be flexible to adapt. There may be aggressive competition and rivalry in a market. Globalization means that there is always the threat of substitute products and new entrants. The wider environment is also ever changing, and the marketer needs to compensate for changes in culture, politics, economics and technology.7 These are the four main factors which constitutes macro-environmental:1. Political and legal factors 2. Economic factors 3. Social and cultural factors 4. Technological factors

These factors are often referred to as PEST factors in the marketing analytical context. It is sometimes referred to as STEP also and it refers to listing all possible points that may affect the organisation under review under each of the P.E.S.T. headings and analyzing their impact on the organisation in order to plan the strategies accordingly. Now days, it is referred to as PESTLE also by adding L (standing for legal) and E (standing for environmental). Some writers have incorporated yet another E (standing for ecological) with the new acronym STEEPLE. The figure below shows the PEST factors-

http://www.da-group.co.uk/geoff_lancaster/micro_macro_handout.doc, visited on August 14, 2007

11

Figure. 28

 Political and legal environment

Political factors include areas such as tax policy, employment laws, environmental regulations, trade restrictions and tariffs and political stability. It relates to the pressures and opportunities brought by changes of the government and public attitudes toward the industry, changes in political institutions and the direction of political processes, legal issues, and the overall regulatory climate.9 The political arena has a huge influence upon the regulation of businesses, and the spending power of consumers and other businesses.

8 9

http://marketingteacher.com/Lessons/lesson_PEST.htm, visited on August 12, 2007 http://www.provenmodels.com/32, visited on August 12, 2007

12

In developing countries like India where the political and economical situation is usually less stable the Marketing firms operating in such volatile conditions clearly have to monitor the local political situation very carefully. Many of the legal, economic and social developments, in our own society and in others, are the direct result of political decisions put into practice, for example the privatization of state industries or the control of inflation. Thus, while operating in such environment the organisation has to consider following issues in to mindy y y y y y How stable is the political environment? Will government policy influence laws that regulate or tax your business? What is the governments position on marketing ethics? What is the governments policy on the economy? Does the government have a view on culture and religion? Is the government involved in any trading agreements?

To summarize, whatever industry the marketing firm is involved in, changes in the political and legal environments at both the domestic and international levels can affect the company and therefore needs to be fully understood.  Socio-cultural environment Social and cultural factors refers to cultural attitudes, ethical beliefs, shared values, level of differentiation in lifestyle, demographics, education levels, etc. Observing social factors helps organisations maintain their reputation among stakeholders. The type of goods and services demanded by consumers is a function of their social conditioning and their consequent attitudes and beliefs. The needs and demands of the same product vary with the culture and societal structure. Core cultural values are those values which are firmed in the society but the secondary cultural values are those which keep on changing. The organisation as such has no role in its control mechanism but what it can do is to have a research mechanism in order to know their demands and priorities based on their social environment. For eg. The decline in the popularity of smoking is a classic example of how changes in social attitudes have posed a significant threat to an industry, forcing tobacco 13

manufacturers to diversify out of tobacco products and into new areas of growth. In food industry, the firms are responding to the changes in attitude towards health. These days the people are now questioning the desirability of including artificial preservatives, colourings and other chemicals in the food they eat. Also when the attitude of people towards cold drinks changed due to health issues and they shifted to other substitutes like fruit juices and other soft drinks, which provided an opportunity to the juice manufacturers to respond to their demands quickly. Thus, it includes following factors10:y y y y y y y y y Demographics Class structure Education Living conditions Growth rate, population, age distribution Culture (gender roles, etc.) Entrepreneurial spirit Attitudes (health, environmental consciousness, etc.) Leisure interests etc.

 Technological environment Technology is a major macro-environmental variable which has influenced the development of many of the products we take for granted today, for eg. television, computers, video games etc. Technological factors are the scientific advances, which influence the competitive position of the enterprise. It refers to changes in technology that can alter the firms competitive position. Maintaining awareness of new technologies decreases the probability of becoming obsolete and promotes innovation. That is the reason why many organisations have their own research departments and those who dont have sponsors research through other institutions. Advancements in technology can impact the transformation plan in many ways. It is obvious that the new technology can
10

http://www.12manage.com/methods_PEST_analysis.html, visited on August 11, 2007

14

change the demand for a product, render current manufacturing processes obsolete, reduce costs to undercut competitors, produce new products and a host of other possibilities. For example- in toys market when the manufacturers came out with the new remote control cars, the other players have been forced to respond to that and manufacture cars with new technological features in it instead of normal cars. Thus the technology environment includes following issues to be considered11:y Does technology allow for products and services to be made more cheaply and to a better standard of quality? y Do the technologies offer consumers and businesses more innovative products and services such as Internet banking, new generation mobile telephones, etc? y How is distribution changed by new technologies e.g. books via the Internet, flight tickets, auctions, etc? y Does technology offer companies a new way to communicate with consumers e.g. banners, Customer Relationship Management (CRM), etc?

 Economic environment The economy has a significant impact on the viability of a corporate strategy. Economic conditions, economic policies and the economic system are the important external factors that constitutes the economic environment of business. It refers to a societys economic structures and such variables as the stock exchange, interest and inflation rates, the nations economic policies and performance, exchange rates, etc. Economic factors are of concern to marketing firms because they are likely to influence, among other things, demand, costs, prices and profits. The factors like the nature of the economy, the stage of development of the company, economic resources, the level of income, the distribution of income and assets, etc. are among the very important determination of business strategies. For eg. A reduction in the cost of production may be necessary to facilitate price reduction. It may even be necessary to invent or develop a new low-cost product to suit the low income market.
11

http://www.12manage.com/methods_PEST_analysis.html, visited on August 12, 2007

15

The economic policy of the government has a very greater impact on the business. Some are favourably affected while some are adversely or some may have a neutral impact. Like an industry that falls within the priority sector in terms of government policy may get a number of incentives and other positive support from the government, whereas those industries which are regarded as inessential may have odds against them.

It is therefore vital that marketing firms continually monitor the economic environment at both domestic and world levels. Economic changes pose a set of opportunities and threats, and by understanding and carefully monitoring the economic environment, firms should be in a position to guard against potential threats and to capitalize on opportunities.

IMPACT OF ENVIRONMENT
As discussed earlier, there is a continuous interaction between the organisation and its environment. Such an interaction affects the functioning of both, in other words impact lies on both. But as in the earlier section the point is made clear that the impact of organisation on environment is not as significant as that of environment. The figure below shows the environment and organisation interaction and explains how it affects the objectives achieved by the organisation.

The figure below makes it clear that the environmental factors have a direct impact on the organisations operations which includes both business functions in the form of production of goods, its marketing, finance and personnel and at the same time its management functions which includes planning, organizing, directing and controlling which will further be made clear in coming chapters.

