CONTEMPORARY ISSUE ON SEMINAR

Micro Finance- Financial Product for Bottom of Pyramid Market

Session: 201113

Presented at

APEX INSTITUTE OF MANAGENENT & SCIENCE

Submitted To:Mrs. NEHA SHARMA

Submitted By:KAMAL SINGH MBA 2nd Sem.

ACKNOWLEDGEMENT

The beatitude, bliss and euphoria that accompany successful completion of any task would not be complete without the expression of appreciation of simple virtues to the people who made it possible. So, with reverence, veneration honor I acknowledge all those whose guidance and encouragement has made successful in winding up this.

It is my privilege to express a deep sense of gratitude and thanks to MrS. Mahima Rai and Mrs. Neha sharma for providing us various information directly related to project.

I extend my gratitude and thankfulness to Apex Institute of Management & Science. Last but not the least Im also grateful to my parents for providing me the continuous support to motivate me to successfully complete my report.

Date:03-05-2012 Place: Jaipur

Submitted By: (KAMAL SINGH)

(2)

PREFACE
The underlying aim of the seminar on contemporary issue as an integral part of MBA program is to provide the students with practical aspects of the organization working environment. Such type of presentation helps a student to visualize and realize about the congruencies between the theoretical learning in the premises of college and actual followed by the organization. It gives the knowledge of application aspect of the theories learnt in the classroom. The seminar project in Micro Finance- Financial Product for Bottom of

Pyramid Market is a complete experience in itself, which provide me with the

understanding. This has become as inspirable of my knowledge of management being learned in MBA program.

(3)

M I C R O- F I N A N C E Bottom of Pyramid Market

(4)

CONTENTS
s. no
1.

Topic
Introduction Elements of Microfinance

Page no
06 07 09 11 11 12 13 15 15 15 16 17 19 20 21 26 34 35

2. 3.

History of Microfinance in India Need for micro finance Who are client for micro finance ? How it helps the poor people ?

Arent poor too poor people save?

4.

Types of Organizations and Composition of the Sector Formal sector Semi formal sector Informal sector What are MFIs and SHGs?

5. 6. 7. 8. 9. 10.

Why do MFIs charge high interest rates to poor people? Can Micro finance be profitable Impact of microfinance over poverty Current Scenario of Micro - financing in India Objective of the project Bibliography

(5)

INTRODUCTION

Micro financing is the provision of financial services to poor and low income households without access to formal financial institutions. As defined by the Asian Development Bank (ADB), it is - A provision of a broad range of financial services such as deposits, loans, payment services, money transfers, and insurance to poor and low-income households and their micro-enterprises. To most, microfinance means providing very poor families with very small loans to help them engage in productive activities or grow their very small businesses. Like us, many poor people need and use financial services all the time. They save and borrow, invest in home repairs and improvements and meet occasional and domestic expenses such as food and school fees. However, there are some 500 million low income entrepreneurs in the world and about 5% have access to financial services. Indeed, the financial services available to the poor often have serious limitations in terms of cost, risk and convenience. As a result, over time, microfinance has come to include a broader range of services (credit, savings, insurance, etc.) as the industry has come to realize that the poor and the very poor that lack access to traditional formal financial institutions require a variety of financial products.

(6)

 Elements of Microfinance

Is the extension of very small loans (microloans) to the unemployed, to poor entrepreneurs and to others living in poverty who are not considered bankable? These individuals lack collateral, steady employment and a verifiable Microfinance refers to loans, savings, insurance, transfer services and other financial products targeted at lowincome clients. Micro credit: Refers to a small loan to a client made by a bank or other institution. Micro credit can be offered, often without guarantee, to an individual or through group lending. Microcredit: Credit history and therefore cannot meet even the most minimal qualifications to gain access to traditional credit. Microcredit is a part of microfinance, which is the provision of a wider range of financial services to the very poor. Microcredit is a financial innovation which originated in Bangladesh where it has successfully enabled extremely impoverished people to engage in self-employment projects that allow them to generate an income and, in many cases, begin to build wealth and exit poverty. Due to the success of microcredit, many in the traditional banking industry have begun to realize that these microcredit borrowers should more correctly be categorized as pre-bankable; thus, microcredit is increasingly gaining credibility in the mainstream finance industry and many traditional large finance organizations are contemplating microcredit projects as a source of future growth. Although almost everyone in larger development organizations discounted the likelihood of success of microcredit when it was begun in its modern incarnation as pilot projects with ACCION and Muhammad Yunus in the mid-1970s, the United Nations declared 2005 the International Year of Microcredit.

