MINI PROJECT REPORT II

MICRO FINANCE

(Submitted in partial fulfilment of the requirements for MBA)

Submitted By Surbhi Sharma Under the guidance of Prof. Rahul Kumar sir

Name of Student Surbhi Sharma Name of the Faculty Prof. Rahul Kumar

Father's Name Brahma lal Sharma

Batch of 2022-24 MBA 2nd semesters

LLOYD INSTITUTE OF MANAGEMENT & TECHNOLOGY

PLOT NO 11, KNOWLEDGE PARK-2, GREATER NOIDA-201306 (UP)

 MINI PROJECT -2

Table of Contents

TABLE OF CONTENTS........................................................................................................................................................2
CERTIFICATE........................................................................................................................................................................3
DECLARATION.....................................................................................................................................................................4
ACKNOWLEDGEMENT.......................................................................................................................................................5
INTRODUCTION...................................................................................................................................................................1
DESCRIPTION OF BUSINESS.............................................................................................................................................5
MICROFINANCE AND POVERTY: -..........................................................................................................................................7
EXECUTIVE SUMMARY...................................................................................................................................................10
MISSION:..............................................................................................................................................................................10
VISION:................................................................................................................................................................................11
KEY TO SUCCESS:................................................................................................................................................................13
COMPANY HIGHLIGHTS:.......................................................................................................................................................15
REGULATIONS FOR MFIS...............................................................................................................................................21
INDUSTRY ANALYSIS:......................................................................................................................................................22
TARGET MARKET:................................................................................................................................................................22
COMPETITION:.....................................................................................................................................................................23
CHALLENGES & ISSUES OF MICROFINANCE IN INDIA........................................................................................27
STATEMENT OF THE PROBLEM:..................................................................................................................................28
SUSTAINABLE DEVELOPMENT...................................................................................................................................29
MICROFINANCE: AN OVERVIEW.................................................................................................................................29
CHALLENGES OF MICROFINANCE & MFIS IN INDIA:............................................................................................30
MEASURES TO OVERCOME CHALLENGES:.............................................................................................................33
1. PROPER REGULATION......................................................................................................................................................33
2. FIELD SUPERVISION.........................................................................................................................................................33
3. ENCOURAGE RURAL PENETRATION.................................................................................................................................33
4. COMPLETE RANGE OF PRODUCTS...................................................................................................................................33
5. TRANSPARENCY OF INTEREST RATES..............................................................................................................................34
6. TECHNOLOGY TO REDUCE OPERATING COST.................................................................................................................34
7. ALTERNATIVE SOURCES OF FUND...................................................................................................................................34
 CERTIFICATE

MINI PROJECT REPORT 2021-2022

This is to certify that Surbhi Sharma roll no.2201720700268 student of MBA 1ST year of our
institute has prepared a report on (Concept/Title) MICRO FINANCE INDUSTRY.

She has developed the concept of developing a new product/service under my supervision
and has completed the same in conformance with /partial fulfilment of the provisions of
AKTU.
The work is original and has not been submitted anywhere else in any manner.

(Student Signature)
Date: ____________

(Faculty Mentor’s Signature)

Date: _________________
 DECLARATION

I hereby declare that the dissertation titled “MICRO FINANCE INDUSTRY "Submitted for the
Award of MBA at Rd. A.P.J. Abdul Kalam Technical University, Lucknow is my original work and
the dissertation has not formed the basis for the award of any degree, associate ship fellowship
or any other.
The material borrowed from similar titles other sources and incorporated in the dissertation
has been duly acknowledged.

I understand that I myself could be held responsible and accountable for plagiarism, if any,
detected later on.

The papers published based on the conducted out of the course of the study are also based on
the study and not borrowed from other sources.

Name of Student: -

Surbhi Sharma
 ACKNOWLEDGEMENT

This project is the outcome of sincere efforts, hard work and constant guidance of not only me but a
number of individuals. First and foremost, I would like to thank LLYOD, GREATER NOIDA.

I am thankful to my guide Mr. Rahul Kumar for providing me help and support throughout the Project
Report period.

I owe a debt of gratitude to my faculty guide who not only gave me valuable inputs about the industry
but was a continuous source of inspiration during these months, without which this Project was never
such a great success.

Last but not the least I would like to thank all my faculty members, friends and family
members who have helped me directly or indirectly in the completion of the project.

Name of Student:

Surbhi Sharma
 INTRODUCTION

Microfinance refers to the provision of financial services, such as small loans, savings
accounts, insurance, and other financial products, to low-income individuals and
underserved populations who have limited access to traditional banking services. The
concept of microfinance emerged as a strategy to alleviate poverty and promote economic
development, particularly in developing countries.

Microfinance institutions (MFIs) are organizations that specialize in providing these

financial services to the economically disadvantaged. They often operate in rural or
remote areas where traditional banks are not readily available or accessible. MFIs
typically target individuals who lack collateral, formal credit history, or stable sources of
income.

