Micro Finance: Growth and Development in India

K.N.Marimuthu*

Dr. Mary Jessica**

Abstract

Micro Finance supports largely (formal & informal) activities that often have low market
require. It fulfill the basic requirements of financially poor section such as; self-employment,
borrowings, income, savings and standards of living etc. It is an effective instrument for lifting
poor from poverty, increasing opportunities and making them credit worthy, enhance socio-
economic and financial sustainability plus it discussed the MFI’s, that throw light on new
institutions for providing insurance and credit and for generating savings be developed. The
paper in its later part describes case of Indian situation and NABARD experience. This idea
emphasis one help to himself and helping hand to others, it exchange the loan mechanisms range
between families, communities to more planned institutions that enable an entire community to
protect themselves. This paper aims to study the micro finance institutions growth and
development in India based on secondary data with theoretical point of view and it found there is
a vast scope for the future generation people to develop their income source through MFI’s, plus
it considered SHG members having a considerable access in financial services resulting positive
impact on the socio-economic conditions. Further it suggests some policy measures for
achieving MFI’s, it require better delivery systems to ensure access to future benefits by the
intended beneficiaries. MFI’s should be managed with better scrutiny in terms of finance and
technology with social responsibility. It recommends providing more incentive package from
government for motivate the NGOs in future & diversify into various back areas.

Key Words: Micro Finance, SHG, SBLP, Growth, and Development

*K.N.Marimuthu- Research Scholar and **Dr.Mary Jessica, Associate Professor

School of Management Studies, University of Hyderabad, Hyderabad-500046.

Introduction

Micro-Finance refers to small savings/credit and insurance services extended to socially

and economically weaker segments of the society, through this MFI enabling them to raise their
income levels and improve living standards. Micro-Finance is too providing loan to the poor
people/to below poverty line, who are not able to borrow from other sources and to build their
living standard as better. Micro finance first introduced by Nobel laureate Prof. Mohammad
Yunus in 1976 and started Grameen Bank, afterwards many other countries has followed
Grameen Bank Model. It is not possible to cover each and every aspect of micro finance in this
short research.

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Review of Literature

Micro finance is a powerful tool for achieving the higher level of MFI’s efficiency in
undeveloped country (Conroy, 2008; Jayasheela et.al, 2008) & it is not only providing the
financial source, but more importantly it gives opportunities to utilize all resources (Lucas,
2008). Its crucial circumstance help to reduce poverty create self-employment, economic growth
with long term perspectives, further the country without providing this financial sources, no one
can achieve the target of 100% literate, employment, growth initiatives etc. (Ghost, 2007).
NABARD’s SHG-Bank Linkage Programme created good connection between Banks and SHG
members (Chakrabarti, 2006) and SHG creates social awareness, sanitation, talent of women
(Rao, 2002) it provide financial self-governance & made themselves economically independent
with lot of achievements (Lakshmanan, 2001) further it creates women empowerment
(Mahendra, 2011) in the society. Jayasheela mentioned, it fulfill the demand and appreciation of
reservations growth and developments plus it one of the new avatar. Researcher find the research
gap from the previous large no. of research article, books, and other reports, no one didn’t give
proper details for what this micro finance? & there are no serious attempt, elaborately as what is
what about micro finance & its uses? This study concentrated the growth and development of
MFI in India & its uses.

Objectives of the Study

 To analyze the growth and development of the Micro Finance Institution’s in India

 To elaborate the role and effectiveness of MFI through SHG

Research Methodology

The present study is descriptive in nature based on the secondary data, collected from
NABARD, India stat, economic survey, journals, magazines and paper cuttings etc. MFI’s
growth and development is showed using the Simple percentage, Cumulative percentage, and
averages. This research concentrated on the MFI’s growth through SHG and its various actions
from the previous studies.

What is Micro Finance?

There are many definitions to micro finance, as per RBI, Microfinance defined as “small-
scale financial services primarily credit and savings provided to people who farm, fish or herd”
plus it also refers to” all types of financial services provided to low-income households and
enterprises.” Further, microfinance grows out of developmental roots. This can be termed the
“alternative commercial sector.”

MFI’s classified under this head are promoted by the alternative sector and target the
poor. Microfinance is an economic development tool whose objective is to assist the poor to

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work their way out of poverty. It covers a range of services which include, in addition to the
provision of credit, and many other services such as savings, insurance etc.