(7)

Micro savings : Microfinance is deposit services that allow one to store small amounts of money for future use. Often without minimum balance requirements, savings accounts allow households to save in order to meet unexpected expenses and plan for future investments. Remittances: Remittances are transfers of funds from people in one place to people in another, usually across borders to family and friends. Compared with other sources of capital that can fluctuate depending on the political or economic climate, remittances are relatively steady source of funds. Micro-insurance : Micro-insurance is a term increasingly used to refer to insurance characterized by low premium and low caps or low coverage limits, sold as part of atypical risk-pooling and marketing arrangements, and designed to service low-income peoples. Micro-insurance is insurance with low premiums and low caps / coverage. In this definition, micro refers to the small financial transaction that each insurance policy generates. The Micro-insurance Regulations, issued in 2005 by the Indian Insurance Regulatory and Development Authority (IRDA).

(8)

HISTORY OF MICROFINANCE IN INDIA

In India, institutional credit agencies (banks) made an entry in rural areas initially to provide an alternative to the rural money lenders who provided credit support, but not without exploiting the rural poor. There are 3 main factors that count to the bringing up of Microfinance as a Policy in India 1. The first of these pivotal events was Indira Gandhis bank nationalization drive launched in 1969 which required commercial banks to open rural branches resulting[3] in a 15.2% increase in rural bank branches in India between 1973 and 1985. Today, India has over 32,000 rural branches of commercial banks and regional rural banks, 14,000 cooperative bank branches. 2. The second national policy that has had a significant impact on the evolution of Indias banking and financial system is the Integrated Rural Development Program (IRDP) introduced in 1978 and designed to be a direct instrument for attacking Indias rural poverty. This program is interesting to this study because it was a large program whose main thrust was to alleviate poverty through the provision of loans and it was considered a failure.

3. The last major event which impacted the financial and banking system in India was the liberalization of Indias financial system in the 1990s characterized by a series of structural adjustments and financial policy reforms initiated by the Reserve Bank of India (RBI).

The systems and procedures of banking institutions was emphasizing on complicated qualifying requirements, tangible collateral, margin, etc., that resulted in a large section of the rural poor shying away from the formal banking sector. The search for an alternative mechanism for catering to the financial service needs of the poor was thus becoming imperative.

(9)

Microfinance has b been in practice for ages (though informally). Legal framework for establishing the co-operative movement set up in 1904. Reserve Bank of India Act, 1934 provided for the establishment of the Agricultural Credit Department. Nationalization of banks in 1969 Regional Rural Banks created in 1975. NABARD established as an apex agency for rural finance in 1982. Passing of Mutually Aided Co-op. Act in AP in 1995.

( 10 )

NEED FOR MICRO FINANCING

Since independence, various governments in India have experimented with a large number of grant and subsidy based poverty alleviation programs. These programs were based on grant/subsidy and the credit linkage was through commercial banks only. As a result, these programs became unsustainable, perpetuated a dependant status on the beneficiaries and depended ultimately on the govt. employees for delivery. This not only led to misuse of both credit and subsidy but banks never looked at it as a profitable and commercial activity as well. Hence was adopted the concept of micro-credit in India. Success stories in neighboring countries, like Grameen Bank in Bangladesh, Bank Rakiat in Indonesia, Commercial & Industrial Bank in Philippines etc, gave further boost to the concept in India in the 1980s. India thus adopted the similar model of extending credit to the poorest sector and took a no. of steps to promote micro-financing in the country.

Who are the clients of microfinance?

The typical microfinance clients are low-income persons that do not have access to formal financial institutions. Microfinance clients are typically self-employed, often household-based entrepreneurs. In rural areas, they are usually small farmers and others who are engaged in small income -generating activities such as food processing and petty trade. In urban areas, microfinance activities are more diverse and include shopkeepers, service providers, artisans, street vendors, etc. Microfinance clients are poor and vulnerable non-poor who have a relatively stable source of income.