16

Environmental factors

Organizational operations

Business functions

Management functions

Production Marketing Finance Personnel Objective achievement

Planning Organising Directing Controlling

Environment-organisation interaction

17

Chapter 2

Microfinance Industry In India-An Overview

Micro-finance refers to small savings, credit and insurance services extended to socially and economically disadvantaged segments of society. In the Indian context terms like small and marginal farmers, rural artisans and economically weaker sections have been used to broadly define micro-finance customers. The recent Task Force on Micro Finance has defined it as provision of thrift, credit and other financial services and products of very small amounts to the poor in rural, semi urban or urban areas, for enabling them to raise their income levels and improve living standards. The microfinance industry in India is among the largest in the world. Seeing the present scenario it is estimated that about 350 million people (approx. 75 million households) live Below Poverty Line but only 5% of them have access to microfinance. It is estimated that there are around 800 MFIs in India. They cover 7.3 million households (about 30 million persons) of which about half may be classified as poor. Direct and indirect linkages between SHGs and banks under the SBLC cover around 22 million households or over 100 million persons. The combined disbursement of MFIs and the SBLC as on March 2006 was around Rs. 200 billion (approximately US$ 5 billion, equivalent to only 0.6 per cent of GDP). In terms of scope, the microfinance sector in India is concentrated only in the southern states of Andhra Pradesh, Tamil Nadu, Karnataka, and Kerala, with Andhra Pradesh alone encompassing 50 to 70 percent of microfinance activities i.e. over three-fourth. In spite of the impressive figures in Southern States, microfinance in India as a whole is still presently too small to create a massive impact in poverty alleviation, but if pursued with skill and opportunity development of the poor, it holds the promise to alter the socioeconomic face of the Indias poor.

Historical background of Microfinance

Microfinance activities where in practice from a long period of time informally, but the initiative for its legal existence was taken by establishing the co-operative movement to

18

help the poor people in 1904. Co-operative banks were established to target the rural areas to provide the primary services and were the first to provide financial services to the poor. Among the most prominent is the Self-Employed Womens Association (SEWA) Bank, which primarily services urban women.

It was in the year 1974 that the Micro Finance Institution (MFI) also showed their emergence in the field of microfinance and the first MFI in India was set up in the same year, but the momentum was achieved only during the 1990s.

Again with the establishment of Regional Rural Banks in 1975 the microfinance activities appeared in their completely formal shape. In the year 1982, Integrated Rural Development Program (IRDP) was one of the largest poverty alleviation programs to include a microfinance component. It was in the same year that the NABARD (National Bank for Agriculture and Rural Development) was established as an apex agency for rural finance. It came out with various ideas for the rural development like to provide and regulate credit for the promotion and development of agriculture, small scale industries, cottage and village industries, and handicrafts in rural areas. NABARD was the first bank which introduced the concept of SHG (Self help Groups) Bank Linkage Program which links these groups to the banks in order to encourage the microfinance activities for rural development.

In the year 1990; the Small Industries Development Bank of India (SIDBI) was established as the main coordinator and principal financial institution for the promotion, financing, and development of industry in the small scale sector. But it was in the year 1999 the SIDBI Foundation for Micro Credit (SFMC) was established to promote the growth and sustainability of the microfinance sector by providing a range of financial and non-financial services to MFIs, including loan funds, grant support, equity, and institution building support.

Thus, the emergence of microfinance services in India was through two main delivery channels:-

19

The SHG (Self Help Group)-Bank Linkage Channel (SBLC), which was developed from field experiments in the early 1990s by NABARD

The second channel is Micro Finance Institution (MFI) which also showed its drive during 1900s

In early days both these channels worked independently and there was no willingness on the part of the formal financial institutions to be involved with the MFIs, and social entrepreneurship was also in short supply. But in recent years the idea of banks has changed and the banks and other MF institutions, helped by supportive public policies, have become more aware of the commercial viability of the micro finance services. Instead of competing with each other they have developed innovative partnership models between themselves. These have increased availability of funding to the sector and have subsequently enabled MFIs to increase their scale of operations and outreach. Both these channels are growing with a faster rate over the last five years. While the cumulative number of SHGs linked to the banking system has grown almost tenfold during the period 2001-2006, the outreach of MFIs grew by 29 times during the same period. Social entrepreneurship is now getting more sophisticated and diffused leading to many financial and service delivery innovations in a decentralized manner.

Types of Microfinance Organizations

In Indian context the Microfinance providers or organizations can be categorized under three heads:  Formal,  Semiformal, and  Informal

 Formal Sector
The formal sector in the field of microfinance comprises of various banking units. The Banking sectors comprises of 105 commercial banks, 196 regional rural banks and 12,128 cooperative banks. Banks hold a larger size in the form of formal financial sector but its outreach to the poor remains rather limited.

20

As per RBI the commercial banks are required to give 40% of its lending to the priority sectors in which 18% is for agriculture and 10% is for disadvantaged groups. These days, banks are increasingly using microfinance to meet these targets.

Now days, NABARD, SIDBI, State bank of India, Bank of Baroda etc. as public sector banks and ICICI, HDFC, Andhra Bank etc. as private banks have emerged as major players in this field. Like ICICI, the largest private bank in India, has begun to partner with MFIs to serve their clients and in some cases has bought out their portfolio in lieu of opening microfinance retail branches directly.12 The HDFC has been making continuous and sustained efforts to reach the lower income groups of society, especially the economically weaker sections. They are providing small loans to the poor people in collaboration with organizations both, Governmental and Non-Governmental.

 Semi-Formal Sector
The semi-formal sector for microfinance consists of a variety of MFIs (Microfinance Institutions), NGOs and SHGs (Self Help Groups). This sector covers the maximum organizations providing microfinance. These are the various institutions registered under various Acts like as societies, public trusts, or non-profit companies. The largest and most profitable MFIs in India are registered as non-banking financial companies (NBFC). While the vast majority of the 37,000 NBFCs target the rural and urban middle class, a few such as BASIX focus on providing microfinance services to the poor. Unlike NGOs, NBFCs, with permission from RBI, are able to mobilize savings and can thus provide a wider array of services. For the better understanding let us see the role of these organizations/ institutions-

Role of Micro Finance Institutions There is no standard definition of a micro finance institution (MFI). An MFI generally provides relatively small loans (in the Indian context, loans of less than Rs. 50,000) to low income individuals. The loans could be for income generation or for consumption. Sources of MFI funds however can be varied, including grants and loans from
12

http://www.wws.princeton.edu/research/PWReports/F04/wws591g_2.pdf , visited on August 12, 2007

21

commercial banks, insurance companies, governments, foundations and others. MFIs can give direct loans to the SHGs or via NGOs also. Like YCO, a Andhra Pradesh based NGO acts as an intermediary between various MFIs and SHGs. Presently many microfinance institutions like have joined the hands with various banking institutions and both are working together efficiently instead of competing with each other. Current position of MFIs in India13     About 60 % of the MFIs are registered as societies About 20 % are Trusts About 65 % of the MFIs follow the operating model of SHGs. Large concentration of these MFIs in South India 600 MFI initiatives have a cumulative outreach of 1.25 crore poor hoseholds