As per Malegam Committee Report (2010), Microfinance is, the borrowers are low-
income groups, the loans are for small amounts, and the loans are without collateral. Normally
loan are generally taken for income-generating activities and also provided for consumption,
housing and other purposes.

Raghuram Committee on Financial Sector Reforms (CFSR) “Expanding access to financial

services, such as payments services, savings products, insurance products, and inflation-
protected pensions...”

Beginning of Micro Finance

One of the earliest entrants in the microfinance space was Muhammad Younus’ Grameen
Bank. NABARD was established as an apex rural development bank in the year 1982, through
an Act of Parliament. The SHG-Bank Linkage Model was pioneered by NABARD in 1992. With
one of the highest growth rates globally since 2002, the Indian microfinance sector has emerged
as one of the most socially conscious, commercially feasible, and financially sustainable
(Economic Times). The liquidity crunch did affect the availability of equity for microfinance
players in the years prior to 2008-09.

Scenario of Micro Finance in India

India’s population is more than 1100 mn, around 350 mn are living below the poverty.
Only 20% access loan from the formal sources and 80% from the informal sources. Out of that
20% only 10% have access to Micro finance. Annual credit demand by the poor is estimated to
be about Rs.60000 crores, plus only 12000 crores are disbursed. (Apr, 2009) Micro Finance
members are “Small and marginal farmers", "rural artisans" and "economically weaker sections“
Recently, microfinance Institutions reached 76.6 million compare with 2009’s 59 million,
according to the “State of the Sector Report.” Indian MFI Survey (2010) plus more than 50
percent of low income households are covered by some form of microfinance product. Further
these MFIs reached highly 234 out of the 331 poorest districts identified by the government. It’s
playing an important role in achieving financial inclusion of poor.

Micro Credit Model

It focuses on providing the capital for poor women to use their inborn "survival skills" to
pull themselves out of poverty. It would draw up a weekly or bi-weekly repayment schedule. In
case any member defaults the entire circle is denied access to credit. As per MFI survey (2010),
the microfinance business model in India naturally generates a Return on Equity (ROE) of
between 20% and 30%, driven by financing from commercial banks, strong operating efficiency
with high portfolio quality. In spite of achieving rapid growth with a CAGR of 86% in loan

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portfolio outstanding and 96% in borrowers over the last five years since 2005, this sector still
faces a large unmet demand which means that it still has great potential for continued growth.

Progress of Micro Credit in India

(NABARD) Refinance Assistance

Year No. of SHGs Linked Bank Loan
(Rs. in Crores)
1992-93 255 0.29 0.27
1993-94 620 0.65 0.46
1994-95 2122 2.44 2.30
1995-96 4757 6.06 5.66
1996-97 8598 11.84 10.65
1997-98 14317 23.76 21.39
1998-99 32995 57.07 52.06
1999-00 114775 192.98 150.13
2000-01 263825 480.87 251.00
2001-02 461478 1026.34 796.00
2002-03 717000 1022 622
2003-04 1079000 1856 705
2004-05 1618000 2994 968
2005-06 2239000 4499 1068
2006-07 6570 1293
2007-08 5009794 8849 1616
2008-09 6121147 12254 2620
2009-10 - 14453 3174
Source: Report of Trend and progress of banking in India 1998-99 to 2002-03, RBI Bulletin,
November 2006 & NABARD 2009-10.

State-wise Number of Self Help Groups (SHG) in India

States/UTs 2007-08 2008-09 2009-10 2010-11 2011-12*

Andhra Pradesh 190051 53095 216595 47817 15282
Arunachal Pradesh 0 92 46 0 0
Assam 14338 21869 22120 24992 9872
Bihar 14036 20407 30701 31453 9552
Chhattisgarh 3934 4945 3877 5572 1184
Delhi 0 0 0 0 0
Goa 98 96 35 38 19
Gujarat 4901 56648 5467 6417 3070
Haryana 2265 4506 3260 2999 1187
Himachal Pradesh 965 1402 1429 1100 401
Jammu & Kashmir 1191 945 926 1442 600
Jharkhand 8246 13150 9145 21950 9050