Microfinance generally targets poor women because they have proven to be reliable credit risks and when they have the financial means, they invest that money back into their families, resulting in better health and education, and stronger local economies. By providing access to financial services - loans and responsibility for repayment,

( 11 )

maintaining savings accounts, providing insurance - microfinance programs send a strong message to households and communities. Studies have shown that women become more assertive and confident, have increased mobility, are more visible in their communities and play stronger roles in decision making. For instance, micro credit might have a far more limited market scope than, say, a more diversified range of financial services which includes various types of savings products, payment and remittance services, and various insurance products. For example, many very poor farmers may not really wish to borrow, but rather, would like a safer place to save the proceeds from their harvest as these are consumed over several months by the requirements of daily living. For example, many very poor farmers may not really wish to borrow, but rather, would like a safer place to save the proceeds from their harvest as these are consumed over several months by the requirements of daily living.

How does microfinance help the poor?

Microfinance brings the power of credit to the grassroots by way of loans to the poor, without requirement of collateral or previous credit record. Experience shows that microfinance can help the poor to increase income, build viable businesses, and reduce their vulnerability to external shocks. Poverty is multi-dimensional. By providing access to financial services, microfinance plays an important role in the fight against the many aspects of poverty. For instance, income generation from a business helps not only the business activity expand but also contributes to household income and its attendant benefits on food security, children's education, etc. Moreover, for women, who, in many contexts, are secluded from public space, transacting with formal institutions can also build confidence and empowerment.

( 12 )

Recent research has revealed the extent to which individuals around the poverty line are vulnerable to shocks such as illness of a wage earner, weather, theft, or other such events. These shocks produce a huge claim on the limited financial resources of the family unit, and, absent effective financial services, can drive a family so much deeper into poverty that it can take years to recover.

Aren't the poor too poor to save

The poor already save in ways that we may not consider as "normal" savings--investing in assets, for example, that can be easily exchanged to cash in the future (gold jewelry, domestic animals, building materials, etc.). After all, they face the same series of sudden demands for cash we all face: illness, school fees, need to expand the dwelling, burial, weddings.

These informal ways that people save are not without their problems. It is hard to cut off one leg of a goat that represents a family's savings mechanism when the sudden need for a small amount of cash arises. Or, if a poor woman has loaned her "saved" funds to a family member in order to keep them safe from theft (since the alternative would be to keep the funds stored under her mattress), these may not be readily available when the woman needs them. The poor need savings that are both safe and liquid. They care less about the interest rates that they can earn on the savings, since they are not used to saving in financial instruments and they place such a high premium on having savings readily available to meet emergency needs and accumulate assets.

These savings services must be adapted to meet the Poors particular demand and their cash flow been in practice for ages (though informally). Legal framework for establishing the co-operative movement set up in 1904. Reserve Bank of India Act, 1934 provided for the establishment of the Agricultural Credit Department. Nationalization of banks in 1969 Regional Rural Banks created in 1975. ( 13 )

NABARD established as an apex agency for rural finance in 1982. Passing of Mutually Aided Co-op. Act in AP in 1995.

When is microfinance an appropriate tool?

It is hard to imagine that there would be any family in the world today for which some type of formal financial service couldn't be designed and made useful. But the fact of the matter is that in most people's mind, "microfinance" still refers to micro credit. Micro credit is only useful in certain situations, and with certain types of clients. As we are finding out, a great number of poor, and especially extremely poor, clients exclude themselves from micro credit as it is currently designed. Extremely poor people who do not have any stable incomesuch as the very destitute and the homelessshould not be microfinance clients, as they will only be pushed further into debt and poverty by loans that they cannot repay. As currently designed, micro credit requires sustained, regular, and often significant payments from poor families. Micro credit serves best those who have identified an economic opportunity and who are in a position to capitalize on that opportunity if they are provided with a small amount of ready cash. Thus, those poor who work in stable or growing economies, who have demonstrated an ability to undertake the proposed activities in an entrepreneurial manner, and who have demonstrated a commitment to repay their debts (instead of feeling that the credit represents some form of social re-vindication), are the best candidates for micro credit. The universe of potential clients expands exponentially however, once we take into account the broader concept of microfinance.

( 14 )

TYPES OF ORGANIZATIONS AND COMPOSITION OF THE SECTOR

Microfinance providers in India can be classified under three broad categories: formal, semiformal, and informal.

Formal Sector
The formal sector comprises of the banks such as NABARD, SIDBI and other regional rural banks (RRBs). They primarily provide credit for assistance in agriculture and micro-enterprise development and primarily target the poor. Their deposits at around Rs. 350 billion and of that, around Rs. 250 billion has been given as advances. They charge an interest of 12-13.5% but if we include the transaction costs (number of visits to banks, compulsory savings and costs incurred for payments to animators/staff/local leaders etc) they come out to be as high as 21-24%.