Role of NGOs These days the role of NGOs has changed to mere facilitator to a lender. Many of them are engaged in activities related to community mobilization for their socio-economic development and has initiated savings and credit programmes for their target groups. They are playing a crucial role in the formation and bank linkage of SHGs. They are helping the SHGs to reach the Banks to enjoy the benefit of microfinance, in other words they are acting as intermediaries between banks and SHGs. These days, many NGOs have emerged as successful financial intermediaries between banks and apex institutions on the one hand, and individuals, SHGs, and other groups of borrowers on the other. Thus on the basis of microfinance activities these NGOs can be divided into two partsy y NGOs supporting SHG Federations, and NGOs directly retailing credit borrowers or groups of borrower

Few of the NGOs supporting SHG Federations include MYRADA in Bangalore, SEWA in Ahmedabad, PRADAN in Tamilnadu and Bihar, ADITHI in Patna, SPARC in Mumbai, ASSEFA in Madras etc. While few of the NGOs directly retailing credit to

13

Supra Note 1

22

borrowers are SHARE in Hyderabad, ASA in Trichy, RDO Loyalam Bank in Manipur etc. Not only this in some areas they are acting as intermediaries between banks or MFIs and SHGs i.e. inspite of just linking the banks with SHGs they are performing the task of intermediates which in turn affecting the microfinance activities. Being an NGO they have to perform their other activities along with the role of financial intermediate and the job of microfinance provider is not so easy, since the work flow is intense and timebound and any loading of staff with other work shows up in the form of delinquency or default. Thus many NGOs have decided that they should not be financial intermediaries and so have taken to the role of forming SHGs only and linking those with banks. While a census of NGOs in micro-finance is yet to be carried out, there are perhaps 250300 NGOs, each with 50-100 Self Help Groups (SHG). Few of them, not more than 2030 NGOs have started forming SHG Federations.

Models of Microfinance in India

 Individual Banking model The individual banking model is divided into two sub-models: one where joint liability groups are formed thereby providing social collateral to the lending institution, the other being direct lending to individual clients. BASIX which is one of the major MFI offers both the products, in addition to offering loans to intermediaries for on-lending. This model is feasible only for the larger clients like those who either carry out enterprise on their own, or carry out enterprises that hire the other poor who want to be self employed. The main reason why this model works with larger clients is because in this model total transaction cost is justified as the transaction size is large enough.

The Grameen Model

The Grameen Model is perhaps the most well known, admired and practised model in the world. The model involves the following characteristics14: Homogeneous affinity group of five
14

http://www.iimb.ernet.in/iimb/microfinance/Docs/mr03206b.pdf, visited on August 12, 2007

23

 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 The Grameen model is a more disciplined model. Here the customers are supposed to pass a test before the lending could start, in other words the group members tend to be selected or at least strongly vetted by the bank. Thus, it is very cost intensive as it involves building capacity of the groups. The staff members can conduct only two meetings a day and thus are occupied for only a few hours, usually early morning or late in the evening. The model is also rather meeting intensive which is fine as long as the members have no alternative use for their time but can be a problem as members go up the income ladder. But the Grameen model is very simple in the design of its products and delivery. However, the Grameen model works only under certain assumptions likey As all the loans are only for enterprise promotion, it assumes that all the poor want to be self-employed. y The repayment of loans starts the week after the loan is disbursed the inherent assumption being that the borrowers can service their loan from the ex-ante income. This model cannot be considered as best model for the poors like the SHG model due to its rigidity and its assumptions. One of the necessary conditions for this model to work is discipline and growth of the number of clients. That is the reason why by design this model might not be appropriate for sparsely populated areas like Kutch in Gujarat, or areas where there is a widespread migration of the labour class such as in parts of Rajasthan and some parts of Gujarat.

SHG Model of Microfinance

It was during the early 1990s that the NABARD introduced the NABARD Self Help Group (SHG) bank linkage model to overcome the problems associated with rural

24

outreach through this model, which used participation, social intermediation and financial intermediation for advancement through access to financial services. The essential design elements of the SHG model are as follows15:  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 SHG is a group of individuals consists of 5-20 persons, usually poor and often women who pool their savings into a fund from which they can borrow as and when necessary. Such a group is linked with a bank a rural, co-operative or commercial bank where they maintain a group account. Over time the bank begins to lend to the group as a unit, without collateral, relying on self-monitoring and peer pressure within the group for repayment of these loans. The size of individual loans is determined either by the volume of individual savings or by the groups savings as a whole, and interest rates is set by members for the group loans while the banks followed their own interest rates. In simple words when the bank lends money to the group as a whole it charges its own interest rate but when the members take the loan from the group then the group also charges its own interest rate. Usually all these people are from different families having similar socio-economic background or people from same community or same caste etc. Generally, after forming the group, it is given a name. Each such group has a leader and a deputy leader, elected by the group members. The members decide among themselves the amount of deposit they have to make individually to the group account which may ranges from Rs 10-Rs 100 or even more on monthly basis i.e. it is on the group to decide what will be the amount for saving on the basis of socio-economic conditions of the group members. On the basis of the resolutions adopted and signed by all members of the group, the manager of a local rural or commercial bank opens a savings bank account. The savings are
15

ibid

25

collected by a certain date from individual members and deposited in the bank account and if the bank finds it feasible then it can give loans to these groups the range of which may exceed according to their performance. Generally all the banks and other MFIs follow their own criteria for giving loans and charging interest rates.  Who helps in the formation of SHGs? Non Governmental Organisations (NGOs) Social Workers, health workers, village level workers, etc Informal Associations of local people, development oriented government departments Banks, Bank personnel and other individuals (in their personal capacities) Farmers Clubs under the Vikas Volunteer Vahini ( VVV) Programme of NABARD and other development institutions helped to form these groups.16 The main purpose of forming the SHGs is to provide financial assistance to the poor people who do not have access to formal financial institutions. They act as the forum for the members to provide space and support to each other. It also enables the members to learn to cooperate and work in a group environment. The SHGs provide savings mechanism, which suits the needs of the members and it also provides a cost effective delivery mechanism for small credit to its members.17 It also helps the poor people to develop the habit of working in order to save as they have to return the money back after the term of loan is over and even the co guarantee given by the members also served as a check on default, as the threat of denial of further credit to the entire group for the default of a single member incentivized the group to pay up themselves, or put pressure on the borrower to pay back the dues. This model accounts for 70 percent of microfinance in India and NABARDs bank linkage program has cumulatively reached a total of 9.4 lakh SHGs with about 1.4 crore households. SHGs may borrow directly from an MFI or a bank and are often organized into federations to obtain external funds in bulk. Currently, the predominant financing model for SHGs is one in which the MFI acts as facilitator between banks and SHGs,

16 17

http://www.indianngos.com/ngosection/newcomers/selfhelpgroups.htm, visited on August 12, 2007 ibid

26

while in other cases lending goes to SHGs through the financial intermediation of MFIs. Thus, the lending may go to the SHGs in following waysy y y y Directly to SHGs by the banks, no intermediaries Banks give money to NGOs and then NGOs to SHGs Banks give money to MFIs and then they give to SHGs Banks give to MFIs, then they give to financial intermediaries, then it goes to SHGs y NGOs just acts as a linkage between banks and SHGs (SHG bank linkage programme) With traditionally loss-making rural banks shifting their portfolio away from the rural poor in the post-reform period, SHG-based microfinance, nurtured and aided by NGOs, have become an important alternative to traditional lending in terms of reaching the poor without incurring a fortune in operating and monitoring costs.