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Karnataka 7226 7384 7018 7388 9310
Kerala 1789 1222 1678 1986 1033
Madhya Pradesh 18379 45257 16846 23193 7050
Maharashtra 29676 31737 33452 14756 4884
Manipur 627 258 165 725 67
Meghalaya 829 527 1062 956 304
Mizoram 0 0 0 0 78
Nagaland 334 507 230 703 439
Orissa 16403 13163 19525 8536 2518
Puducherry 0 210 150 176 126
Punjab 757 771 1009 896 413
Rajasthan 13744 165941 2846 4328 920
Sikkim 379 287 174 158 65
Tamil Nadu 19061 15000 30000 29647 22026
Tripura 2398 3245 5238 4441 1127
Uttarakhand 349 1320 7033 6189 2369
Uttar Pradesh 29126 36283 60920 52473 29373
West Bengal 37423 33398 35123 36348 14272
Andaman&Nicobar Islands 68 46 47 76 50
Chandigarh - 0 0 0 0
Dadra & Nagar Haveli 0 0 0 0 0
Daman & Diu 0 0 0 0 0
Lakshadweep 0 0 0 0 0
India 418593 533711 516117 336755 146641
*: Figures are April-September 2011.
Source: Ministry of Statistics and Programme Implementation

Importance of Micro Finance

 Millions of poor people coming out from their poverty through the power of micro credit
 Easy- reaching the cost effective delivery of financial products to the poor
 Many private equity investors and foreign investment source involved to invest in MFI’s.
 MFI recently used money recovery method for the reason of some controversy
 Providing financial services to the poor with challenges: spending with high transaction
cost of risk management challenges due to information asymmetry problems, plus
accessibility (geographic accessibility and easiness to deal with). Here there is no
collateral, low value and cash intensive nature of the business as well as providing little
staff training and motivation.
 Information irregularity: in between this group having a decision to take loan, it may be
adverse selection, further this loan utility & loan repayment have with a lot of peril.

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Debt Relief and Interest rate in India

Debt will create serious threat through political intervention in MFI’s; it is easy and
secure way to attract the voters, borrower creates a negative mind set and many decent borrowers
has affected by this waive of schemes. In addition, the waiver of farm loans hence increased
defaulters. Further, the legacy continues Rs.60000 crore was declared by Shri P.Chitambaram.
Most MFI’s financially sustainabled by charging interest rates that is high enough to cover all
their costs. Four key factors determine these rates: the cost of funds, MFI's operating expenses,
loan losses, and profits needed to expand their capital base and fund expected future growth.
Here are three kinds of costs the MFI has to cover when it makes microloans:

a. The cost of the money that it lends

b. The cost of loan defaults
c. Transaction and Operating cost
Ex: MFI lends is 10 percent, and it experiences defaults of 1percent of the amount lent, then total
Rs.11 for a loan of Rs.100, and Rs.55 for a loan of Rs.500 and the third is transaction cost.

Type of Micro Finance

Microfinance sector can be classified (Malegam Committee Report, 2010) as falling into
three main groups:
A. The SHG-Bank linkage Model accounting for about 58% of the outstanding loan
portfolio.
B. Non-Banking Finance Companies accounting for about 34% of the outstanding loan
portfolio.
C. Others including trusts, societies, etc, accounting for the balance 8% of the outstanding
loan portfolio

Sector of Micro Finance Institutions

MFI
Sector
SHG-Bank Linkage MFIs (NBFC) MFIs trusts, societies etc (MFIs
Programme (SBLP) holding more than 80% of the
outstanding loan portfolio)

Non-Banking Financial Companies

As per Malegam Committee report NBFC is "A company which provides financial
services pre-dominantly to low-income borrowers with loans of small amounts, for short-terms,
on unsecured basis, mainly for income-generating activities, with repayment schedules which are

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more frequent than those normally stipulated by commercial banks and which further conforms
to the regulations specified in that behalf ".