The distinguishing feature of microfinance is the emphasis on small loan amounts. Instead
of providing large sums of money, microfinance institutions offer relatively small loans,
commonly referred to as microloans or microcredit, which are tailored to meet the needs
of borrowers engaged in income-generating activities. These loans enable entrepreneurs
and small business owners to start or expand their businesses, invest in productive assets,
or smooth their consumption during difficult times.

1
Microfinance has had a significant impact on poverty reduction by empowering
individuals and communities to break the cycle of poverty. It promotes financial inclusion,
builds resilience, and fosters economic self-sufficiency. Additionally, microfinance often
incorporates financial education and training to enhance borrowers' financial literacy and
business management skills.

The success of microfinance initiatives has led to the development of various models and
approaches, including village banking, peer lending groups, and microfinance
cooperatives. Furthermore, advancements in technology have facilitated the growth of
digital microfinance, allowing for the delivery of financial services through mobile
banking, online platforms, and digital payment systems.

Overall, microfinance plays a vital role in promoting inclusive economic growth,

empowering marginalized populations, and fostering sustainable development in
communities around the world.

Microfinance services encompass a range of financial products and services designed to

meet the needs of low-income individuals and underserved populations. Here are some
common microfinance services:

2
1. Microloans/Microcredit: These are small loans provided to entrepreneurs, small
business owners, and individuals to start or expand their businesses, purchase
equipment or inventory, or invest in income-generating activities. Microloans are
typically provided without requiring traditional collateral, relying instead on
alternative methods to assess creditworthiness, such as group guarantees or social
collateral.

2. Savings Accounts: Microfinance institutions offer savings accounts to help

individuals build financial resilience and accumulate savings. These accounts may
have low minimum balance requirements and flexible deposit and withdrawal
options.

3. Micro insurance: Micro insurance provides insurance coverage to protect low-

income individuals against risks and unexpected events, such as illness, accidents,
or natural disasters. micro insurance products are tailored to the specific needs and
affordability of the target population.

4. Money Transfer Services: Microfinance institutions often provide secure and

affordable money transfer services, enabling individuals to send and receive
money within and across borders. These services help facilitate remittances from
migrant workers and promote financial inclusion.

5. Financial Education and Training: Many microfinance programs incorporate

financial literacy and business training to enhance the financial knowledge and
skills of borrowers. These programs aim to improve financial management,
budgeting, business planning, and entrepreneurship skills.

3
 6. Business Development Services: Microfinance institutions may offer additional
non-financial support to borrowers, including business development services such
as market research, technical assistance, mentoring, and access to networks and
markets. These services help borrowers improve their business operations and
increase their chances of success.

7. Mobile Banking and Digital Financial Services: With the advancement of

technology, microfinance institutions increasingly leverage mobile banking, digital
platforms, and digital payment systems to provide convenient and accessible
financial services. This allows individuals to access their accounts, make
transactions, and receive financial services through their mobile phones or other
digital devices.

These microfinance services aim to empower individuals, promote financial inclusion,

stimulate economic activity, and contribute to poverty reduction by providing the
necessary financial tools and resources to underserved populations.

4
 DESCRIPTION OF BUSINESS

Microfinance businesses, also known as microfinance institutions (MFIs), specialize in providing

financial services to low-income individuals and underserved populations who lack access to
traditional banking services. These businesses aim to promote financial inclusion, alleviate
poverty, and empower individuals to improve their livelihoods. Here's a description of a
microfinance business:

1. Target Market: Microfinance businesses primarily target individuals who are

typically excluded from the formal financial sector, such as small-scale
entrepreneurs, micro-entrepreneurs, farmers, artisans, and low-income households.
They focus on serving clients who may lack collateral, formal credit history, or a
stable source of income.

2. Small Loans: Microfinance businesses offer small loans, often referred to as

microloans or microcredit, to individuals and small businesses. These loans are
tailored to meet the specific needs of borrowers engaged in income-generating
activities, such as starting or expanding a business, purchasing equipment, or

5
 investing in productive assets. Microloans are typically characterized by low loan
amounts and short repayment periods.

3. Group Lending: Microfinance businesses commonly use group lending models

where borrowers are organized into small groups. These groups serve as a form of
social collateral, where members support and guarantee each other's loans. This
approach helps mitigate the lack of traditional collateral and fosters a sense of
responsibility and peer support among borrowers.

4. Savings Accounts: Microfinance businesses also offer savings accounts to

encourage individuals to build financial resilience and accumulate savings. These
accounts often have low minimum balance requirements and provide a safe place
for clients to deposit their earnings and save for future needs.

5. Financial Education: Microfinance businesses often provide financial literacy and

business training to their clients. These programs aim to enhance borrowers'
financial knowledge, improve their financial management skills, and promote
responsible borrowing and saving habits. Financial education helps clients make
informed financial decisions and improve their overall financial well-being.

6. Social Impact: Microfinance businesses prioritize social impact alongside financial

sustainability. Their mission is to address poverty, empower individuals, and
contribute to sustainable development. They often measure their success not only
in financial terms but also by the positive social outcomes achieved, such as
poverty reduction, women's empowerment, and increased economic opportunities
for marginalized communities.