Semi - formal Sector

The majority of institutional microfinance providers in India are semi-formal organizations broadly referred to as MFIs and SGHs. Registered under a variety of legal acts; these organizations greatly differ in philosophy, size, and capacity. There are over 5000 non-government organizations (NGOs) registered as societies, public trusts, or nonprofit companies.

( 15 )

Informal Sector
In addition to friends and family, moneylenders, landlords, and traders constitute the informal sector. While estimates of their importance vary significantly, it is undeniable that they continue to play a significant role in the financial lives of the poor.

What are MFIs and SGHs?

Quite simply, a microfinance institution is an organization that offers financial services to low income populations. Almost all of these offer micro-credit and only take back small amounts of savings from their own borrowers, not from the general public. Within the microfinance industry, the term microfinance institution has come to refer to a wide range of organizations dedicated to providing these services: NGOs, credit unions, cooperatives, private commercial banks and non-bank financial institutions (some that have transformed from NGOs into regulated institutions) and parts of state-owned banks, for example. The image most of us have when we refer to MFIs is of a financial NGO, an NGO that is fully and virtually exclusively dedicated to offering financial services; in most cases micro credit NGOs are not allowed to capture savings deposits from the general public. These groups of a few hundred NGOs have led the development of microcredit, and subsequently microfinance, the world over.

A great many NGOs that offer microcredit, perhaps even a majority, do many other nonfinancial development activities and would bristle at the suggestion that they are essentially financial institutions. Yet, from an industry perspective, since they are engaged in supplying financial services to the poor, we call them MFIs. The same sort of situation exists with a small number of commercial banks that offer microfinance services. For our purposes, we refer to them as MFIs, even though only a small portion of their assets may actually be tied up in financial services for the poor. In both cases, when people in the industry refer to MFIs, they are referring only to that part of the institution that offers microfinance.

( 16 )

There are other institutions, however, that consider themselves to be in the business of microfinance and that will certainly play a role in a reshaped and deepened financial sector. These are community-based financial intermediaries. Some are membership based such as credit unions and cooperative housing societies. Others are owned and managed by local entrepreneurs or municipalities. These institutions tend to have a broader client base than the financial NGOs and already consider them to be part of the formal financial sector. It varies from country to country, but many poor people do have some access to these types of institutions, although they tend not to reach down market as far as the financial NGOs.

SELF HELP GROUPS (SHG) is group of rural poor who have volunteered to
organize themselves into a group for eradication of poverty of the members. They agree to save regularly and convert their savings into a Common Fund known as the Group corpus. The members of the group agree to use this common fund and such other funds that they may receive as a group through a common management. The group formation will keep in view the following broad guidelines: Generally a self-help group may consist of 10 to 20 persons. However, in difficult areas like deserts, hills and areas with scattered and sparse population and in case of minor irrigation and disabled persons, this number may be from 5-20. Generally all members of the group should belong to families below the poverty line. However, if necessary, a maximum of 20% and in exceptional cases , where essentially required, up to a maximum of 30% of the members in a group may be taken from families marginally above the poverty line living contiguously with BPL families and if they are acceptable to the BPL members of the group. This will help the families of occupational groups like agricultural laborers, marginal farmers and artisans marginally above the poverty line, or who may have been excluded from the BPL list to become members of the Self Help Group. However, the APL members will not be eligible for the subsidy under the

scheme. The group shall not consist of more than one member from the same family. A person should not be a member of more than one group. The BPL families must actively participate in the management and decision making, which should not

( 17 )

ordinarily be entirely in the hands of APL families. Further, APL members of the Self Help Group Shall not become office bearers (Group Leader, Assistant Group Leader or Treasurer) of the Group. The group should devise a code of conduct (Group management norms) to bind itself. This should be in the form of regular meetings (weekly or fortnightly), functioning in a democratic manner, allowing free exchange of views, participation by the members in the decision making process. The group should be able to draw up an agenda for each meeting and take up discussions as per the agenda. The members should build their corpus through regular savings. The group should be able to collect the minimum voluntary saving amount from all the members regularly in the group meetings. The savings so collected will be the group corpus fund. The group corpus fund should be used to advance loans to the members. The group should develop financial management norms covering the loan sanction procedure, repayment schedule and interest rates. The members in the group meetings should take all the loaning decisions through a participatory decision making process. The group should maintain simple basic records such as Minutes book, Attendance register, Loan ledger, General ledger, Cash book, Bank passbook and individual passbooks. The sample Performa for maintenance of above records by the group is in the Annexure II for guidance. These could be used with necessary changes/ modifications wherever required.