 Informal Sector
Informal sector unlike formal and semi-formal includes money lenders and various social networks. In early times and even today also the people prefer to go to friends and family, moneylenders, landlords, and traders in order to get small loans or other needs. They continue to play a significant role in the financial lives of the poor. The studies suggest that the informal sector accounts for 84 percent of poor households credit usage inspite of highest interest rates on loans.18 But due to various MFIs and Banks coming out in this field these informal players are increasingly being driven down by competition from these microfinance providers.

Current trends and challenges-in the field of Microfinance

The microfinance sector in India, largely unfettered by tedious regulation and interference is young and dynamic. The biggest obstacle until recently was little access to commercial markets and the forbidding cost of capital funds. As private banks,

18

http://www.wws.princeton.edu/research/PWReports/F04/wws591g_2.pdf , visited on August 12, 2007

27

spearheaded by ICICI in 2003, entered the microfinance market, this barrier has partly disappeared and microfinance is growing at a break-neck pace on all fronts viz. loan outstanding, client outreach, product and service diversification or geographic spread. Following are the major issues (challenges) which the microfinance organizations need to address in order to achieve growth19 skilled human resources,  flexible product design,  reducing transaction costs,  filing the gap between demand and supply  ensuring adequate management information systems,  standard credit information,  better use of advances in technology,  expanding into underserved areas, and  Dealing with regulatory hurdles and political risks The main default in this industry is that till now there is no Act which can regulate the functioning of microfinance institutions in India. A Microfinance Bill called The Micro Financial Sector (Development and Regulation) Bill, 2007 (henceforth the Microfinance Bill) was introduced in the Lok Sabha on March 20, 2007 but the Act has not come into picture yet. Thus, there is an urgent need for structured long term financing to the sector to fully address these important issues and smoothly transition into a well functioning mature industry. Here are some of the challenges faced by the microfinance organisations:

Limitations of Microfinance industry  It takes an average of thirty-three weeks to get a single loan approved.  Inadequate regulation is one element curbing this sectors healthy expansion.

19

http://ifmr.ac.in/cmf/wp-content/uploads/2006/11/MF-in-India-(WA4.10.06).pdf , visited on August 12, 2007

28

 Savings products have not been offered until now, the microfinance is stressing only on micro-credits. The provision of savings products will enable MFIs to offer a more complete suite of products to low income groups.  There is disproportionate reliance on group lending. The MFIs in particular need to shift from group to individual-based lending.  Higher interest rates due to high transaction cost These are some of the current limitations which the industry needs to look upon.

29

Chapter 3

Role of Bank of Baroda-In the field of microfinance

Our mission statement To be a top ranking National Bank of International Standards committed to augmenting stake holders' value through concern, care and competence.

Bank of Baroda was founded by the great visionary Maharaja Sayajirao Gaekward III, on 20th July 1908. It was established with the name The Bank of Baroda Ltd. which was later changed to Bank of Baroda on 19th July, 1969. The vision of Maharaja Sayajirao Gaekward III was that, a bank of this nature will prove a beneficial agency for the lending, transmission and deposits of money and a powerful factor in the development of art, industries and commerce of the State and adjoining territories.

Thus, about a hundred years ago, the Bank was established to serve Agriculturists, Small traders and entrepreneurs and by the completion of 100th year the bank has done a lot for the development in this field. The Bank assures that they are characterized by diversity, their network of branches spans geographical and cultural boundaries and rural-urban divides and their customers come from a wide spectrum of industries and backgrounds. From humble beginning, this great institution has grown into a multi specialist national Bank with international presence.

During these years, the bank has been in the forefront for social commitment with its innovative approaches and products. The initiative for this was taken in the year 1969 to fulfill the requirements of rural people and for providing them the opportunities for growth that the Bank operated from 433 branches. In this year only the Bank committed itself to the new role of national development and it gave social banking a new dimension, with its Multi Service Agency (MSA) model for urban micro-credit. It was in the year 1976; the Bank opened the first of its 19 Regional Rural Banks complementing its own operations in the rural heartland. Consequent to the merger of 17 (out of 19)

30

RRBs into 4 larger RRBs during 2005-06, the number of RRBs Sponsored by the Bank stood at 6 having 1,700 branches all over by the end of March, 2007. Not only this, the Bank has also taken the initiatives like opening of Gram Vikas Kendra and Baroda Swarojgar Vikas Sansthan for providing appropriate skill upgradation to unemployed youth and women for their gainful employment. A passion for agriculture and rural development and to serve the common man is ingrained in the Banks philosophy and business strategies.

Rural India contributes a major chunk to the economy every year. To give this sector a stronghold on finance and to enable economic independence, today the Bank of Baroda has special offerings that extend credit facilities to small and marginal farmers, agricultural labourers and cottage industry entrepreneurs. The Bank has always been in the forefront in the area of Priority Sector and Agriculture Lending.

With the objective of developing rural economy through various promotional mechanisms like growth in agriculture lending and also extending credit facilities particularly to small and marginal farmers, agricultural labourers and small entrepreneurs, Bank of Baroda, over the years, has reached out to larger part of rural India. The bank has made it explicit that they extend loans not only for the agricultural activities and a host of services for farmers but also for those poor people who requires micro-credits or other microfinance facilities.

Bank in the field of Microfinance With the above aim in mind the Bank has taken a major footstep in the form of providing Microfinance activities in order to offer financial assistance to those poor and needy people who are below poverty level and not in the position to afford large loans. The Bank is not only providing the micro-credit facilities but at the same time micro-saving facilities also thus to promote the savings habit among them. This is an important decision taken by the bank not with the sole idea of commercial benefits but also to help those economically backward rural farmers or artisans or other poor people who could not get financial assistance through any other means, the reason being obvious that giving

31

loan to such poor people is not feasible for the many financial institutions as it incurs a large transactional cost and also no assurance for the return of the money in the case of credit transactions. But the Bank has taken an initiative in this field also like other ones for rural development and adopted the strategies to assure the success in this field also. Microfinance is covered under the priority lending by the bank i.e. among the 40%. Within this 40%, agriculture contributes 18% while 10% amounts for the weaker sections of the society. Thus, the microfinance is included under that 10% lending. As per the data of March, 2007 it shows that the Banks credit-linked Self Help Groups (SHGs) were expanded by 9,382 to reach 55,375, during the year. Credit assistance extended under the SHG-Bank Linkage Programme stood at Rs.66.87 crore as at endMarch 2007. Currently the bank is charging 10.25 % p.a. as rate of interest on microcredit. Here is the SHG model followed by the bank-

SHG-Bank Linkage
Bank Branch N GO
 

S HG

Clie nts

Branches assess credibility and m onitor repaym ent from SH Gs Group form ation by N GOs

The bank follows SHGs Bank Linkage Model provided by the NABARD. It gives microcredit through both direct and indirect means. It provides direct loans in the areas where it has its existence while in other areas it uses NGOs to link these SHGs with them.