6
 7. Risk Management: Microfinance businesses implement risk management practices
to mitigate financial risks associated with lending to low-income individuals. This
includes thorough client assessment, loan portfolio diversification, credit risk
analysis, and appropriate risk management systems and policies.

Overall, microfinance businesses play a critical role in providing financial services to

those who have limited access to traditional banking. By offering small loans, savings
accounts, and financial education, they help individuals and communities build financial
resilience, foster entrepreneurship, and create pathways out of poverty.

Microfinance and poverty: -

In developing economies, and particularly in rural areas, many activities that would be
classified in the developed world as financial are not monetized: that is, money is not used
to carry them out. This is often the case when people need the services money can provide
but do not have dispensable funds required for those services. This forces them to revert to

7
other means of acquiring the funds. In their book, The Poor and Their Money, Stuart
Rutherford and Suk winder Arora cite several types of needs:

 Lifecycle Needs: such as weddings, funerals, childbirth, education, home building,

holidays, festivals, widowhood and old age

 Personal Emergencies: such as sickness, injury, unemployment, theft, harassment

or death

 Disasters: such as wildfires, floods, cyclones and man-made events like war or
bulldozing of dwellings

 Investment Opportunities: expanding a business, buying land or equipment,

improving housing, securing a job, etc.

People find creative and often collaborative ways to meet these needs, primarily through
creating and exchanging different forms of non-cash value. Common substitutes for cash
vary from country to country, but typically include livestock, grains, jewellery and
precious metals. As Marguerite S. Robinson describes in his book, The Micro Finance
Revolution: Sustainable Finance for the Poor, the 1980s demonstrated that "micro finance
could provide large-scale outreach profitably", and in the 1990s, "micro finance began to
develop as an industry" In the 2000s, the microfinance industry's objective was to satisfy
the unmet demand on a much larger scale, and to play a role in reducing poverty. While
much progress has been made in developing a viable, commercial microfinance sector in
the last few decades, several issues remain that need to be addressed before the industry
will be able to satisfy massive worldwide demand. The obstacles or challenges in building
a sound commercial microfinance industry include:

 Inappropriate donor subsidies

 Poor regulation and supervision of deposit-taking microfinance institutions (MFIs)

 Few MFIs that meet the needs for savings, remittances or insurance

8
  Limited management capacity in MFIs

 Institutional inefficiencies

 Need for more dissemination and adoption of rural, agricultural microfinance

methodologies

 Members' lack of collateral to secure a loan

Microfinance is the proper tool to reduce income inequality, allowing citizens from lower
socio-economical classes to participate in the economy. Moreover, its involvement has
shown to lead to a downward trend in income inequality.

9
 EXECUTIVE SUMMARY

Mission:
The mission of the microfinance industry in India is to provide financial services to the unbanked

and underserved segments of the population, particularly those who lack access to traditional

banking services. Microfinance institutions (MFIs) aim to empower the poor and low-income

individuals by offering them small loans, savings accounts, insurance, and other financial

products and services.

10
The key objectives of the microfinance industry in India include:

1. Financial Inclusion: The primary mission is to promote financial inclusion by extending

financial services to the economically marginalized sections of society, including small-

scale entrepreneurs, self-employed individuals, and women in rural and semi-urban areas.

2. Poverty Alleviation: Microfinance aims to alleviate poverty by providing credit and

financial resources to the poor, enabling them to start or expand their small businesses,

generate income, and improve their living standards.

3. Empowerment of Women: Microfinance institutions in India place a strong emphasis on

women's empowerment. They provide financial services to women, who are often more

vulnerable to poverty and exclusion, enabling them to become economically independent,

make decisions, and contribute to their families and communities.

4. Social and Economic Development: By facilitating access to financial services,

microfinance contributes to the social and economic development of the communities it

serves. It enables individuals to invest in education, healthcare, and other essential needs,

leading to improved quality of life and human development indicators.

5. Sustainable Development: Microfinance institutions in India strive to operate in a

sustainable and responsible manner. They aim to achieve financial viability while

ensuring fair interest rates, transparent practices, and responsible lending to prevent over-

indebtedness among borrowers.

6. Capacity Building: In addition to providing financial services, microfinance institutions

also focus on capacity building and skill development of their clients. They offer

11
 financial literacy programs, entrepreneurship training, and support services to enhance

the financial management skills and business acumen of borrowers.

Overall, the mission of the microfinance industry in India is to foster inclusive and sustainable

economic growth, reduce poverty, empower women, and promote financial resilience and well-

being among marginalized communities.

Vision:
The vision of the microfinance industry is to create a world where all individuals, especially the

marginalized and underserved populations, have access to affordable and inclusive financial

services. The industry envisions a future where financial inclusion is a reality, and everyone has

the opportunity to improve their lives and participate in economic development.

The specific elements of the microfinance industry's vision may include:

1. Universal Access: The industry aims to ensure that every individual, regardless of their

socio-economic background, has access to a range of financial services, including

savings, credit, insurance, and remittances.

2. Poverty Eradication: Microfinance envisions a world where poverty is significantly

reduced or eradicated through the provision of financial resources and support to the poor

and low-income segments of society. It seeks to empower individuals and communities to

break the cycle of poverty and achieve sustainable livelihoods.