( 18 )

WHY DO MFIS CHARGE SUCH HIGH INTEREST RATES TO POOR PEOPLE?

Providing financial services to poor people is quite expensive, especially in relation to the size of the transactions involved. This is one of the most important reasons why banks don't make small loans. A $100 dollar loan, for example, requires the same personnel and resources as a $2,000 one thus increasing per unit transaction costs. Loan officers must visit the client's home or place of work, evaluate creditworthiness on the basis of interviews with the client's family and references, and in many cases, follow through with visits to reinforce the repayment culture. It can easily cost US$25 to make a micro loan. While that might not seem unreasonable in absolute terms, it might represent 25% of the value of the loan amount, and force the institution to charge a high rate of interest to cover its cost of loan administration.

Evidence shows that clients willingly pay the higher interest rates necessary to assure long term access to credit. They recognize that their alternativeseven higher interest rates in the informal finance sector (moneylenders, etc.) or simply no access to credit are much less attractive for them. Interest rates in the informal sector can be as high as 20 percent per day among some urban market vendors.

Moreover, the interest rate is only a small part of their overall transaction cost of credit, and if microfinance institutions offer credit on a more accessible basis, substantial costs in terms of time, travel, paperwork, etc. can be reduced, thus benefiting the poor.

( 19 )

CAN MICROFINANCE BE PROFITABLE?

Yes it can. Data from the Micro Banking Bulletin reports that 63 of the world's top MFIs had an average rate of return, after adjusting for inflation and after taking out subsidies programs might have received, of about 2.5% of total assets. This compares favorably with returns in the commercial banking sector and gives credence to the hope of many that microfinance can be sufficiently attractive to mainstream into the retail banking sector. Many feel that once microfinance becomes mainstreamed, massive growth in the numbers of clients can be achieved.

Others worry that an excessive concern about profit in microfinance will lead MFIs upmarket, to serve better off clients who can absorb larger loan amounts. This is the crowding out effect. This may happen; after all, there are a great number of very poor, poor, and vulnerable non-poor who are not reached by the banking sector.

It is interesting to note that while the programs that reach out to the poorest clients perform less well as a group than those who reach out to a somewhat better-off client segment, their performance is improving rapidly and at the same pace as the programs serving a broad-based client group did some years ago. More and more MFI managers have c o m e to understand that sustainability is a precursor to reaching exponentially greater numbers of clients. Given this, managers of leading MFIs are seeking ways to dramatically increase operational efficiency. In short, we have every reason to expect that programs that reach out to the very poorest micro clients can be sustainable once they have matured, and if they commit to that path. The evidence supports this position.

( 20 )

IMPACT OF MICROFINANCE OVER POVERTY

There is increasing emphasis on the significance of the wider impacts of microfinance those beyond the immediate financial and social benefits for the individual. Yet, the wider impacts of microfinance are notoriously difficult to identify or assess. Often, MFOs confident claims to be having a wider impact and to be able to assess these impacts are based on weak, circumstantial evidence. Here we consider ways in which building evidence of wider impacts may be approached, which reflects processes of microfinance more faithfully, including the intended and unintended consequences of microfinance operations.

Wider impacts may occur in the following ways: through the labor market: poor people taken on by expanding micro-finance borrowers may as a consequence be taken upward across the poverty line; through the capital market: the intervention of a micro-finance institution may make existing lending institutions in the market, such as private moneylenders, lower their interest rates to compete, with beneficial effects on borrowers from institutions other than the one being studied; through the markets for goods consumed by poor people: if micro-finance induces an increase in supply, and hence a cheapening in the price, of goods consumed by poor people, households other than those of borrowers will benefit; through production linkages: an expansion of livelihoods (agricultural or otherwise) induced by micro-finance will support the formation of rural industries and services, and help to bring about income changes among non-borrower households;

( 21 )

CURRENT SCENARIO OF MICRO - FINANCING IN INDIA

Indian Economy and Micro Microfinance
Home to about 1.9 billion people as of 2008, India constitutes approximately one sixth of the worlds total population. It is the worlds largest democracy and a key emerging market alongside China and Brazil. The picture of growing GDP and rising foreign investments shows an environment where wealth is increasing for the nation.