Recently, the Bank introduced a slew of initiatives to harness the emerging opportunities for rural lending. The Bank appointed an Advisory Committee on Agri. Lending with Dr V S Vyas, an eminent Agri. Economist as Chairman of the Committee for advising the Bank on New Business Model, New Delivery Model and Innovative Products and Schemes with regard to agri. Lending, weaker sections and other rural development.20

20

http://www.bankofbaroda.com/fin/fin_directorreport.asp, visited on August 13, 2007

32

Chapter 4

Field Study And Questionnaire

In order to fulfill the objectives of the Project Environmental Factors affecting Microfinance in India a field study was conducted in Bank of Baroda, Masuda (Beawar). A questionnaire was prepared to identify various environmental factors affecting microfinance in India, their impact on the functioning of Bank of Baroda and the strategies adopted by the Bank to deal with them. For this I presented the questionnaire to Mr. Charan Kumar, Assistant Manager, Bank of Baroda, Masuda Branch (Beawar) and made a conversation with him. Analysis of the response to the questionnaire has been included in the Analysis of the Field Work. The response to the questionnaire given to him is as follows:

1. Since what time has the Bank of Baroda started the scheme of microfinance? To my first question he replied that the Bank started its scheme of microfinance in the year 1997.

2. Who is your target group? To this question he replied that basically they target to those poor people who are below poverty level which includes poor farmers, artisans or other economically backward rural people. They dont target to an individual poor person but give the micro-credits to the group of these poor people which is called as Self Help Group (SHG). Thus they prefer giving loans or allow savings to a group thus to reduce their transactional cost and for assurance of return.

3. What all activities are covered under microfinance by your bank? [ ] Savings [ ] Loans [ ] Both [ ] Any other Giving answer to this question he replied that their Bank provides both, savings and loans facilities, infact savings precedes loans. They give loans to SHGs only if they have

33

sufficient funds in their savings account after watching a period of six months from the date of savings and not before that.

4. Who all are your major competitors in this field? Mr. Charan Kumar told me that at present Bank dont face any major competition. Being a public sector bank it works for social development and the government also acts as a facilitator in this field. But in coming years Bank may face competition from the private sector banks like ICICI, HDFC etc. and other new entering private and international banks like Citibank and Deutsche Bank etc. These Banks are coming with new plans and strategies to enter in to the market. These days other MFIs are also there which are also providing microfinance products. Some how bank is competing with them also but the impact of them on the Bank is not that prominent.

5. How do they affect your functioning? Mr. Charan showed his concern to this question and replied that they have an adverse impact on the functioning of bank because these banks are coming with new technologies and strategic plans and with the help of NGOs and other intermediaries trying to enter into the roots of the rural market.

6. How do you feel the interference of government and other political groups in your microfinance activities? He responded that the role of government is very limited as there in no law which regulates microfinance. It comes only in the form of regulation of interest rates or the lending to priority sector. The interest rates are set by RBI for all the banks and out of 40% of priority lending they are required to give 10% of their total lending to the weaker sections. Government also has a helping role in the from of providing help in the formation of SHGs and linking them to the Banks but in the Northern States the support of State governments is very limited unlike Southern States.

7. In your opinion how does the society affects your microfinance functioning?

34

He said that the microfinance is such an activity which has larger societal interest than the commercial one. When they provide this facility they always keep in mind that their product should by consumer friendly as they are targeting such a section of society which is economically backward and from rural background. Thus, they perceives that it must be flexible enough to fulfill their needs. He said our main advantage in this field is the trust relationship with the people. We feel that the society has a large impact on our functioning and that is the reason why we have adopted such an strategy thus to provide our products to each and every poor person.

8. What is your mode of giving loans? [ ] Direct loans [ ] through some intermediaries [ ] both

He told me that their bank give loans to through both medium depending upon the availability of distributors and feasibility. He said that the basically intermediaries come in the form of NGOs only and they plays a very important role in the whole process. Currently they are giving loans @10.25%.

9. What procedure do you follow in providing microfinance products to the people? He said that those poor people requiring loans or want to open saving a/c form their groups (SHGs) not more than 5-20 members, and give a common name to the group. The group is headed by a leader and his subordinate. The SHG collects the small sum of money say Rs 10 or Rs 20 from the group members, depending upon their capacity, and deposits it with the bank. The bank sees their activities for next 6 months and if thinks that the SHG is working efficiently then it can give loan to the SHG ten times its savings at the specified rates. Even the group can also charge their internal rates of interest from the members depending upon their individual loans. The Branch manager makes weekly visits to these groups. Thus the whole lending depends upon the performance of the group.

10. What are the major challenges faced by the Bank in this field?

35

Mr. Charan told me that apart from competitors, the major challenge comes while dealing with the microfinance activities as they have to incur a high transactional cost and this affects their cost of lending also. Sometimes they have to charge a high rate of interest in order to cope up with the transaction cost. The other important thing is the return of loans by the poor people. Ensuring the return of funds from them is a big challenge thus the bank always try to take all the reasonable steps to ensure the return. Sometimes the SHGs also discovered as fraud.

11. For the promotion of microfinance what would be the advantageous factors for your bank? (According to you) While replying this question he told me that their bank is working from last hundred years and thus it exists in the heart of the people. People recognize their bank and have faith in them and their functioning that is the most advantageous factor according to him. He said that is the trust relationship between them and their customers which encourages them to work efficiently. Similar is with microfinance also the poor rural people still have trust in them and that is the opportunity for them to utilize.

12. What different strategies are used by the bank to promote the microfinance activities? Replying to this question he told that the Bank has increased their micro-credit limit to 10 times the savings which was earlier only 3 times, they are using SHG model which is more flexible in nature thus to reach each individual. They are providing direct loans to the SHGs and also through NGOs where the reach of NGOs is prominent. Recently they have come up with the opening of Grameen Pramarsh Kendra in order to provide the sufficient information to the rural people as to their credit schemes, savings and other facilities. They are even helping in the formation of SHGs and providing information for their efficient working.

36

Chapter 5

Field Analysis
For the purpose of this project, the questionnaire will be analyzed under 3 broad headings, in light of the objectives set, which are as follows:  To identify various environmental factors affecting microfinance  To analyse the impact of the above environmental factors on Bank of Baroda  To identify the strategies adopted by the banks in maximizing the opportunities and minimizing the threats

Analysis To identify various environmental factors affecting microfinance Questions to be referred 4, 6, 7, 8 and 10 As discussed earlier there are various environmental factors which affect the smooth functioning of microfinance. In other words these factors, be micro or macro have an impact on the functioning of bank thus on its strategy formulation and planning. Following are some of the environmental factors which affect the microfinance in India:-

 Competitors
These days Microfinance industry in India has become one of the most attractive industries in the market and every one is trying to enter in to the market quickly and make the assets. One of the major reasons for this is that till now there is no government regulation in this regard to regulate the functioning of the industry as such so any one can enter in to the market anytime. There is no entry barrier in this market due to which many commercial banks (both national and international) and other MFIs have entered into the market with their products and thus are competing with each other. For eg. ICICI bank, HDFC, Citibank, Deutsche Bank, CFMR (Center for Microfinance) and other microfinance institutions. Microfinance market is a growing market thus many players