3. Women's Empowerment: The microfinance industry places a particular emphasis on

empowering women, recognizing their vital role in society and their potential to drive

positive change. It envisions a future where women have equal access to financial

12
 services, decision-making power, and opportunities for entrepreneurship and economic

self-sufficiency.

4. Inclusive Economic Growth: Microfinance aspires to contribute to inclusive and

sustainable economic growth by fostering entrepreneurship, supporting small businesses,

and enabling individuals to invest in income-generating activities. It envisions a future

where every person has the opportunity to participate in and benefit from economic

development.

5. Financial Resilience: The industry envisions a future where individuals and communities

are financially resilient and equipped with the knowledge and tools to manage their

finances effectively. It aims to promote financial literacy, build financial capabilities, and

provide appropriate financial products and services that enhance resilience against shocks

and uncertainties.

6. Ethical and Responsible Practices: Microfinance envisions an industry that operates with

integrity, transparency, and accountability. It seeks to promote ethical and responsible

lending practices, fair interest rates, and client protection mechanisms to ensure the well-

being and long-term sustainability of its clients.

Overall, the vision of the microfinance industry is to create an inclusive financial ecosystem that

empowers individuals, reduces poverty, promotes gender equality, fosters economic growth, and

builds resilient communities.

Key to success:
The key to the success of the microfinance industry lies in several factors, including:

13
1. Financial Sustainability: Microfinance institutions (MFIs) need to maintain financial

viability to ensure their long-term success. This involves managing their operations

efficiently, balancing their loan portfolio, controlling costs, and setting fair interest rates

that enable them to cover their operational expenses and maintain healthy profitability.

2. Client-Centric Approach: The microfinance industry's success is closely tied to its

ability to understand and meet the needs of its clients. This requires adopting a client-

centric approach, tailoring financial products and services to the specific requirements of

the target market, and ensuring affordability, convenience, and accessibility of services.

3. Responsible Lending Practices: Responsible lending is crucial to the success of

microfinance institutions. This involves conducting thorough client assessments,

evaluating the capacity to repay, avoiding over-indebtedness, and promoting responsible

borrowing behaviours. Maintaining a balance between credit access and borrower

protection is key to sustainable growth.

4. Strong Governance and Risk Management: Sound governance structures and effective

risk management systems are essential for the success of microfinance institutions. This

includes establishing robust internal controls, risk assessment mechanisms, and

monitoring systems to ensure prudent lending practices, minimize credit risk, and

safeguard the institution's financial health.

5. Partnerships and Collaborations: Collaboration with other stakeholders, such as

government agencies, non-profit organizations, and financial service providers, can

contribute to the success of the microfinance industry. Partnerships can provide access to

14
 funding, technical expertise, and supportive regulatory environments, fostering a

conducive ecosystem for growth.

6. Technology and Innovation: Embracing technology and fostering innovation can drive

the success of the microfinance industry. Digitization of processes, mobile banking, and

the use of data analytics can enhance operational efficiency, improve outreach, reduce

costs, and enable the delivery of innovative financial products and services.

7. Capacity Building and Financial Literacy: Providing financial literacy programs and

capacity building initiatives to clients can empower them to make informed financial

decisions, improve their business skills, and effectively manage their finances. This, in

turn, contributes to the success and sustainability of microfinance institutions.

8. Regulatory Support: A supportive regulatory framework that balances client protection

with the growth and sustainability of microfinance institutions is crucial. Clear and

enabling regulations can foster an environment that encourages innovation, protects

consumers, and promotes the growth and stability of the industry.

By prioritizing these key factors, the microfinance industry can enhance its effectiveness, expand

its reach, and achieve its mission of financial inclusion and poverty alleviation.

Company highlights:
Top 10 Microfinance Companies in India

1. Equites Small Finance

15
The lender offers small loans between Rs.2,000 and Rs.35,000 to the Economically Weaker

Section (EWS) and Low-Income Group categories in the country.

Loan Details:

Loan Amount Interest Rate Processing Fee

Up to Rs.25,000 24% p.a. Nil

More than Rs.25,000 23% p.a. 1% + GST

2. ESAF Microfinance and Investments (P) Ltd

ESAF Microfinance is a leading MFI in India that has empowered more than 4 lakh members

through its 150 branches. It offers an extensive range of business development and financial

services to the economically and socially challenged members of the society. The institution

offers a bouquet of loan products to suit the varied needs of customers:

Loan Details:

Loan Amount Rs.1,000 - Rs.1 lakh

Interest Rate 22% - 26% p.a. on diminishing basis

Processing Fee 1% - 2% of loan amount + GST

16
 Loan Tenure 3 months – 60 months

3. Fusion Microfinance Pvt Ltd

Fusion Microfinance is an RBI registered NBFC-MFI that works on a JLG lending model of

Grameen. The institution offers loans to women in the rural and semi-urban regions. Apart from

offering financial support and insurance protection, the company also imparts financial literacy

to its customers.