Due to its large size and population of around 1000 million, India's GDP ranks among the top 15 economies of the world. However, around 300 million people or about 60 million households are living below the poverty line. It is further estimated that of these households, only about 20 percent have access to credit from the formal sector. Additionally, the segment of the rural population above the poverty line but not rich enough to be of interest to the formal financial institutions also does not have good access to the formal financial intermediary services, including savings services.

A group of micro-finance practitioners estimated the annualized credit usage of all poor families (rural and urban) at over Rs 45,000 crores, of which some 80 percent is met by informal sources. This figure has been extrapolated using the numbers of rural and urban poor households and their average annual credit usage (Rs 6000 and Rs 9000 pa respectively) assessed through various micro studies. Estimated that 350 million people live Below Poverty Line This translates to approximately 75 million households. Annual credit demand by the poor in the country is estimated to be about Rs. 60,000 corers. Cumulative disbursements under all microfinance programs is only about Rs. 5000 corers.(Mar. 04)

( 22 )

Total outstanding of all microfinance initiatives in India estimated to be Rs. 1600 corers. (March 04) Only about 5 % of rural poor have access to microfinance. Though a cumulative of about 20 million families have accessed microfinance to the extent of Rs. 5000 corers, the total outstanding is estimated to be only about Rs. 1600 corers. The active borrowers are estimated to have a per capita outstanding of only Rs. 2500.

With 75 million poor households potentially requiring financial services, the microfinance market in India is among the largest in the world. Estimates of household credit demand vary from a minimum of Rs. 2,000 to Rs. 6,000 in rural areas and Rs. 9,000 in urban settings. Given that 80 percent of poor households are located in rural areas, total credit demand ranges between Rs. 255 billion and Rs. 500 billion. However, only Rs.18 billion of this amount has been generated so far. The reason for this is that major portion for rural crediting has been from the informal sector and this is at a very high interest rate, thus reducing the volumes of such credits, and by far has been for investment purposes (13%) and more for family emergencies (29%) and social expenditures (19%). There are a number of factors why rural crediting by the formal sector has not taken pace so far. High fiscal deficits have meant that Government is appropriating a large share of financial savings for itself. Persisting interest rate restrictions reduce the attractiveness of lending, particularly to small, rural clients. On the other hand, informal credits have been attractive although high interest rates due to: Flexible repayment options Convenience and frequency with which such loans can be accessed

( 23 )

CREDIT SOURCE OF POOR PEOPLE IN INDIA

credit source of poor people

2 29 32 Moneylender familymember individual to bank SHGs

37

The dependency of poor for credit on their family is 39% while only 2% out of total creditor is taken through SHGs. Moneylenders percentage in total credit is 37% which show the dependency on moneylender. Merely 2% share in total credit show the need to concern about it.

( 24 )

Recent trends in micro finance

The scenario of microfinance sector facing drastically changes recently. The initial trademark of CSR (Corporate Social Responsibility) is now changes to profit earning sector. Many big corporate giant are mulling towards the microfinance sector.

1. Retailers in micro finance

Now it is clear that microfinance is a large untapped market. Todays retail industry are directly dependent on rural production, they consider microfinance as ally of their retail industry

Under these consideration Reliance Capital, the financial services arm of Anil Dhirubhai Ambani Group, has funded two microfinance institutions in Gujarat - MAS Financial Services and Vardan Trust. They havent disclosed the investments, but this is probably the first known foray for Reliance Capital in this area.

Reliance Capital plans to fund microfinance institutions initially in Gujarat and Maharashtra, before spreading out on a national scale.

MAS Financial Services, with 61 branches across Gujarat, caters to over 5oo,ooo customers in the urban, semi-urban and rural markets. Vardan Trust offers microfinance to farmers, small shopkeepers, artisans, small enterprise workers and individuals engaged in animal husbandry. Indian microfinance space is getting hotter with MFIs like SKS.

( 25 )

2. Money transfer
A new concept comes in micro finance is Dhan Sthanantran, through these scheme poor people can transfer their money to their relative through their SHGs account, which is living far from them. For example if a person living in Gujarat interested to send money to their relative living at Rajasthan, he can deposit the money in Gujarat to the name of the SHG in Rajasthan and his relative can withdraw money from Rajasthan

3. Banks in microfinance
The rural banking market is still untapped because of tiny saving by people, lack of infrastructure etc. now banks are penetrating rural market through microfinance.