37

have already entered into the market and many more are still entering into it. They are coming out with new ideas and plans thus to dominate the market. Like recently the Citibank has joined its hands with SKS Microfinance and has announced a USD 44 Million (Rs.1.8 Billion) groundbreaking financing program involving Citibank India purchasing loans that are originated by SKS. Representing Citibanks increased foray into rural microfinance, the program will deliver income generating loans of between Rs.5000/- to Rs.20,000/- to a population of over 200,000 unbanked customers spread across 7000 villages in 11 States of the country by financial year 2007-08. These days many MFIs are encouraging active private sector involvement in this field thus to raise funds and also this is a way for these investors to fulfill their corporate social responsibility objectives by virtue of an investment and not as an expense. The study shows that some foreign venture funds have entered the microfinance field, hoping to maximize their returns and also benefit from the relatively low default rate. Due to such a competition in the market it will have an impact on the functioning of all the layers as they have to adopt such strategies through which they can compete with their counter parts.

 Marketing Intermediaries
The market of the microfinance involves a large network of many commercial banks, MFIs, NGOs, SHG and other financial intermediaries. Here the target group is those poor people who reside in the rural areas of India and the reach of these banks and other MFIs is limited in that area. This is the reason which gave rise to various intermediaries like NGOs and small microfinance institutions. These are the organizations which are closely linked to these weaker sections of society. Being the welfare agency for the people, they still have faith in them and their functioning. That is the reason why many banks and MFIs like NABARD, Bank of Baroda, ICICI and Andhra Bank etc. have used them as both distributors and intermediates. As a distributor their role is to take the funds from banks on certain rates and distribute it among the SHGs after charging some interest on it while in the other case their job is just to link these SHGs with the banks. here their role is to act as an initiator in the formation of SHGs and link them to the particular group. Similar is the case with MFIs, some of them are giving direct loans to the SHGs while 38

some of them have joined the hands with other commercial banks and acting as an intermediary. The current position of microfinance in India reveals that both international and Indian banks are striking partnerships with MFIs. Here there role is similar to the NGOs i.e. to link these SHGs to a particular bank or taking loans from a particular bank and distributing it among the SHGs on certain rates. Thus the role of intermediaries and distributors is prominent in this industry. Apart from the direct funding if the banks are providing funds vis NGOs or MFIs they have to keep good relations and contacts with these institutions. They are one of the most important environmental factors which can affect the functioning of these microfinance organisations. Any organisation will work efficiently if it has a good distribution channels and its products will reach to the final consumers. Similar is the case with microfinance organisations. Their target market is rural area and if they have to sell their product in the market they have to either go directly and give funds to the people or maintain a good distribution channel specially in those parts where they cannot reach directly they have to take the help of these intermediates. Any microfinance institution or commercial banks will be in the position to work effectively if it continues good relation with them.

 Socio-cultural factors
Social and cultural factors have a large impact on the microfinance industry. Banking with the poor is a challenging task as the nature of demand requires doorstep services, flexibility in timings, timely availability of services, low value and high volume transactions and require simple processes with minimum documentation. It differs for the men and women, for people with different economic backgrounds, age group, education level, their living standard, life style, culture etc. Dealing with the people means taking into account different aspect of their life before offering them any product. It is required that the banks or other MFIs must show flexibility with respect to the unique circumstances of the rural poor and they must show sensitivity to the families plight of poverty. Additionally, the banks must increase their responsiveness to the poor and help build trust and confidence between their institutions and the villagers.

39

Like if talking about food products, same type of food cannot be given to the person form Rajasthan and a person from Tamil Nadu, there has to be some difference according to their needs, requirements, taste, preference and culture. Similar is the case with microfinance also. While dealing with the rural people all of them dont attribute same level of understanding, economic background or their needs and preference thus the banks or other MFIs are required to design their products and lending keeping in mind all the parameters and use flexible plans. Like SKS microfinance is providing training to the women in Southern part of the India as there the women are more active then women in Rajasthan or Gujarat. They not only help them in the formation of SHGs but also provided them with vocational trainings and then provide them with the required funds. They even help them in utilizing the funds efficiently and properly. Thus, majority of the MFIs are located in the Southern States and not in Northern States. Thus, the microfinance industry is largely reactive to the changes in social and cultural environment as these factors affect their functioning to a larger extent.

 Economic factors
Economic factors in the field of microfinance are not that prominent, as there is no such governments economic policy or regulations which affect the functioning of this sector to a large extent. The only affecting factors are the stage of economic development of the country as a whole and the guidelines of NABARD with respect to interest rates. Seeing the economic structure of the country, many microfinance organisations are even providing a very small amount in the form of loans. Like Citibank has agreed to pay the loan starting from Rs 4000 seeing the economic conditions of the poor in India. Another factor is transaction cost incurred by the institutions. As they are ready to provide very small amounts also thus it has lead to the increment in cost incurred in each transaction. This is the main reason why the interest rates are going high which in turn is affecting the business of these organisations. As such there is no regulation to have a cap on the interest rates thus it is facilitating the MFIs to increase their profit margin.

 Government Policies

40

The main drawback of the Indian microfinance industry is that there is no regulatory body or Act to regulate its functioning. This is proving as a boon to the MFIs and other private organisations as there is no one to regulate and guide their functioning. There are no interest caps to regulate the rate of interest and even no regulatory authority. This is facilitating the MFIs to even act arbitrarily and gain profits by lending as per their convenience. Thus, these institutions are booming the market. But a Microfinance Bill, the Micro Financial Sector (Development & Regulations) Bill 2007 has been introduced in the parliament in the month of March, 2007. The Act has not yet come into force but if it will enforce it will have a great impact on the whole industry specially MFIs and other private organisations. In the proposed Bill the provision has been made to designate the NABARD as the regulatory authority and also the provisions are made for registration of the MFIs which has been in existence for at least three years, having net owned funds of at least Rs.0.5 million and satisfactory management. The Bill has also made the provisions to have a cap on the interest rate. All these provisions if comes into existence will have a large impact on the MFIs. It will affect their operation to a large extent.21

To analyse the impact of the above environmental factors on Bank of Baroda Questions to be referred-1, 2, 5, 6, 7, 8 and 10 In earlier objective we have identified some major environmental factors which affect the functioning of microfinance in India. Now in this section we will try to analyse the impact of the above environmental factors on Bank of Baroda-

 Competitors
With the continuous entrance of many players in the microfinance market the competition is increasing day by day. But being a public sector bank it doesnt feel a major threat from them the reason being that the aim of Bank is rural development than mere profit making. It works for their progress and doesnt get attracted by mere commercial purpose. But that doesnt take it out from the competitive market and the bank thinks that
21

http://www.downtoearth.org.in/full6.asp?foldername=20070515&filename=news&sec_id=18&sid=24, visited on August 14, 2007