Loan Details:

Loan Amount Rs.3,000 – Rs.60,000

Loan Tenure 8 months – 2 years

Interest Rate 21% - 21.50% p.a. on reducing balance method

Processing Fee 0 – 1% of loan amount + GST

4. Annapurna Microfinance Pvt Ltd

17
The purpose of Annapurna Microfinance is to provide loans to the financially underserved

population. Technical and financial education is also imparted to beneficiaries to strengthen their

entrepreneurial skills. It is one of the top ten NBFC-MFIs in India today.

Loan Details:

Loan Amount Rs.1,500 – Rs.25 lakh

Loan Tenure 12 months – 240 months

Interest Rate 18% - 26% p.a. (reducing)

Processing Fee 1% - 2% + GST

5. Aroha Financial Services Limited

Eastern India’s largest NBFC MFI, Arohan Financial Services Limited offers financial inclusion

products to 1.9 million customers throughout India. The local partners of the company help in

improving its reach to remote locations. Non-financial products are also offered by the company

at affordable costs. Arohan also has an MSME lending business in its portfolio.

Loan Details:

Loan Amount Rs.1,100 - Rs.50,000

Loan Tenure 3 months - 24 months

18
 Interest Rate 20.70% - 21.25% p.a.

6. BSS Microfinance Limited

The company offers microloans to poor women so that they can be part of income generating

activities that bring them out of poverty. The institution offers loans in the states of Maharashtra,

Karnataka, Tamil Nadu, and Madhya Pradesh.

Loan Details:

Loan Amount Rs.8,000 - Rs.60,000

Interest Rate 25% p.a.

Processing Fee 1% + GST (for loans above Rs.25,000)

7. Asirvad Microfinance Limited

This microfinance institution has an extensive network of branches throughout 22 states in India.

It offers microloans to women entrepreneurs from low-income households for income generation

activities. Currently, three types of loans are offered to borrowers, i.e., Product Loan, Income

Generation Program (IGP) Loan, and Small and Medium Enterprise (SME) Loan.

Loan Details:

19
 Loan Amount Rs.2,498 - Rs.45,000

Loan Tenure 12 months - 24 months

Interest Rate 21.70% p.a.

8. Cashpor Micro Credit

Cashpor is a microfinance institution that works towards bringing the economically backward

sections of the society out of poverty. The products offered by the company include credit

facilities, savings services, insurance coverage, and pension services.

Loan Details:

Credit facilities offered by Cashpor is predominantly for undertaking income generation

activities. Loans are also provided for non-income generation activities and acquisition of assets

that improve the health and social status of the beneficiaries. For instance, loans for the

construction of toilets, women empowerment, and the procurement of gas connections are

commonly offered by the company.

9. Bandhan Financial Services Limited

The motive of the institution is to reduce socio-economic poverty by generating employment

opportunities for low-income households. Cost-effective financial and non-financial products are

provided in this regard.

20
10.Fincare Business Services Limited –

The Fincare group consists of two NBFC-MFIs, i.e., Disha Microfin Ltd. (now referred to as

Fincare Small Finance Bank) and Future Financial Services Pvt. Ltd. (FFSPL). The company

caters to the semi-urban and rural households of the country, offering Microenterprise Loans

(MEL) and loan against gold with quick disbursals.

Regulations for MFIs

The regulations pertaining to MFIs are usually based on their statuses. A microfinance bank will

be required to adhere to all banking regulations like traditional banks. Cooperatives and NGOs

will not be expected to comply with the same regulations. However, they may be regulated by

similar oversight authorities.

How are MFIs Funded?

Microfinance Institutions get funding from several sources, such as:

 Member and customer deposits – This is applicable to MFIs that are organised as mutual

funds, cooperatives, and microfinance banks offering savings products.

 Subsidies and grants – Grants are more prominent when the MFI is just being set up.

 Own capital – The microfinance institution’s own finance/capital accounts for a part of

the funding extended to borrowers.

 Loans from partner banks – This is the primary source of funding for an MFI.

21
  Funding received from public investors – Bilateral or multilateral organisations offer

funds to MFIs. This is a source of long-term funding for the MFI.

 Funding received from private investors – These funds are supplied directly to the MFI or

through investment funds that specialise in microfinance. This is also a source of long-

term funding for the MFI.

INDUSTRY ANALYSIS:

Target market:
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.

Access to conventional formal financial institutions, for many reasons, is directly related to

income: the poorer you are the less likely that you have access. On the other hand, the chances

are that, the poorer you are the more expensive or onerous informal financial arrangements.

Moreover, informal arrangements may not suitably meet certain financial service needs or may

22
exclude you anyway. Individuals in this excluded and under-served market segment are the

clients of microfinance.

As we broaden the notion of the types of services microfinances encompasses, the potential

market of microfinance clients also expands. For instance, microcredit 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.

How does microfinance help the poor?

Experience shows that microfinance can help the poor to increase income, build viable

businesses, and reduce their vulnerability to external shocks. It can also be a powerful instrument

for self-empowerment by enabling the poor, especially women, to become economic agents of

change.

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 in not only expanding the business activity but also in contributing to

household income and its attendant benefiting 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.

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
23
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.