ICICI Bank has taken a stake of under 20 per cent in Financial Information Network and Operations Private Ltd (FINO), which was launched on 13th July 2007. FINO would provide technological solutions as well as services to finance providers to reach the underserved in the country. ICICI Bank is the lead facilitator in FINO. ICICI Bank expects to target 200 micro-finance institutions (MFIs) by March 2010. YES Bank, also launching its microfinance division YES Microfinance India today, has signed a MoU for technical collaboration with Boston-based Accion International, a microfinance institution. YES Bank has set apart Rs 10 corer for the next two years for the microfinance division. The division will offer credit, savings, insurance and remittances in phases to the urban and rural poor. International bank ABN AMRO also targeting to reaches 10 lac household by 2010 with maintaining a nil nonperforming assets portfolio.

( 26 )

4. Individual investor
Now microfinance is not merely social services, individual investor can earn money through investing money in micro finance sector. Many organizations like Calvert Foundation, IIRM offering the investment in microfinance sector.

Terms of investment

Interest rate- 2.0 per year Maturity- 12 month Security issuer- Calvert Foundation, IIRM etc.

This security is not a mutual fund not FDIC or SIPC and has certain risk.

5. Biometric ATM backed microfinance initiative

For long, banks have been lenders to their rural customers. Now they have announced some rather unique ways in micro financing to get them to deposit savings, Citibank has launched the Pragati saving account for its micro - finance customers. This account is similar to a no frills account balance. The bank will provide services through a biometric ATM that will also speak to customers in Hindi, Marathi, Tamil and Telugu. "As the customers start saving, there will be ability to sweep this money into deposits so that they earn better interest than the conventional saving account. As we start getting imprints of customers in terms of deposit behavior we may be able to set them overdraft and does not require any minimum

( 27 )

facilities as opposed to convention loan," says PS Jay Kumar, Business Manager - Global Consumer Group, Citigroup India.

Incidentally, ICICI Bank also has a micro saving product in Orissa for farmers. Other banks like Andhra Bank and Bank of India also offer biometric ATM facility to their micro finance customers. In fact banks see this untapped segment not as philanthropy but as sound business, at a time when cheap deposits are hard to come by.

What is the governments role in supporting microfinance?

Governments have a complicated role when it comes to microfinance. Until recently, governments generally felt that it was their responsibility to generate development finance', including credit programs for the disadvantaged. Twenty years of insightful critique of rural credit programs revealed that governments do a very bad job of lending to the poor. Short term political gain is just too tempting for politically controlled lending organizations; they disburse too quickly (and thoughtlessly) and they collect too infrequently (unwillingness to be tough on defaulters). In urban areas, governments never really got into the act, and subsidized micro enterprise credit is still relatively rare when compare to its rural counterpart.

Now that microfinance has become quite popular, governments are tempted to use savings banks, development banks, postal savings banks, and agricultural banks to move microcredit. This is not generally a good idea, unless the government has a clear acceptance of the need to avoid the pitfalls of the past and a clear means to do so. Many governments have set up apex facilities that channel funds from multilateral agencies to MFIs. Apex facilities can be quite complicated and there are few successful examples in microfinance. Successful apex organizations in microfinance tend to be built on the backs of successful MFIs, not the other way around. Finally, governments can also get involved

( 28 )

in microfinance by concerning themselves with the regulatory framework that impinges on the ability of a wide range of financial actors to offer financial services to the very poor. This topic is treated below.

Microfinance and Capital Requirement

The demand situation in the microfinance market can be gauged from the Table:

At a Glance: Scale of Indian Microfinance Population of India (estimate - June 10) Microfinance Services - potential client outreach Microfinance Services - current client outreach (Mar. 11) Annual growth in Microfinance Services Microfinance loan portfolio (Mar. 10) financing needs - 4 year estimate (Sept. 10)
Table 2: Demand for micro-lending in Indian Source: Microfinance India (MFI) 2011

2,000 million 700 million 80million 70% USD 30 billion USD 500 billion

Given these figures there is need for broad basing the reach of financial services to the people falling in the low income category, help them invest in and benefit from their skill sets and tide over the impact of adverse shocks in the process. The intentions might sound quite philanthropic however microfinance is turning out to be a profitable market for commercial banks which is quite evident from their presence in this area. The new commercial banks do not have the infrastructure to ensure the last mile connectivity and have to rely heavily of microfinance institutions (MFI).