GROWTH AND DEVELOPMENT OF MFI’S IN INDIA:

Indian Micro Finance (MFI) would restless 11 crore borrowers and Rs.135000 crore ($30
billion) in loan portfolio by 2014 and will require a huge capital inflow both in debt and equity.
Report said that the growth is expected to come from underserved states that are witnessing a
flurry of activity, and also from a range of new financial and non-financial products that are
being introduced in the sector. Indian MFI’s have grown at a spectacular rate between 2004 and
2009, with an average size portfolio increasing 107% on a year on year basis, while number of
clients increasing 91%. It had a client base of about 2crore and foul loan portfolio of
Rs.11734crores in 2009. Currently, profitable MFI’s are present in most countries reporting huge
returns on assets (ROAs) and returns on equity (ROEs) in comparison to conventional banking
institutions. The MFIs in South Asia have reached profitability through cost efficiency while
those in East Asia seem to have relied more on relatively high interest rates. South Asia has also
distinguished itself by forging successful partnerships for microfinance between governments,
NGOs, civil society, private sector, and communities.

Developments of MF in India
Micro Finance in India has started to evolve in early 1980’s with an effort of forming
informal SHG to provide access of financial services to needy. India is 2nd most populous
country behind China with a large no. of un-financed poor people-Main clients of MFI’s. MFIs
are estimated to have 7.94mn borrowers as of march 2008 with CAGR of 88.42% over the last
five years and cumulative outstanding loan portfolio of US$824mn. SHG has loan outstanding of
US$356.45mn as of March 2008. It shows a CAGR growth of 78.21% from the year 2003
to2008. NABARD and SIDBI are devoting their financial resources and time towards the
development of microfinance. The strength of MFI sector lies in the diversity of models, it has
adopted including home grown models like MFI and SHG to other learnt models from various
countries like Bangladesh, Thailand and Bulgaria.

SHG-Bank Linkage Program in India, as on March (respective years)

Particulars 2001 2005 2006 2009
No. of New SHGs linked during the year 149050 539365 620109 1505581
No. of SHGs provided with repeat bank loan NA 258092 344502
No. of SHGs Linked (cumulative) 263825 1618456 2238565 6121147
% of women groups among all SHGs 90 90 90 79.46
No. of participating Banks 314 573 547 543
i. Commercial Banks 43 47 47 55
ii. Regional Rural Banks (RRBs) 177 196 *158 117
iii. District Central Cooperative Banks (DCCBs) 94 330 342 371
Bank Branches Participating NA 41082 44362
Source: Notes: NA-Not Available; *Reduced figure due to merger of some RRBs & NABARD

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 Despite a sustained high growth rate in this micro finance industry, as per the report the
full potential has not been fully explored in geographies such as Uttar Pradesh, Bihar and north-
eastern states. The microfinance penetration in India is merely 3.6 per cent, and 60 per cent of
the portfolios are rigorous in the southern states of Andhra Pradesh, Tamil Nadu and Karnataka.
Indian MFIs growth has been enhanced by the availability of debt financing from both private
and public sector banks. Banks and financing institutions had a total exposure to MFIs of $2.45
billion in March, 2009. It represents an almost 150% increase from the exposure of March 2008
with $984.8 million and a 200% increase from the exposure in March 2007 of $805.6 million.
The priority sector lending (PSL) requirements set by the RBI have encouraged banks to lend to
MFIs as a way to satisfy their financial inclusion quotas for lending to agriculture, weaker and
more deprived sections of society. Recent changes are;

 MFIs with an informal approach have been able to achieve a deeper reach
 MFIs are said to be more aggressive with more use of locals as field workers
 Simpler and less time consuming procedures
 Bank loans to SHGs have a longer repayment period
 Banks find it easier to use MFIs to meet their priority sector targets
 Microfinance is an institution and agents of social change
Grant Assistance Extended to various Partners in SHG-Bank Linkage Programme
(As on 31 March 2010) (Rs. lakh)
Sanctions during the
Agency Cumulative Sanctions Cumulative Progress
year
No. of No. of
No. Amount No. of SHGs No. Amount No. Amount
SHGs SHGs
Co-operative
7 63.23 5230 102 626.36 59105 252.95 44618 29075
Banks
RRB 4 40.14 3395 117 429.44 47985 189.23 54271 36155
NGO 306 2620.10 53393 2624 9025.81 345173 3469.69 244367 157831
Farmers’ Club 61.96 14858 7986
IRVs 2 154.70 9250 68 684.46 40483 63.91 9991 5636
Total 319 2878.17 71268 2911 10766.07 492746 4037.74 368105 236683
Source: NABARD Annual Report 2009-10
Region-wise Disbursement (Rs. crore)
Region 2007-08 Share (%) 2008-09 Share (%) 2009-10 Share (%) 2010-11
Northern 1957.78 21.64 2636.45 25.02 2419.87 20.15 2810.70 20.80
North-Eastern 178.57 1.97 174.18 1.65 139.85 1.16 265.82 2.00
Eastern 1134.73 12.55 1102.99 10.47 891.07 7.42 1405.35 10.40
Central 1810.40 20.01 1526.02 14.49 1478.60 12.31 1928.63 14.30
Western 712.26 7.87 796.74 7.56 1111.79 9.26 1253.64 9.30
Southern 3252.53 35.96 4298.91 40.81 5967.90 49.70 5821.73 43.20
Total 9046.27 100.00 10535.29 100.00 12009.08 100.00 13485.87 100.00
Source: NABARD Annual Report 2009-10