Competition:
Here are Challenges faced by Microfinance Institutions

1. Over-Indebtedness

The microfinance sector deals with marginalized sections of Indian society intending to improve

their standard of living, and thus over-indebtedness poses a severe challenge to its growth. The

growing trend of multiple borrowing by clients and inefficient risk management are the most

significant factors that stress the microfinance industry in India. The microfinance sector gives

loans without collateral, which increases the risk of bad debts. Fast-paced growth needs proper

infrastructural planning, in which the Indian microfinance sector evidently lacks .

2. Higher Interest Rates in Comparison to Mainstream Banks

The financial success of MFIs is limited when compared to commercial banks in India. The

centuries-old banking system has a strong foothold in Indian grounds and is slowly evolving to

meet the needs of the times. Most Microfinance Institutions charge a very high rate of interest

(12-30%) when compared to commercial banks (8-12%). The regulatory authority RBI issued

guidelines to remove the upper limit of 26% interest on MFI loans.

24
While many MFI sector players benefited from the RBI guideline update, the borrowers were left

for the worse. A massive trend of farmer suicide in states like Andhra Pradesh and Maharashtra

is the outcome of borrower indebtedness that resulted from the higher interest rates.

3. Widespread Dependence on Indian Banking System

Because most microfinance institutions function as registered Non-Governmental Organizations

(NGOs), they are dependent on financial institutions such as commercial banks for stabilized

funding to carry out their own lending activities. Most of these commercial banks are private

institutions charging a higher rate of interest. They also sanction loans for shorter periods. The

massive dependence of Indian MFIs on banks makes them incompetent as a lending partner.

4. Inadequate Investment Validation

Investment valuation is a crucial capability for the healthy functioning of an MFI. The developing nature of

the markets in which MFIs operate, the market activity is often limited. That is why it becomes difficult for

MFI to gain access to market data for valuation purposes. Lack of consistent and reliable valuation

procedures, MFI management teams, are unable to achieve the level of quality information that they need to

be able to make investment decisions

5. Lack of Enough Awareness of Financial Services in the Economy

A developing country in the making, India has a low literacy rate, which is still more moderate in

its rural areas. A large chunk of the Indian population fails to understand the basic financial

concepts. There is a severe lack of awareness of financial services provided by the microfinance

industry among the masses. This lack of adequate knowledge is a significant factor that keeps the

rural population from accessing MFIs for easy credit to meet their financial needs.

25
It also contributes to widespread financial exclusion in the country. The additional task of

educating masses and establishing trust before they initiate loans also falls on the shoulders of

MFIs. The severe lack of awareness about policies and products offered by MFIs makes it

difficult for these institutions to sustain in excessively competitive environments that developing

nations are home to.

6. Regulatory Issues

The Reserve Bank of India (RBI) is the premier regulatory body for the microfinance industry in

India. However, RBI more or less caters to commercial and traditional banks more than it helps

MFIs. Even the needs and the structure of microfinance institutions are entirely different from

those of other conventional lending institutions.

Some regulations seem to have benefitted the MFIs, but others left numerous issues unaddressed.

In spite of sporadic and unprecedented regulatory changes, the Microfinance industry appears to

have been struggling to sustain. While new regulations result in structural and operational

changes, they also result in ambiguity in norms of conduct. The result is sub-optimal

performance and failure in the development of new financial products and services.

Conclusively, there is a need for a separate regulatory authority for the microfinance industry.

6. Regulatory Issues

The Reserve Bank of India (RBI) is the premier regulatory body for the microfinance industry in

India. However, RBI more or less caters to commercial and traditional banks more than it helps

MFIs. Even the needs and the structure of microfinance institutions are entirely different from

those of other conventional lending institutions.

26
Some regulations seem to have benefitted the MFIs, but others left numerous issues unaddressed.

In spite of sporadic and unprecedented regulatory changes, the Microfinance industry appears to

have been struggling to sustain. While new regulations result in structural and operational

changes, they also result in ambiguity in norms of conduct. The result is sub-optimal

performance and failure in the development of new financial products and services.

Conclusively, there is a need for a separate regulatory authority for the microfinance industry.

Challenges & Issues of Microfinance in India

From the time of independence unemployment and poverty has been two major characteristics

and challenges of India. The major cause for the above two has been the unavailability of

sufficient credit facilities for the poor and unemployed. These two factors have become the most

challenging roadblock in the path of sustainable development of the country. The rapidly

opening economy is widening the gap between the rich and poor. To have a sustainable life style

along with saving and investment, microfinance allows the poor to get the loan that leads to

financial independence and growth. The poor use these loans in a productive manner to create

their businesses, assets of their own and get rid of poverty once and for all. Microfinance is

becoming a significant buzzword in India. Remarkable progress has been made during the last

two decades in innovating techniques to deliver financial services to the poor on a sustainable

basis. These loans are aimed at empowering the impoverished people to start their own

27
businesses and to grow their money so that they can achieve long-term financial independence

and develop sustainably. Economic growth, sustainable development and poverty alleviation can

be achieved effectively with the help of an instrument like Microfinance. This paper will focus

the challenges and suggestive measures for growth of microfinance in Indian context for a

sustainable development.