41

it may face threats in the near future from the private players and other international banks. With the entrance of many players the competition has become huge. These new players are coming in the market with new technology and new strategies thus to penetrate the market. At present bank is providing only micro-credit facilities through SHGs but the new entrants are coming with new products like savings, insurance, and remittance to serve the swelling numbers of urban and rural poor. In most of the areas the bank is providing direct loans while only in some parts where it doesnt have its reach it is using NGOs as intermediaries. The bank feels that their network of rural market is so strong that they prefer giving direct loan to SHGs. Through this they have entered in to the roots of rural market especially in Northern States and in those areas where they dont have their existence they give loans to various NGOs who further give them to SHGs. But the new players are adopting new strategies like ICICI bank which is Indias top Private bank has entered in to the microfinance market few years back and has joined its hands with many NGOs and other organisation thus to have a larger share in the rural market also. Currently it is holding a good network of urban market and now trying to capture rural market also. Citibank has also entered into the market with its attractive plans.While the coming players are using all the possible methods to capture the large share of the rural market, Bank of Baroda feels that it has developed such a strong trust relationship with its customers that it doesnt feel any threat from new entrants but it accepts the presence of various large public sector banks like SBI, PNB etc. It assumes that even if the new players are entering into the market or entered into the market it will take time for them to set themselves into the market but they have the advantage of trust from people and which is an opportunity also which they can utilize efficiently. Moreover their microfinance plans are very flexible with regard to both loans and returns keeping in mind the condition of the people. Inspite of all these factors the bank is required to take the necessary steps in the coming future to provide better products and use new strategies to compete with them and the bank has started taking initiatives in this field.

 Marketing intermediaries

42

Bank of Baroda provides loans to both self-help groups and non governmental organisations for on-lending to SHG members of SHGs, individuals or small groups. Lending to SHGs is included as a part of their lending to priority sectors. Micro credit is provided by them either directly or through any intermediary. Basically they prefer direct lending to SHGs especially in Northern States or North-eastern States where they have their strong existence in the rural market and in other parts like Southern States or some parts of Northern States also they prefer giving loans through NGOs. The method used by them is either they give loans to NGOs, who then give it to SHGs or the role of NGOs is only to link these SHGs to the Bank and the Bank then provides loan to them. Seeing the network of bank in the rural market they dont feel that they face any problem in the absence of these intermediaries as they themselves takes part actively in the formation if SHGs and also linking them with the bank. The procedure followed by the bank clearly indicates that they believe in creating trust relationship with their customers and that is the reason why they prefer giving loans directly to these groups. Not only this they even help the group to distribute the amount further and maintain a record of it. They even provide them with the trainings and other developmental activities thus they feel it as their social responsibility and not only profit earning. Even if they provide the loans via NGOs they have maintained very good relationship with them so that their micro-credit product reaches the people properly. They believe that it is very important to keep an eye on the changing trends of intermediaries also and that is the reason why they are working with various NGOs who have their strong subsistence in the minds of the rural people. While talking about using new intermediaries or new distribution channel as their counter parts are using, they believe that the NGOs are very important channel of distribution as the faith that exists among the people for them is more than any other intermediaries and even in their policy also they have included it as one of their important strategies. But they also wont mind taking other necessary steps if required in the future as they are ready to change with the changing demands of the people.

Social factors

43

Bank of Baroda is working in the field of agriculture and rural development in India from such a long period of time that it is recognized by the rural people as a faithful and trustworthy organisation. Bank has its strong setup in the Northern Part of India and that is the reason why it has designed its microfinance products for them keeping in mind their culture, income group, social status, mobility etc. the micro-credit facility provided by the bank is very flexible in nature as there is no fixed term for return of the credit. The time period for the return differs from purpose to purpose and also keeping in mind the economic condition of the people. Like if a SHGs group takes loan for buying a tractor so that they can use it in their farmers then the bank doesnt count its return period from the day the loan was given but give some time say 2-3 months to generate the income from it and then pay the money back. Same is the case if lending is done for some other purpose. Generally bank doesnt bother about the purpose of the lending but if they are informed the purpose and it feels that the poor wont be in the position to return it back sooner they can divide the time and installments accordingly i.e. the policies of bank are very flexible seeing the social status of the people like in Rajasthan where the condition and status of the people are lower than the rural people of Andhra Pradesh. Even the education level and the living standard of the people there is better than the rural from here. In Rajasthan the SHGs mainly take loans for buying tractors or for farming or for other small businesses. Here the role of women is not as affective as is there in the Southern States, where the women are indulged in many activities like stitching, leather work, machineries and other small scale work and the banks and other MFIs are taking active participation to provide them these activities. But the Bank of Baroda feels that it has the social responsibility to provide growth opportunities to them here also, for this reason only it has opened many training centers and providing the trainings to women. Like in Ajmer (Rajasthan) the Bank has its training centre for the women where they are provided with various activities to learn and after that the loans are given to them for starting their small business in that field. Thus, the bank is not only reacting quickly with the changing structure of the society and growing well but also helping the rural people to develop by providing them with the opportunities.

44

 Economic Factors
Bank doesnt feel a greater impact of the environmental factors on its operation as there is no such economic policy which affects their functioning. Microfinance being the priority sector lending the government even acts as a helping body in this field. They have to lend 40% of the total loans to priority sector and in the case they failed to do so the balance amount is deposited with NABARD. The only thing for the concern is the high transaction cost which affects its lending but till now the bank is not in the position to react to this situation. With regard to the economic background of the rural people of India the bank is providing very small loans with an interest rate of only 10.25% p.a. on whatever sum of money they are taking which looks quite arbitrary.

 Governmental factors
As it is made clear in the first issue itself that till now there is no regulatory body to govern the functioning of microfinance in India but the bill has been introduced for the same. At present there is no impact of the governmental factors as such but if the Bill is approved by the parliament and comes into picture then it will have a favourable impact on it. The Act provides for the registration of the MFIs and their regulations which presently are unregulated. This will provide the bank to form a good image in the rural market as it being the Public sector bank is already working with all the care and cautions. The only point to be considered here is that if the interest rates are fixed as suggested by the Act22 then the bank has to frame new strategies and plans in this regard. In whole the impact of the Act will be more on the MFIs than the bank like Bank of Baroda. Thus this objective of the project has been fulfilled.

To identify the strategies adopted by the banks in maximizing the opportunities and minimizing the threats Questions to be referred 3, 9 and 12
22

Banks lending less than Rs. 2,000 to individuals may not charge more than their prime rate, which is currently around 10.5 to 11 percent, while the rate at which they lend to MFIs or at which MFIs lend to clients is not regulated.

45

The bank has adopted following strategies to work affectively in the field of microfinance  The Bank is currently providing micro-credit 10 times the savings which was earlier only 3 times, They are using SHG model which is more flexible in nature thus to reach each individual inspite of Grameen model which is rigid in nature.   They are providing direct loans to the SHGs and also through NGOs where the reach of NGOs is prominent. Recently they have come up with the opening of Grameen Pramarsh Kendra in order to provide the sufficient information to the rural people as to their credit schemes, savings and other facilities.   They are even helping in the formation of SHGs and even helping them in utilizing the fund properly. Bank has opened many training centers for providing vocational trainings to the rural people and also providing them with the microcredit facilities. Like they have setup a training center in Ajmer which provides vocational training to the women and also provides them with the micro-credit.