( 29 )

Yearly progress in SHG-Bank linkage(NABARD)

Year

No.

of

SHGs Annual

loan Cumulative loan amount 4685 7213 13936 23661 36219

credit linked March08 March09 March10 March11 March12 22742 33846 59906 98219 137837

amount in lac 2184 2587 6723 9725 12558

Need of financial services:

It has been well researched and documented that poor have temporary surpluses and they are in need of services to keep their savings safe. A poor family may get the payment for their labour or they sell their small assets or crops etc.

Need of financial services:

It has been well researched and documented that poor have temporary surpluses and they are in need of services to keep their saving safe. A poor family gets the payment for their labor or they sell their small assets or crops etc. the money received from such transaction would have small temporary surplus, which they would use over next few days/ months. If they do not have access to a place where they can save that safety, it might result in to expenses on less critical items or even on things like drinking etc. it has been noted that due to lack of access to banks or SHGs they keep the money in cash and it does not earn any interest.

( 30 )

Category Very Poor

Description Landless, SC/ST, Single women Migrants HH

Credit For

Loan Size

Source of credit Money lenders,

Food, cloth Illness, Consumption HH consumption loans up to Rs 2000/-

Poor

Small and Marginal Farmers, Traditional trades

Food,

health, Consumption

Money lenders,

marriage and other and productive SHGs, friends, social obligations, loans up to Rs 10000/relatives

services equipments

Average

Medium shopkeepers

farmers, Working

capital, Productive

SHG, Banks,

PACS

agric inputs, and loans up to Rs small assets 25000/-

moneylenders Commercial banks, banks coop

Better off

Large

farmer, Big assets- vehicle More than Rs to pay old loans, to 25,000 loans, advance loans may be up to Rs. 2,00,000

permanent/semiprmane nt job holders, traders

( 31 )

The major issues that need to be addressed are:

1. Access of poor to formal financial institutions.

2. Quality of the existing Self Help Groups- only 30% SHGs have been Able to take Loan from Banks.

3. Spread of the movement: About 80% of SHGs are located in 30% of The districts.

4. Outreach: Large number of poor is still beyond the reach of SHGs and Formal financial institutions.

5.Microfinance is limited to micro savings and credit.

6.Human resource challenge: Perspective and capacities of mf promoters is very Limited, Numbers of skilled persons in microfinance is very less.

7.Most mf products and services offered are pre determined and they are not based On the needs of the clients.

8. There is double reporting (same group being reported by different SHG Promoters), There are also cases where one person is member of many groups.

9. Largely the SHGs are promoted to meet project requirements/ targets

10. Still there are many operational problems in SHG-Bank linkage

11. Inadequate financial support so far on SHG formation, it needs at least 3 years, and about Rs.8-10, 000/- per SHG for promoting a good quality SHG.

( 32 )

Objective of the project

Learnt in details the process of micro-finance from its need at the grass root level. theoretical learning of how SHG are formed. Most important learning, how it change the life of the economic disadvantages people. How to calculate the interest rate of loan amount. Functioning of various Govt. , semi-govt, various other delivery channels. How micro-finance company work? How govt. regulate the rules & regulation for micro-finance institution.

( 33 )

BIBLIOGRAPHY:

WEBSITES

1. www.microfinancegateway.org 2. www.wikipedia.com 3. www.wikianswers.com 4. www.indianmba.com

BOOKS OF MICROFINANCE 1. Sundaresan suresh Microfinance: Emerging Trends and Challenges Edward Elgar publishing limited, 2009 2. J.D. Von Pischke New Partnerships for Innovation in Microfinance Springer Heidelberg publication , march 2008 3. Kumar vijay Banking, Micro Finance and Self-help Groups (SHGs)
New Century Publications , july 2009 4. Kapoor G. P

Poverty Alleviation and Self Help Groups APH publishing corporation , 2010

JOURNALS AND MAGAZINES

1. Centre for microfinance, Jaipur 2. Centre of NABARD, Jaipur 3. Magazine Micro finance world.(Jan-March 2011) 4. Business India.(may 3, 2011) 5. Journal management trends (march-10) vol.5 no. 1 & 2

( 34 )

( 35 )