Microfinance is one of the most visible innovations in anti-poverty policy in the last half-

century, and in three decades it has grown radically. The most important benefit of microfinance

in India is that it helps long-term financial independence in these poverty-stricken areas.

Microfinance help sustained impact by educating recipients on how to create their own

businesses and how to properly manage and grow their money. There is a rapid growth in the

strength of microfinance in India and several other countries. Undoubtedly it has been successful

in bringing formal financial services to the poor. People believe that it has provided money to the

poor families and it has the strength to increase investments in health, education and

empowerment of women. Microfinance institutions (MFIs) have created a massive social

infrastructure uniquely positioned to reach millions of clients on a regular basis. Microfinance is

no more a financing channel but it has also emerged as a strong distribution channel with

numerous credit products, repayable over a longer period of time, and solar lamps, fuel-efficient

stoves are some of them. In the last two years, many companies are manufacturing solar products

with microfinance distribution channel to sell their products. There are many areas where slow or

negative growth is seen especially in the rural areas. There may be improvement in terms of

GDP and in HDI, but the overall development of the country is still under the curtains. The

benefits of development have distributed unevenly between rich and poor nations and between

rich and poor groups in individual nation. The global number of extremely poor and under

28
nourished have remained high and in some societies it has increased. One of the major negative

impacts of development has been on the environment and on existing social structure. Many

traditional societies and villages have been devastated by development of forest, water system

and intense of fisheries. Environmental damage of development, if unchecked, may undermine

the achievement of development and even collapse of essential ecosystem. The growing

awareness of the challenges to traditional development thinking has led to the increasing

acceptance of a new concept of development i.e., Sustainable development.

STATEMENT OF THE PROBLEM:

Many poor in the world don’t have access to basic financial services which are helpful in

managing their assets and create income. They need access to borrowings, savings and

investment to eradicate their poverty. Microfinance is one of the ways of fighting poverty in rural

areas, the place where most of the world’s poorest people live. It provides funds, insurance,

savings and other ancillary financial services within the reach of the poor. Through microfinance

institutions (MFIs) such as financial non-governmental organizations, commercial banks and

even credit unions, poor people can fulfil their requirement of small loans and safeguard their

savings.

SUSTAINABLE DEVELOPMENT:

The most common definition of sustainable development refers to a pattern of resource use that

"meets the needs of the present without compromising the ability of future generations to meet

their own needs" (1987 UN World Commission Report). The term broadly encompasses a

number of inter-related global issues such as poverty, hunger, inequality, and degradation of

environment. In the extensive discussion of the concept of sustainable development since then,

29
there has been recognition of three aspects of sustainable development: economic, environment

and social. An economically sustainable system must be able to produce goods and services on a

continuing basis to maintain manageable levels of government’s internal and external debt and to

avoid unhealthy sectorial imbalance which damage agriculture or industrial production.

MICROFINANCE: AN OVERVIEW
Micro Finance may be defined 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 institutional initiatives of rural credit and to the improve living

standards". At present, a large part of micro finance activity is confined to credit only. Women

constitute a vast majority of users of micro-credit and savings services. Microfinance is the

supply of loans, savings, and other basic financial services to the poor. (http://cgap.org)As these

financial services usually involve small amounts of money - small loans, small savings, etc. - the

term "microfinance" helps to differentiate these services from those which formal banks provide.

The poor rarely access services through the formal financial sector. They address their need for

financial services through a variety of financial relationships, mostly informal.

Microfinance is provided through Microfinance Institutions (MFIs). To be sustainable, MFIs

ultimately have to:

Organize their own resources through savings and equity, enhanced by other domestic resources

Recover their loans

Cover their costs from their operational income

Finance their expansion from their profits

30
Acquire an appropriate legal status

Submit to appropriate regulation and super- vision

CHALLENGES OF MICROFINANCE & MFIs IN INDIA:

Poor people do not live in a static environment of poverty. Many millions of people get out of

poverty by successfully embracing new farming technologies, investing in new business

opportunities, or by locating new jobs. At the same time, large numbers of people fall back into

poverty due to financial setbacks, health problems, and other shocks. If available at critical

moments, effective tools for savings, payment, credit, and insurance can help households capture

an opportunity to climb out of poverty or weather a crisis or emergency without falling deeper

into poverty. Worldwide, approximately 2.5 billion people do not have a formal account at a

financial institution, according to the World Bank’s Global Financial Inclusion Database. As a

result, most poor households operate almost entirely in the cash economy, particularly in the

developing world. This means they use cash, physical assets (such as jewellery and livestock), or

informal providers (such as money lenders and payment couriers) to meet their financial needs—

from receiving wages to saving money for fertilizer. However, these informal mechanisms tend

to be insecure, expensive, and complicated to use. And they offer limited recourse when major

problems arise, such as a serious illness in the family.

Following are some issues in MFIs in providing microfinance which become a challenge for

them and ultimately pausing sustainable development:

Low Outreach: In India, MFI outreach is very low. It is only 8% as compared to 65% in

Bangladesh.