The study makes it clear that the bank has adopted a very flexible approach while dealing with the poor rural people. Their process of lending clearly states that their aim is not just giving the loans but to ensure that it is utilized efficiently, thus bank is here acting as a facilitator also. Bank in one of its strategy is using direct lending method in those areas where it has its existence, the reason being that to deal with the people directly and understand their problems. Their aim is to create strong relationship with them. For this purpose only the Bank has recently started the scheme of Grameen Pramarsh Kendra where it provides all the information about its rural products including microfinance, thus the people can directly come and take the help of the bank people to solve their problems. The other method used by them is the field visits. The branch manager and the Accounts person make weakly visits to the rural areas to inform them about their various schemes.

46

In the case of microfinance they even help them to form the SHGs and managing their activities. They provide them all the information time to time thus to help them in any manner they require. They even keep an eye on the functioning of SHGs so that they perform better. They even help them in maintaining their own registers for microfinance. The most important is that they even ensures that the money given to them be distributed equally among all the members as per their share or need. Thus above are some of the strategies used by the bank.

47

Chapter 6

Conclusion
Environmental factors and business operations are closely related. Environmental factors in the form of micro and macro environmental factors surround the business organisations in such a way that any change in it will have a direct impact on its functioning. Thus, the strategy promulgation to achieve the desired organisation objective is not possible unless the organisation has the required competence to assess the impact of either the impeding changes in environment or existing environmental dynamics. Recent changes in environmental settings have far-reaching impact on strategy formulation and strategy implementation of the organisation. The above factors influence the microfinance activities in the same way. The study of Bank of Baroda with respect to its microfinance activities clearly reveals that these environmental factors have a large impact on the planning of the bank. Some of them affects in positive way while some in negative, whatever the impact is the point that is required to be remember is that the bank have to react to these changes if it wants to work efficiently and build its share in the microfinance market. The study shows how the bank has reacted to them and also how it is reacting to the coming changes and also the bank has prepared its strategies in order to minimize the negative impact of these factors and for its promotion. Seeing the overall position the bank is working efficiently in this field.

48

Chapter 7

Recommendations
The study shows that Bank of Baroda is doing well in providing microfinance activities to the poor people thus playing an important role in the rural development. But here are some of the suggestions made in which Bank is need to look upon so that it can modify its strategies in order to have a balance with the changing environmental factors. Following are the suggestions: 

Try to reduce the transaction cost-this is one of the challenges which the bank is currently facing. It includes the total cost incurred on the transaction in relation to microfinance activities. Microfinance included savings or credit of small loans which increase the transaction cost which further forces the bank to raise its interest rate. Thus the bank is required to frame some strategic plans for this purpose.

Improve the distribution channel- At present the bank has good position and reach in Northern India and here it is providing direct loans to SHGs and in some places via NGOs but the Bank has no such existence in Southern States. One of the reasons being that it doesnt have good distribution channel there, thus the Bank should make some plans to make its share in Southern States also. One of the solutions would be to join the hands with major MFIs or NGOs who are currently operating in these parts in order to expand their reach in the rural market there also.

Come out with new products- Currently the bank is providing only single product i.e. Micro-credit. It is required to come out with new products like savings and insurance like other banks are providing. Also the bank can come out with such products which are especially for the women thus to encourage them as currently the bank is providing training to them but that is not sufficient seeing the present demand.

49

Research and development-research should be conducted in order to find out the areas where the demand of microfinance is still unmet. The current figure shows that the demand of microfinance is more than supply as there are still many parts of the India where the poor people doesnt have sufficient financial service and they still borrow from the informal means at a much higher rate. So research can be conducted by the bank to identify the same thus reaching the same.

50

Chapter 8

ANNEXURE
1) Since what time has the Bank of Baroda started the scheme of microfinance?

2) Who is your target group?

3) What all activities are covered under microfinance by your bank? [ ] Savings [ ] Loans [ ] Both [ ] Any other

4) Who all are your major competitors in this field?

5) How do they affect your functioning? 6) How do you feel the interference of government and other political groups in your microfinance activities?

7) In your opinion how does the society affects your microfinance functioning?

8) What is your mode of giving loans? [ ] Direct loans [ ] through some intermediaries [ ] both

9) What procedure do you follow in providing microfinance products to the people?

10) What are the major challenges faced by the Bank in this field?

11) For the promotion of microfinance what would be the advantageous factors for your bank? (According to you)

12) What different strategies are used by the bank to promote the microfinance activities?

51

Chapter 9

LIMITATIONS
The whole project was made with utmost care and the data was also collected and interpreted with utmost reliability and consistency. But the project has a few limitations as follows:

1. The study of this project is limited to a single Microfinance bank thus may not give the true picture of whole microfinance industry. 2. Answers of the questionnaire depend on the knowledge and experience of the concerned person of the Bank of Baroda which may differ.

The findings of this study are based on the information given by the concerned officer of the bank on the assumption that he has given a true picture of his organisation.

52

Chapter 10

BIBLIOGRAPHY
WEBSITES:                  http://www.banknetindia.com/banking/61124.htm http://ifmr.ac.in/cmf/ http://www.wws.princeton.edu/research/PWReports/F04/wws591g_2.pdf http://economictimes.indiatimes.com/articleshow/1648287.cms http://www.gdrc.org/icm/conceptpaper-india.html http://www.adb.org/Microfinance/default.asp http://www.uncdf.org/english/microfinance/pubs/newsletter/pages/2005_06/news _india.php http://www.wfp.org.in/ifadindia/IFAD_in_India/IFAD_in_India.htm http://economictimes.indiatimes.com/articleshow/1648287.cms http://www.basixindia.com/micro_finance_in_inda.asp http://www.responsability.ch/de/documents/GrameenFoundationUSAMicrofinanc eImpact1205EN.pdf http://www.nextbillion.net/newsroom/2006/04/17/icici-bank-expands-retailmicrofinance-in-india http://www.bankofbaroda.com/fin/fin_directorreport.asp http://www.downtoearth.org.in/full6.asp?foldername=20070515&filename=news &sec_id=18&sid=24 http://www.indianngos.com/ngosection/newcomers/selfhelpgroups.htm http://www.iimb.ernet.in/iimb/microfinance/Docs/mr03206b.pdf http://marketingteacher.com/Lessons/lesson_PEST.htm

BOOKS:  Wheelan Thomas L & Hunger David J, Staregic Management &Business Policy: Entering 21st Century Global Society, (Addison-Wesley, 6th edition, 1998)

53

  

Kzmi Azhar, Business Policy, (Tata McGraw Hill, 2000) Prasad LM, Business Policy: Strategic Management, (Sultan Chand & Sons, 2001) Mamoria & Mamoria, Business Planning & Policy, (Himalaya Publishing House, 1st edition, 1987)

Cherunilam Francis, Strategic Management: A Book on Business Policy/ Corporate Planning, (Himalaya publishing House, 5th edition, 2005)

54