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Microfinance as a Tool for Poverty Alleviation: Out of the world’s 6.7 billion inhabitants, 3
billion live on less than 2 USD per day and 80% of the world’s population has no access to
financial services.

Originals of Micro Finance: Microfinance has social objectives at its core:

> Poverty reduction

> Employment creation
> Empowerment of marginal groups
> Social mission and commitment
Building Inclusive Financial Systems: Microfinance implies building inclusive financial
systems that serve the poor. Around the world, over 10000 MFIs provide funding to 150 mn
active clients (3/4 women), 66.6mn micro finance clients are among the poorest, living on less
than 1 USD per day. Yet, poor borrowers have proven to be astonishingly creditworthy.

A High Growth Sector: MFIs manage a loan portfolio estimated at 30 B-USD, the potential
demand reaches 263 B-USD, and in addition, about 500mn microfinance clients have yet to be
reached. This sector enjoys an annual growth of almost 30%. For investors, microfinance is often
considered a special asset class of socially responsible investment, balancing financial return
with positive social impact. Traditionally, microfinance grew with the support of government
subsidies, donor funding, and grants.

The commercial flow of Micro Finance: microfinance enters the mainstream as a profitable
business proposition in olden days, now commercialization has increased market competition at
both the wholesale and retail levels, to the general benefit of microfinance lenders and borrowers
alike. The entry of private capital has improved access to diversified sources of funding. With
more funding options and higher volume, MFI managers have enhanced their negotiating power
and skills to access better financing terms. Commercialization is necessary to sustain growth in
the sector, to scale up outreach, and serve a greater number of financially excluded, low-income
people.

Growth &
Development

Commercialization Micro Finance Society Revolution

through Agent

Self-employment

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Limitations of the study

Recently, more analytical and rigorous studies (e.g. randomized control trials) paint a
measured picture of microfinance which impacts on the poor. There is no scientific evidence to
suggest that microfinance is a transformational tool to lift people out of poverty. The research
findings have been disappointing because the expectations of microfinance were unrealistically
high. MFI has a constructive role to play in the campaign to help the world’s poor. Its impact is
not as large and powerful as some promoters romanticize. Nor is its contribution in the struggle
against poverty as inconsequential, as critics dismissively contend. In general, it is difficult to
conduct reliable, scientific testing on the impact of microfinance in a cost-effective way.

Way out of Micro Finance: As per the RBI report currently, several exit opportunities exist
including secondary and trade sales which are increasing as more mainstream investors enter the
market. Another likely exit scenario is mergers and acquisitions, as larger MFIs seek to acquire
players with product or geographical niches and banks also seek to enter the sector by forming
alliances with existing MFIs.

Issues faced by the MFI: In the Indian context, specific areas of concern have been identified
from the previous research; unjustified high rates of interest, lack of transparency in interest rates
and other charges, multiple lending, upfront collection of security deposits, over-borrowing,
ghost borrowers and Coercive methods of recovery. Flexibility in the credit instruments makes
poor for credit without striking insufferably high cost of monitoring its end-use upon the lenders.

Conclusion: MFI is a powerful tool to eradicate the poverty & build the growth and
development among the people of developing and undeveloped areas. It provides self-
employment, savings, housing and consumption credit, insurance moreover create the positive
collision on its citizen’s financial well-being.

Recommendations: As per review of literature, reduce the interest rate through bank lending to
the Microfinance sector both through the SHG-Bank Linkage programme and directly should be
significantly increased. Focus on rural infrastructure development, credit bureau, health
insurance, technological innovations with information sharing within and outside the group

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