31
High Interest Rate: MFIs are charging very high interest which the poor find difficult to pay.

Negligence of Urban Poor: It has been noted that MFIs pay more attention to rural areas and

largely neglect the urban poor. Out of more than 800 MFIs across India, only seven are currently

focusing their attention on the urban poor.

Client Retention: Client retention is an issue that creates problem in growing the MFIs. There is

about 28% client retention in the MFIs.

Loan Default: Loan default is an issue that creates a problem in growth and expansion of the

organization because around 73% loan default is identified in MFIs.

Low Education Level: The level of education of the clients is low. So, it creates a problem in

the growth and expansion of the organization because its percentage is around 70% in MFIs.

Language Barrier: Language barrier makes communication with the clients (verbal and written)

is an issue that creates a problem in growth and expansion of the organization because around

54% language barrier has been identified in MFIs.

Late Payments: Late payments are an issue that creates a problem in growth and expansion of

the organization because late payments are around 70% in MFIs.

Geographic Factors: The Geographic factors make it difficult to communicate with clients of

far-flung areas which create a problem in growth and expansion of the organization. MFIs are

basically, aimed to facilitate the BPL population of the country but due to lack of infrastructure

in those areas it becomes difficult to reach them.

32
Debt Management: Clients are uneducated about debt management. 70% of the clients in MFIs

are unaware of the fact that how to manage their debt.

Table No. 1 Factors Contributing to Slow Growth of Microfinance

Internal Factors: External Factors:

High Transaction Cost Uneven Population Density

Lack of access to Funding Regional Disparity

Loan Collection Method Deserving Poor are Still not Reached

Fraud Low Depth of Outreach

Unregulated Microfinance Institutions

Lack of Insurance Services

MEASURES TO OVERCOME CHALLENGES:

The following are some measures to overcome the challenges faced by MFIs in providing

microfinance services to have a sustainable development.

1. Proper Regulation: When the microfinance was in its nascent stage and individual

institutions were free to bring in innovative operational models, the need for a regulatory

environment was not a big concern. However, as the sector completes almost two decades of age

with a high growth trajectory, an enabling regulatory environment is needed that protects interest

of stakeholders as well as promotes growth.

2. Field Supervision: In addition to proper regulation of the microfinance sector, field visits

can be adopted as a medium for monitoring the conditions on ground and initiating corrective

33
action if needed. This will keep an eye on the performance of ground staff of various MFIs and

their recovery practices. This will also encourage MFIs to abide by proper code of conduct and

work more efficiently. However, the problem of feasibility and cost involved in physical

monitoring of this vast sector remains an issue in this regard.

3. Encourage Rural Penetration: It has been seen that instead of reducing the initial cost,

MFIs are opening their branches in places which already have a few MFIs operating.

Encouraging MFIs for opening new branches in areas of low microfinance penetration by

providing financial assistance will increase the outreach of the microfinance in the state and

check multiple lending. This will also increase rural penetration of microfinance in the state.

4. Complete Range of Products: MFIs should provide complete range of products

including credit, savings, remittance, financial advice and also non-financial services like

training and support. As MFIs are acting as a substitute to banks in areas where people don’t

have access to banks, providing a complete range of products will enable the poor to avail all

services

5. Transparency of Interest Rates: As it has been observed that, MFIs are employing

different patterns of charging interest rates and a few are also charging additional charges and

interest free deposits (a part of the loan amount is kept as deposit on which no interest is paid).

All this make the pricing very confusing and hence the borrower feels incompetent in terms of

bargaining power. So, a common practice for charging interest should be followed by all MFIs

so that it makes the sector more competitive and the beneficiary gets the freedom to compare

different financial products before buying.

34
6. Technology to Reduce Operating Cost : MFIs should use new technologies and IT

tools & applications to reduce their operating costs. Microfinance institutions should be

encouraged to adopt cost-cutting measures to reduce their operating costs. Also, initiatives like

development of common MIS and other software for all MFIs can be taken to make the operation

more transparent and efficient.

7. Alternative sources of Fund: In absence of adequate funds the growth and the reach of

MFIs become restricted and to overcome this problem MFIs should look for other sources for

funding their loan portfolio. Various alternative sources of fund for the MFIs may be by getting

converted to for-profit company i.e., NBFC, Portfolio Buyout, and Securitization of Loans etc.

REFERENCE

https://www.investopedia.com/terms/m/microfinance.asp

https://economictimes.indiatimes.com/industry/banking/finance/mfis-to-play-leading-role-in-

indias-economic-growth-study/articleshow/96990049.cms

https://scholars.unh.edu/cgi/viewcontent.cgi?article=1367&context=honors

https://www.chaitanyaindia.in/future-of-microfinance-in-india/#:~:text=The%20future%20of

%20Microfinance%20in,enter%20the%20organized%20financial%20channels.

35
https://www.academia.edu/35920710/A_Study_on_Microfinance_in_India A Study on

Microfinance in India

Gillon, Sean P., "Indian Microfinance Sector: A Case Study" (2017). Honours Theses and Capstones. 364.

https://scholars.unh.edu/honors/364

36